To maximize your earnings with decreasing interest rates, follow this guidance from our financial expert ANNE ASHWORTH:
Chilling Out on Lower Interest Rates: A Prospective for Savers and Investors
Interest rates are on a downward spiral, leaving many savers shivering, while investors are rubbing their hands in glee. Following the recent cut, the Bank of England's base rate now stands at 4.25%, forecasted to drop to 3.75% by year's end.
With a substantial £1.9 trillion in Bank and building society accounts, some cash is looking for a cozy new home as deposit rates dwindle. To placate savings account holders, companies worldwide are expected to distribute an impressive $1.83 trillion in dividends in 2025, according to the latest Janus Henderson index, the highest in history after a record haul of $1.7 trillion in 2024.
The UK's FTSE 100 index is estimated to shower investors with £83bn in dividends, according to AJ Bell. The anticipated total could reach £90 billion, or so suggests the Computershare Dividend Monitor. In May alone, over £9 billion will be distributed, with groups such as Aviva and Lloyds Bank leading the charge.
This suggests that the stock market could be a lucrative venue to park a portion of your cash, but it does come with a risk if you're accustomed to the safety of deposit accounts and National Savings & Investments. The rewards, however, can be substantial, with potential for some long-term growth, especially with UK-based opportunities.
In contrast to US companies, which are often stingy towards their shareholders, the FTSE 100 boasts an impressive 3.7% yield (calculated by dividing the share price by the dividend).
Sue Noffke, manager of the Schroder Income Growth Fund, advises: "Other global markets are typically lower-yielding. The UK market also has an interesting mix of companies that derive approximately 75% of their revenues from overseas."
To capitalize on this dividend bonanza while backing Britain, exploring Europe, and venturing further afield, here's a game plan:
THE HOMEGrown Heroes
The growing fascination with UK shares reflects a desire to diversify away from the US, a trend that is likely to continue despite Wall Street's rebound after this week's US-China trade deal.
James Coker of Quilter Cheviot argues that the UK is an alluring destination due to its mature companies in industries like financial services, mining, and oil, which can provide consistent dividends without hindering day-to-day operations.
In recent weeks, investors have been eagerly buying shares in FTSE 100 stocks, such as mining giant Rio Tinto with a yield of 5.82%, pharmaceutical giant GSK offering 4.81%, and HSBC delivering 5.67%.
The insurance powerhouse Legal & General is trading on a yield of 9.3%, making it a popular choice among income-seeking investors. Over the next three years, Legal & General aims to return approximately 40% of its £13.8 billion market capitalization to shareholders through dividends and share buybacks, potentially boosting share prices and dividend values for remaining shares.
AJ Bell reports that FTSE 100 companies had already unveiled £29 billion in share buybacks by the start of this year, with more announcements likely.
THE FUND CONNECTION
With the appeal of dividends at an all-time high, funds and investment trusts prioritizing these distributions are often referred to as 'aristocrats' or heroes. As many as 20 'dividend heroes' have increased their dividends for the past 20 years, including some UK trusts like City of London, Merchants, Murray Income, and JP Morgan Claverhouse with yields of 4.72%, 5.41%, 4.68%, and 4.87%, respectively.
Some long-established UK names aspiring to hero status are Law Debenture (3.73%) and Dunedin Income Growth (4.76%).
Foreign flavors include the SPDR S&P Euro Dividend Aristocrats fund, offering a yield of 3.71%. This fund tracks an index of 40 eurozone companies, including Bouygues, the French construction group and the German insurer Allianz SE.
For a broader range, Ben Yearsley of Fairview Consulting recommends funds like Artemis Global Income (yield 4.07%) and Jupiter Asian Income (yield 3.56%), providing exposure to companies like Taiwan Semiconductor Manufacturing Company and Newmont, a US-based gold mining group with operations in Australia.
THE FUTURE IS BRIGHT
Estimates for dividends in 2025 are a welcome reminder of their importance for investors who recall the postponed or withheld billions during the pandemic's dark days. If you opt to reinvest your dividends, you can take advantage of compounding over the longer term, a potentially lucrative approach.
Mr. Coker reflects, "Over the past two decades, UK stocks have returned just under 290%. The capital growth element of this figure is about 90%. This means that reinvesting dividends has accounted for more than two-thirds of the total return."
Dividends, dating back to 1602, are a tradition worth celebrating in 2025. So go on, invest wisely and reap the rewards.
- Investors who prefer a mix of safety and potential growth might consider reallocating some of their savings towards investing in stocks, especially in UK-based companies, as they offer higher dividend yields compared to many global markets.
- For those seeking a diversified portfolio, funds like Artemis Global Income or Jupiter Asian Income could be a good choice, offering exposure to companies worldwide and providing attractive yields.
- As the dividend bonanza continues, with UK-based FTSE 100 companies projected to distribute £90 billion in 2025, proactive investors could potentially enjoy substantial returns by reinvesting their dividends, taking advantage of compounding over the longer term.
