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OPINION

Homework for the new term

Homework for the new term
September 4, 2015
Homework for the new term

Global issues are causing the usual head scratching and there are new subjects for investors to swot up on too with the arrival of dividend tax and the loss of buy to let tax relief. The dividend tax is expected to raise close to £7bn during this parliament, while a buy-to-let investor with a £150,000 mortgage can expect to see their profit slashed by more than 60 per cent. These are knotty problems for investors whose portfolios are structured to produce income.

The answers to the big macro problems above might be to sit tight (see Algy Hall's analysis of best days v worst days charts), or to exploit market weakness (see Simon Thompson).

Solutions to the dividend tax issue include rejigging portfolios to move your income payers into Isa shelters, and to make pension contributions, or even to create tax-free income by selling gain-laden shares up to the CGT allowance.

But pay heed to Newton's law - the abridged version of which is that for every action, there is a reaction.

That's particularly true in the last "cure" mentioned: selling shares to create an income. It's akin to investment heresy - in effect it is eating your seeds rather than the fruit from the plant and the complete opposite of the highly recommended dividend reinvestment theory. Even so, in some circumstances it makes good sense to do this.

And while you're thinking about how to protect your dividends, look at where your income is coming from. If it's all from the UK, you need to revise your diversification theory. While dividend payouts from UK companies have been healthy this year - they rose 12.7 per cent to £28.3bn in the second quarter according to Capita research and they should hit £87bn for the year - in fact, payments from UK companies are highly concentrated.

And the Bank of England's chief economist Andrew Haldane has expressed another concern - about the amount UK companies pay out in dividends. Where once dividends accounted for roughly 10 per cent of profits, now it's 70 per cent. Your portfolio might be at risk of jam today, not jam tomorrow.

The easiest way to find reliable dividend payers from around the world is to use a fund. In fact funds and investment trusts allow all investors to build a solid core to their portfolios to help keep them afloat and moving in the right direction when markets turn stormy.

If you are wondering where to start, just use our Top 100 Funds guide here. It will make the task an awful lot easier.