U have a sum of money u wish to invest to start earning dividends, u would like to achieve a yield of 7% as u know this compounded, doubles yours income in ten years.
Let’s use 10k, all other amounts pro rata and u want to invest your money for four years as u learn more about re-investing dividends. U would like to start your journey cautiously as it’s your hard earned. U could take no risk and invest it all in a Government gilt but u will not achieve a return of 7%.
Your funds are inside a tax wrapper so u want a gilt that pays interest (coupon) to re-invest into a higher yielder. U choose to buy:
ISINGB0002404191TIDMTR28 ExchangeLSE Par Value£100Maturity Date7/12/2028 Coupons per year 2 Next coupon date7/6/24
When u buy u have to pay the seller the interest accrued to date, note that the price u have to pay is above the £100 that will be returned at the end of 2028 because of the market beating interest rate.
The next dividend (coupon) payment is 7th June, so u will not have to wait long for some cash to re-invest. The yield u will receive if u wait until the maturity date is 4.18%, u do not have to do anything, the cash will appear in your account.
You want a Trust that yields 10% to add to your 4% and would like the opportunity for a capital gain so u buy NESF (other Trusts are available so DYOR) trading at a discount to NAV of 30%. The 10% is not guaranteed, unlike your gilt, so u have to be comfortable that the dividend is repeatable before u buy.
The blended yield is 14%, so u have achieved your goal, hopefully nothing to do for the next 4 years but to decide where to re-invest your £700 a year.
NESF has just gone xd so u will have to wait for your first dividend but normally if u buy after the xd date u get more shares for your money and a higher yield.
A journey of a thousand miles begins with a single step” is a Chinese proverb that originates from the Tao te Ching12. The quotation is from Chapter 64 of the Dao De Jing ascribed to Laozi, although it is also erroneously ascribed to his contemporary Confucius. The meaning of this saying is that even the most difficult and longest ventures have a specific starting point. Similarly, it implies that daunting tasks can typically be begun by doing something very simple.
Investors who want to balance their equity bets with fixed income might look to government bonds, also known as gilts.
The name “gilts” dates back to the time when these bonds were issued in the form of paper certificates with gilded edges.
Here, Telegraph Money explains what you need to know about gilts – and how they can even serve to reduce your tax bill.
What are government bonds?
Gilts are a form of IOU that you can buy off the Government. You lend money to the Government that it will use to pay for healthcare or schools or wherever it’s needed, and it pays you a fixed return – sometimes called a coupon – for doing so.
At the end of the bond’s term, when it matures, you get back the original amount you paid for the bond.
The price of a gilt can change in accordance with interest rates – if rates rise, gilt prices will usually fall. However, this means the yield increases.
The duration, as it’s known, can be from three months to as much as 50 years.
Benefits of investing in gilts
Gilts are considered low risk because it’s unlikely that the Government would default on its debts. Issued by the Treasury, gilt investments are deemed as safe as putting your money into National Savings & Investments (NS&I) accounts, where 100pc of your money is also guaranteed by the Government
A key reason for investing in bonds is for income. Gilts provide investors with a known level of interest, which can be attractive for income-seekers – particularly those in retirement.
Diversification is another key benefit. Gilts provide a safer alternative during times of uncertainty. Held alongside equities, they can help to reduce the volatility of the portfolio as a whole. That’s because bond prices typically fluctuate less, and behave differently to stock markets.
Better still, any profit made from a gilt when you sell or redeem it is free from capital gains tax, unlike many other investments, such as shares, funds or investment trusts held outside an Isa.
Gilts are often traded on the secondary market, which means they’re being sold on behalf of investors – by stockbrokers, for example.
You can make a decent capital gain – or profit – if you manage to buy them at a discount, as you will pay less than the price you will get back when the gilt eventually matures.
While the interest you earn from gilts is subject to income tax, for those higher-rate taxpayers who have maxed out their £20,000 Isa allowance and will exceed the £500 personal savings allowance – and would rather not lock money away in a pension – gilts are worth considering.
If you can find a gilt where a lot of the return is coming from capital returns rather than interest, you can save on your tax bill.
You also won’t pay any tax on gilts if you hold gilts in a tax-efficient wrapper, such as an Isa or a self-invested personal pension (Sipp).
