Russell Bruce: Time running out for the taxman’s giveaway

Time is running out if you have not yet looked at opening a SIPP or adding to one in this tax year.

If you are below the age of 75, thinking about retirement or already retired you can put up to £3600 into a SIPP (Self Invested Personal Pension) whether you are a taxpayer or not.

Previous articles have covered the detail and I will set out today how you could invest this money for an income return.

In the last article I suggested you could simply sit on the cash as the Treasury would pay in 20% of the total. Try getting that return on a bank or building society product.

The maximum for those with low or no qualifying income means the contribution that needs to be made before 5th April is £2880 and the taxman will add £720 giving you £3600 to invest.  If you cannot find this from underperforming savings you will still be able to contribute but the minimum will be in the order of £800 from you and £200 from the Treasury.

The Chancellor gives out billions to help encourage pension saving and most of it goes to high income earners looking to reduce their tax bill.

Take the case of Mr or Ms A. He or she has retired but have accumulated considerable savings and investments to the extent that in the current tax year they are on the 50% tax rate. (The new lower 45% rate does not start until 6th April)

Each year they can shelter over £11,000 in a Stocks and Shares ISA. As they are retired they do not have pension contribution qualifying earnings. But they also have the £3600 annual allowance if under the age of 75.

They also pay in £2800 and also get £720 added automatically. But then they can claim back the remaining 30% of the higher rate when filing their tax return for the tax year just ending. So in their case the net cost of a £3600 investment in a SIPP is only £1800.

The purpose of these articles is to make readers without access to tax advisers aware that the rules can work for savers of more limited means.

We all know that inflation is eating into our income and that will continue under present monetary management for some time to come.

Tax increases bite at the other end and tax comes in a multitude of disguises. The Office of Budget Responsibility (OBR) has calculated that an extra £156 billion tax will be paid in 2015/16 compared with 2009/10.  That amounts to a tax take increase of over 30% in the full five years of the coalition government’s intended life span.

So where should you invest the money if you do not want to sit on the cash?

This week I want to examine the FTSE 100 largest companies that also have a record of paying dividends of around 5% and have a market capitalisation of £4 billion and above.

Diversification of a portfolio is important, but few portfolios do not include at least some of the well-known names on this list of these large companies with an international reach and income streams that help reduce dependence on the UK economy.

A $ sign after the company name denotes the company’s local currency. You will buy them in sterling and receive your dividends in sterling even if they use dollars for their accounts.

First the big oil companies, BP ($) and Royal Dutch Shell B ($).

Both are mainstays of major investment portfolios and both trade on below average FTSE Price Earnings ratios. BP has had its problems in the last 2 years but has now resumed paying a dividend. Either of these shares would be a sensible investment based on their long-term ability to deliver shareholder value.

In the Pharmaceutical sector the choice breaks between Astra Zeneca ($) and Glaxo Smith Kline.

Again both are widely held by institutional investors. Both have patents running out on long-term income generating drugs. They also have the purchasing power to buy up smaller companies with new or promising drugs. GlaxoSmithKline is the larger of the two and has a basket of over the counter brands making for a more diversified portfolio.

The third group is made up of insurance companies RSA and Aviva.

Both have cut their dividends recently. This was not popular with investors and led to their share prices falling. Both still pay around 6% after the cut, which is arguably a realistic and more sustainable return. Aviva shares have dropped quite a bit over the last year and with disposals and restructuring under a new CEO Aviva are being tipped by some as a recovery stock.

The fourth group are energy companies: SSE, National Grid and Centrica.

SSE shares have performed well in recent years. It is Perth based and formerly known as Scottish and Southern Energy. The shares still trade on a Price Earnings ratio of around 12 and SSE consistently pay solid dividends of around 5.5%. National Grid is the company that owns and maintains most of the gas and electricity grid. It has substantial interests in the US, which returns more than half its profits. Centrica owns British (and Scottish) Gas. It also has North American interests which it has been adding to recently.

The last group have no obvious connection being Vodafone and BAE Systems.

Vodaphone is the second largest company by capitalisation on the FTSE 100. Its shares took a tumble recently but have since largely recovered though there is some concern about management direction. It owns 45% of Verizon Wireless in the US, which accounts for a substantial part of its share value. It is due to receive over £8 billion in dividends from Verizon. Talks about a merger recently broke down. Vodafone has equity interests in 30 countries. BAE Systems is a global defence, aerospace and security company. It pays a shade over a 5% dividend which is twice covered.

In this selection of the largest dividend payers in the FTSE 100 with a market capitalisation of over £4billion I have left out Eurasian Natural Resources Corp – which I consider high risk to include in a stable portfolio aimed at preserving value and delivering dividends over the medium term at least.

All of these 11 shares should be ones that you should not have to worry too much about retaining value over the longer term and have growth potential as well as returning a decent income. Just remember, a good past record in delivering dividend income is not a guarantee for the future.

That does not mean you will not experience some volatility. Share values fall as well as rise. If I were to pick out one that may have higher risk it would be Vodafone. But that is just my judgement at this time and I have no more insight into future unknowns than any other writer on the Stockmarket.

If you have little experience of owning stocks and shares but have or intend opening a SIPP I would suggest waiting and watching. With a pot of £3600 select 1 share from 3 of these 5 groups and buy when you think the price seems to offer best value.

Russell Bruce
17th March 2013

Some terms explained

  • PE or Price Earnings ratio. If a share trades on a PE of 10 the price of the share is 10 times annual earnings. The FTSE 100 average is presently around 16.
  • Dividend A payment to shareholders paid yearly, half yearly or sometimes quarterly. The final payment is usually the larger dividend
  • Dividend Cover Company earnings are also expressed as an amount per share in issue. So if the earnings per share are 10p and the dividend is 5p for the year then the dividend cover is 2. If the cover is less than 1 then the company is partly paying the dividend from reserves and this is not sustainable unless attributable to non-recurring factors.

This article is for information and does not constitute personal financial advice.

Declaration: The writer owns shares mentioned in this article in Aviva, BAE, BP, Centrica, GlaxoSmithKline and RSA.

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