Since the coronavirus really started to make an impact in March, central banks around the world began cutting interest rates. The premise is that lower rates should encourage people to spend instead of save, as they’re receiving less reward for holding money. In turn, this should help to stimulate the economy again. Regardless of whether this is the correct way to go, it meant that interest rates here in the UK are now down to 0.1%. So if you have £1,000 in a savings account, you’re receiving £1 interest annually. Alternatively, you can look to high-dividend-yield stocks for a way to get higher returns.
Keep the income in your ISA
If you hold a dividend-paying stock, the dividend is taxable beyond your dividend allowance. There are different rates of tax on this, but it can be 30%+. If you make use of a Stocks and Shares ISA, the dividend income is also paid into the ISA. This means that it doesn’t use up your dividend allowance, and can sit and accumulate in the ISA. You can then use these funds to reinvest, saving you from paying unnecessary tax.
You were probably drawn towards this article with the 7% dividend yield mentioned in the title. After all, it’s significantly higher than you can pick up in income from most assets at the moment. Remember that the dividend yield is calculated by dividing the share price by the dividend per share. There are two ways a high yield is achieved. Either the company has maintained the same dividend payout and the share price has fallen. Or the share price has increased but the firm has also increased the size of the payout.
For example, take Plus500. It’s an online trading platform that allows you to buy and sell all kinds of securities. Thanks to a rush of new investors wanting to get involved in the stock market volatility, Plus500 has performed well financially. This has seen the share price rally 60% this year. On the dividend side, the firm actually states that it “intends to pay not less than 60 percent of retained profits in each financial year out as dividends to shareholders”. So the amount of dividend payout is also going to increase, meaning the high dividend yield of 7.35% should be maintained.
Another good example of a high-dividend-yield stock is Jupiter Fund Management. Here, the share price has been on a downward spiral. It’s almost halved since the start of the year. This is mainly due to investors pulling out money from mutual funds and other managed investments. Since the firm makes money based on the amount of capital it manages, this drags earnings lower. Yet for the dividend yield, this move lower in the share price helps. The interim dividend payout has not changed. So overall, the dividend yield is higher, currently sitting at 7.67%.
Making your £1,000 work harder
Thanks to the two above examples, you’ve got some ideas on how to invest your £1,000. Not only are they good stocks offering a dividend yield, but also hopefully some capital appreciation too. In this way, you get the best of both worlds, all housed within your ISA.
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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.