Risks associated with gilts
One major risk to fixed income is that posed by inflation – the arch enemy for bond investors. Government bonds offer few attractions in periods of rising inflation – as inflation rises, the real value of the bonds’ income falls.
Since the income bonds offer is usually fixed at the time they’re issued, this can quickly become less valuable if inflation rises to essentially eat into the return.
While inflation is rising at a far slower pace at the moment, it remains a risk for the future.
The issue of risk is also something to bear in mind. While the lower volatility of bonds tends to make them favoured for lower risk investors, there are no guarantees; bonds can experience significant downdrafts, too.
How to buy government bonds
You can buy government bonds directly through the Government’s debt issuer – the Debt Management Office – where they are issued in units of £100.
It provides a trading service, meaning that you can buy and sell gilts that are already in the market. However, to be eligible to use the service you must first sign up as a member of a DMO “approved group of investors”, which is only available to British residents.
You don’t need to be a member of the approved group to sell gilts via the service, however.
For buying or selling you’ll pay fees of 0.7pc of the value of the gilts you’re trading. Alternatively, you can use a stockbroker or investment platform.
Each gilt is priced differently, and will have varying coupon and maturity dates, which means that there are several choices to make before investing.
The maturity date and the coupon appear in the name of the gilt, so they are easily found.
Investing via a fund
As well as buying individual bonds, you can also invest in gilts via a fund, which holds a portfolio of gilts either chosen by a fund manager, or via a tracker or an Exchange Traded Fund (ETF) which tracks an index of government bonds.
The benefit of these for investors is diversification across a wide range of issuers, which is more important in the corporate bond market because of the higher rate of defaults than in the developed government bond market.
The downside is you can’t control the maturity of the bonds you’re investing in to the same degree as an individual bond portfolio.
Plus, gains via funds are not free from capital gains tax, which might not be a concern if held in a Sipp or an Isa, but if like many people you are holding low coupon gilts to minimise tax outside of a tax shelter, a fund isn’t going to achieve the same goal.
Comparison between government bonds and investments
Over the long term, it is reasonable to expect gilts to provide lower returns than the stock market because of the lower risk of lending money to the Government compared with investing in companies.
Indeed, data from Hargreaves Lansdown shows that over the last 10 years the FTSE Actuaries All Stocks Gilt Index – the standard gilt index – returned 3.94pc. This is compared to the IA corporate bond sector which returned an average of 26.6pc, the IA high yield bond sector which returned 39.65pc and the FTSE All Share which returned 75.79pc.
Hal Cook, senior investment analyst at Hargreaves Lansdown, said: “Gilts are also likely to have lower returns than more risky parts of the bond market, such as high yield, for the same lower risk reason.
“That said, during periods of stock market stress, it is reasonable to expect gilts to outperform both shares and higher risk bonds. This is because investors like the relatively low risk of gilts compared to other assets.”
Current market trends and rates
Rising interest rates and cuts to the CGT exemption are making Government bonds, or gilts, much more appealing for investors.
10-year government bonds are currently providing a yield of 4.3pc, up from 3.5pc at the beginning of the year.
They might not offer the eye-popping returns experienced by Nvidia shareholders, for example, but individual gilts were some of the most popular investments made by DIY investors who have recognised the buying opportunities.
Hargreaves Lansdown reported that investor demand for gilts has tripled in the first three months of this year compared to the same time a year ago.
Of the top 10 most-bought investments by AJ Bell customers in the first three months of this year, four were gilts.
The five most-bought gilts on the AJ Bell platform ranged from those with a coupon of between cc 0.125pc and 5pc, and were all short-dated gilts – in other words, with a maturity of five years or less. The average purchase transaction volume in these gilts was £126,000.
Laith Khalaf head of investment analysis at AJ Bell said: “This year has witnessed a rather conspicuous reverse ferret in the gilt markets as investors have pared back bets that the Bank of England will cut interest rates.
“This has been reflected in rising short-term yields, but the same phenomenon in longer term gilt yields tells us that the market is bracing itself for interest rates being higher for longer, too.
“With the 10-year gilt yield back up to 4.3pc, yields on offer are even more attractive for investors looking to access the asset class. There may be further volatility to come this year thanks to unpredictable inflation readings and an election campaign which has the potential to spook the markets.
