Income is an essential part of our financial lives. It allows us pay the bills and lead a certain lifestyle. Even if our bank accounts suggest otherwise, paying measly interest on what cash we keep to hand. Low bond yields have made annuities unattractive, encouraging many to take their finances into their own hands, becoming much more actively involved in how their money is invested. Managed funds are being increasingly ignored in favour of Self-Invested Pension Plans (SIPP), Stocks and Shares ISAs and simple investment/trading accounts, offering the chance to produce both income and capital gains.

Many share prices have rallied strongly in 2016, Brexit thankfully proving only a minor blip. Others have had it a little harder but, as it stands, over 60% of UK Index blue-chip shares are up this year. An impressive 30% are up more than 20%, an amazing 65% are trading above pre-Brexit levels and only 15% are down by more than 20%. Solid statistics for a major equity index exposed to a commodity price downturn, significant oil price volatility and a once in a generation vote by the UK to leave the European Union.

Such stats suggest solidity and resilience which leads me back to the subject of income and dividends. Analysis we carried out this week made for exciting findings. While your cash might make you a smidgen more than 1% annually, we highlighted a mammoth 70% of UK Index shares yielding 2% or better, as well as offering the chance that the share prices rise too to give you a capital gain. For those desiring income closer to what we had in the run-up to the financial crisis (remember, banks used to pay us 4%!), the number of UK Index stocks that could do this for you via dividends is…… 33%! A third of UK Index blue-chips pay you over 4 times what you can earn on your cash. Some pay as much as 8%. It’s easy to see why so many are interested in getting involved. Especially as dividends tend to rise over time, increasing the returns.

There’s never any guarantee that a dividend will be paid. BP (Gulf of Mexico disaster), Banks (financial crisis) and certain Miners (commodity market downturn) are examples of where dividend pay-outs were cancelled in order to preserve cash and help the companies from disaster. However, these examples are thankfully few and far between. Diversification – seeking dividends from a selection of stocks/sector rather than just a few – is a simple means of protecting against any concentrated risk (company/sector specific). It also offers the chance that one of the stocks rallies to deliver a capital gain that can be cashed in on.

Many of the traditional high-yielding stocks (defensive, non-cyclicals, like utilities) have already seen their yields depressed by share price rises. But with attractive stats still aplenty on the UK 100 and its sibling the offering over 50 companies yielding more than 4%, that’s 80+ names to choose from between the two indices. Plenty of options for the discerning investor, amid what has become known as the hunt for yield.

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Mike van Dulken, Head of Research, 30 Sept.