Savers continue to pay a heavy price for the Bank of England's decision to slash interest rates to near zero after the financial crisis. Years later savers are struggling to get any return at all, while inflation is eroding the value of cash in real terms. You can get an income of between three and seven per cent a year by investing in dividend paying stocks, but only if you are willing to take a risk…

Higher income

Dividends are regular payouts companies make to reward investors for holding their shares. They're typically paid quarterly and can either be taken as income or reinvested back into the stock for growth. You can invest in individual companies, which is too volatile for many, or spread the risk with an investment fund.

Share prices are volatile so only invest money you won’t need for at least five or 10 years, to allow time to recover from a market crash.

 

Shares thrash cash

In the longer run, stocks should easily beat cash. If you had invested £15,000 into the average UK savings account 10 years ago it would now be worth just £15,691.

However, the FTSE All Share index would have turned your investment into £25,270, an incredible £9,579 more, according to Fidelity International.

This gap is too big to ignore, although there is no guarantee that recent strong stock market performance can continue.

 

Feel the yield

The most generous dividend payers tend to be large blue-chips quoted on the FTSE 100 index, such as oil majors BP and Royal Dutch Shell, banks HSBC and Lloyds, pharmaceutical giants GlaxoSmithKline and AstraZeneca, and utilities such as British Gas owner Centrica and National Grid.

The key figure is the yield: if the company pays a 5p dividend per share, and the share trades at £1, the yield is five per cent. Share prices change all the time, and so do yields. A word of warning: if a company's share price crashes, the yield will automatically soar. If stock yields, say, six per cent or more, this could be a sign it is in trouble.

Dividend payouts are not guaranteed and can be cut at any time.

 

Income for growth

Most companies aim to increase their payout year after year, which means you are locking into a rising income.

If you invest for the long-term, three quarters of your profits will come from dividends, provided you reinvest them for growth. You can draw dividends later, to top up your retirement income.

 

Spread your risk

Buying individual stocks is too scary for most people but you can spread the risk by investing in dozens of dividend stocks via an equity income fund.

CF Miton UK Multi-Cap Income, for example, currently yields 4.5 per cent before charges, while Royal London UK Equity Income yields 4.1 per cent, and Threadneedle UK Equity Income yields four per cent. Plus you will get growth on top if stock markets rise. There are more to choose from, so do your research.

Equity income funds can also be risky, so don't put all your eggs in one basket, and again, only invest for the long term.

 

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