“The beauty of buying individual gilts, though, is you get a set return provided you hold to maturity, and if you get a chance to exit at an attractive price in the meantime, well that’s just gravy.”
Mr Khalaf highlighted that the tax treatment of gilts has also fuelled their popularity. Since investors aren’t liable to capital gains tax on gilts, short-dated, low coupon gilts have been popular, being effectively used as a tax-efficient cash alternative.
“There is likely to be some continued appetite for using gilts as tax-efficient, safe cash alternatives for a rainy day fund,” he said, “especially in light of frozen income tax band
Passive income from stocks is often regarded as one of the most appealing aspects of investing. It offers individuals the opportunity to generate a steady stream of earnings without active involvement in day-to-day business operations.
Time is key
At the age of 30, with a retirement goal set at 50, I have a significant advantage — time.
Having a 20-year investment horizon provides me with the invaluable opportunity to nurture and grow my current portfolio into something substantial.
This extended period allows me to harness the power of compounding, where my investments can potentially multiply and generate substantial returns over time.
By strategically allocating my assets and staying committed to my financial objectives, I can aim to build a portfolio that not only provides financial security but also creates a substantial passive income stream, offering me the possibility of a comfortable and fulfilling retirement.
Compounding
Compound returns might not sound like a game-changer, but it really is.
First, I need to start by investing my money in assets like stocks or bonds. Then I need to be patient and resist the urge to constantly tinker with my investments. As time goes by, my investments will generate returns, and these returns will get reinvested.
Here’s the key. I must avoid withdrawing those returns and let them stay invested alongside my original capital. This way, I’m not just earning returns on my initial investment, but I’m earning returns on the returns I’ve already earned.
Over the years, this compounding effect can snowball, significantly growing my wealth.
To make it work efficiently, I should keep adding to my investments regularly, whether it’s monthly, quarterly, or annually. This practice, known as pound-cost averaging, can amplify the benefits of compounding.
In a nutshell, compounding returns require me to invest wisely, be patient, and let time work its magic. It’s a recipe for building long-term wealth and achieving my financial goals.
Aiming for an early retirement
To answer my question in the title, I have to say, yes — but it’s not easy. Here’s an example of how I could grow my investments over 20 years and retire at 50.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Let’s start by assuming I’ve got £100,000 invested as a starting point.
Then I’m going to need to continually invest, while reinvesting my returns each year. Using my 20-year investment horizon, I’d need to contribute nearly £10,000 a year, while achieving an annualised return of 8%.
Of course, these figures can vary. And there are lots of ways to reach £1m. This is just one route. An easier way would be to start much earlier, maybe retire a few years later and not have to invest quite so much each year.
However, either way, it’s important to remember that if I choose investments poorly, I could lose money.
£££££££££££££££
Now lot’s of people will not have 100k to invest or if they do they may not be willing to commit at this time.
Mr. Market has given u an outstanding opportunity to start on the journey, even if u have limited funds adding fuel to the fire by regular contributions will accelerate your journey.
Remember 100k compounding at 7% doubles your income in ten years and after 20 years your 14k should grow to 28k. Depending on markets that journey may last longer but the destination is assured but u will need to consider the effect of inflation in your plan.
How I’d try to ironclad my second income before interest rates fall
Jon Smith explains a couple of tactics he’s looking to implement in his dividend portfolio to try and protect his second income stream.
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.
It’s very likely that interest rates will start to fall later this summer. From the current base rate of 5.25%, the market’s expecting a cut in August (or September at the latest).
The dividend yields in the stock market are related to interest rate movements. Thus, I’m expecting yields to also fall in the coming year. So here’s what I can do to try and protect my second income from dividends.
A couple of ideas
A stock’s dividend yield is calculated by using its current share price and the dividend per share from the past year. I can’t predict exactly what the future dividend per share will be. But I can buy the stock and lock in the share price cost.
Let’s say a company pays out the same dividend over the next year. If I purchase the stock now, the yield will be the same in the coming year.
But if I decide to hold off and the share price increases over the next year, the dividend yield will fall. This has happened to me in the past and I still rue some of my missed opportunities.
What about if I already own a stock that I think could suffer if interest rates fall? In that case, I’d try and iron clad my income now by hedging my bets.
What this means in practice is to look for a stock that should do well with falling interest rates. Then if my existing holding cuts the dividend, I’ll be protected as the new stock should keep paying it. In fact, it could increase the payment if it does well.
An example right now
For example, I currently own shares in Barclays. However, lower interest rates could make the bank less profitable, which could cause the dividend per share to drop.
SHED
As a result, I’m thinking about buying the Urban Logistics REIT (LSE:SHED). This FTSE 250 stock has a dividend yield of 6.38%.
I think lower interest rates should help to make the company more profitable. This is because the real-estate investment trust (REIT) has to finance new acquisitions and the existing portfolio via some loans. The lower the interest rate, the cheaper a new loan would be.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Further, lower interest rates will help to ease pressure on tenants that lease out the properties. The industrial and logistics properties are home to some consumer-facing businesses. If customers spend more as they feel more confident with lower interest rates, it ultimately does help the REIT. Through higher profitability, I’d expect the dividend per share to increase.
The risk is that the benefit to the company takes a long time to filter through. After all, the tenants aren’t going to get an instant boost from any interest rate cut.
Ultimately, I’m seriously thinking about buying shares in the REIT to help hedge against the potential of my dividend income falling.
The blog rules for any new readers, don’t panic there are only two.
Accumulation.
Buy Investment Trusts that pay a dividend to buy more Investment Trusts that pay a dividend.
Any Trust that drastically changes its dividend policy will be sold even at a loss.
De-accumulation.
Instead of reinvesting the dividends, the dividends are used to pay a ‘pension’ and u can leave the capital to any deserving relatives but please remember those wee cats and dogs. The earlier u start on this journey the more u will benefit from compound interest and may have surplus dividends to re-invest for that special occasion.
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All articles can be copied but please include any wealth warning. GL
Money expert Becky O’Connor of PensionBee reveals the most useful – and profitable – real world sums.
Compound growth, which generates massive gains the longer you save and invest, is lesson number one… so what are the others?
3. Understand your risk profile
Risk is an inherent part of investing, but it’s a tough balance. Take too much risk, and you might find yourself racking up some painful investing lessons.
But taking too little (or no risk in the case of cash) is a risky strategy in itself. It could have a hugely detrimental effect on your finances in the future because you might not reach your goals.
And our risk appetite isn’t static. It can change as our circumstances change so needs reviewing regularly.
4. Diversify your investments
This reduces the risk of any one stock in the portfolio hurting the overall performance.
But diversification doesn’t just mean investing in different stocks. It also means having exposure to different sectors, assets, and regions.
5. Rebalance your investments
Trimming the excesses and redirecting funds into underperforming assets ensures that your risk-return equilibrium remains intact.
This calculated approach of buying low and selling high has the potential to bolster long-term returns.
Whether nearing retirement or sprinting towards a shorter investment horizon, rebalancing grants the opportunity to recalibrate allocations to achieve the desired financial destination.
6. Review costs and fees
Investors cannot control the market, but they can control how much they pay to invest. Understand the costs associated with your investments – not least the platform charge.
7. Drip feed your investments
A good and proven way of lowering your investment risk is by investing small amounts regularly. Most often, investors do this by drip-feeding investments monthly to help smooth out the inevitable bumps in the market.
The advantage is that you also buy fewer shares when prices are high and more when prices are low – a process known as pound-cost averaging.
8. Set clear goals
Define your financial goals and time horizon before making investment decisions. Avoid making impulsive decisions based on short-term market fluctuations. Stick to your investment strategy.
Investing over many years eventually reaches a ‘tipping point’ where your returns double what you’ve put in to date, highlights new research from Interactive Investor.
Putting £250 per month into investments returning 5 per cent a year would see a gain of £83 on your £3,000 total contributions, or 3 per cent, in year one.
This means that your returns after that year would represent just a small percentage of the total pot.
But by year 10, the power of compounding would mean the portion delivered by investment growth would make up 30 per cent of the overall portfolio, and by year 20 it would be 72 per cent.
At year 26 it would hit 105 per cent – with a pot containing £78,000 worth of your monthly contributions over the period now worth £160,229.
Then you’ve reached the tipping point where your returns double what you’ve put in.
If you paid in the same amount but achieved an annual investment return of 7 per cent, it would take 18 years to reach the investment ‘tipping point’, calculates II.
You can use This is Money’s long-term saving and investing calculator to see how compounding works. When considering compounding, you also need to take into account inflation and charges.
Compounding returns offer a layer of protection against investment volatility, says Myron Jobson, senior personal finance analyst at ii.
‘Generally, as your investment grows, compounding becomes more significant, and there’s a point where growth outpaces new contributions.
‘This varies for each individual’s investment strategy and market conditions.
‘In our scenario, the investment tipping point is 26 years, but the reality is many investors will hit their financial goal, be it investing to buy a home or for retirement, a lot sooner.’
Jobson explains: ‘The nature of investing means the annual rate of return isn’t fixed, meaning you can earn more or less in a given year, depending on the market environment.
Jobson adds that for pension savers, retirement investments are turbocharged by the tax relief and employer cash that are added to your own contributions.
‘This dual advantage not only amplifies the initial investment but also leverages compounding over time, accelerating the growth of the pension fund.’
Pensions are possibly the longest-term investment you will ever have, which makes them particularly fertile ground for compounding to work its magic.
Think of your own and your employer’s pension contributions as the seeds, tax relief as the water, your investment plan as the soil and compound growth as the sunshine, helping to grow what eventually becomes a mature pension pot for when you retire.
One of the beauties of pensions is that if you start paying into them early, as so many workers now do thanks to auto-enrolment kicking in at age 22 (set to come down to 18), you will benefit from around 45 years of compound growth from the investments within that pension.
In fact, assuming roughly similar average annual investment returns, the impact of compound growth for younger pension savers who maximise their workplace pension contributions in their early career rather than starting with lower contributions or even foregoing a pension altogether for more immediate priorities, can be really astonishing.
Someone who makes the same annual contribution of £2,000 a year for their whole working life, but misses five years of pension contributions in their twenties would have a pot £22,000 lower at retirement, at £121,450 rather than £143,215.
“Compounding can work against you too, in that percentage fees on investment products can add up the wrong way, magnifying the reduction in your investment pot over time”
However, if they choose to keep paying in when they are young and instead miss those five years of contributions when they are older, from 60 to 65, the impact on their pension pot is much smaller – with a pot size around £11,000 lower, at £131,895, highlighting the greater importance of contributions made early on to eventual pot size.
Unfortunately, compounding can work against you too, in that percentage fees on investment products can add up the wrong way, magnifying the reduction in your investment pot over time.
Of course if your investment grows by significantly more than the fee, the impact of this is reduced, but it’s worth keeping an eye on and making sure you aren’t being charged over the odds for an investment that isn’t delivering.
How to get the most out of long-term investing
Myron Jobson of Interactive Investor offers the following tips.
1. Take advantage of Isa allowances
The shrinking capital gains and dividend tax allowances provide the impetus for investors to invest through a tax-efficient wrapper if they haven’t already done so.
The transfer, however, will involve selling and buying back shares, which could trigger a capital gains tax bill.
Over the long term Bed & Isa is likely to outweigh the charges that might apply.
2. Consider using your partner’s Isa allowance
You can also help reduce your taxable income by transferring assets between spouses or civil partners.
Each year you can shelter £20,000 from tax in an Isa – so £40,000 between two.
Only married couples and civil partners can transfer assets tax-free, meaning those who aren’t could potentially trigger a tax liability.
Alliance Trust PLC ex-dividend payment date BlackRock World Mining Trust PLC ex-dividend payment date Canadian General Investments Ltd ex-dividend payment date Downing Renewables & Infrastructure Trust PLC ex-dividend payment date Fair Oaks Income Ltd ex-dividend payment date Great Portland Estates PLC ex-dividend payment date Henderson EuroTrust PLC ex-dividend payment date JPMorgan European Growth & Income PLC ex-dividend payment date JPMorgan Global Growth & Income PLC ex-dividend payment date Law Debenture Corp PLC ex-dividend payment date Premier Miton Global Renewables Trust PLC ex-dividend payment date Regional REIT Ltd ex-dividend payment date Temple Bar Investment Trust PLC ex-dividend payment date Triple Point Social Housing REIT PLC ex-dividend payment date
