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Small shares, big dividends

Created:
2 May 2008
Written by:
Jon Mainwaring

Thanks to the credit crunch, and its associated effects on property and equity markets around the world, investors are facing some difficult choices about where to put their wealth. Even certain high-interest-paying cash deposits are not to be trusted, particularly by those with more than £35,000 to invest, if you believe the recent reports in the personal finance pages of the newspapers.

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But the recent fall in share prices also represents an opportunity to buy into shares that will make you money in the medium to long term (although not necessarily in the immediate future). One way of obviating the short-term downside risk is to hunt for high-yielding shares: shares that at their current level already pay a healthy dividend.

A quick look through London-listed shares reveals several that are paying very attractive dividends, including a handful that yield a double-digit return in percentage terms. However, many of these higher-yield shares are paying dividends that are not that well covered by earnings, which means they could be cut should those earnings fall as a result of an economic downturn. There are also some highly geared companies out there paying large dividends that may have to be trimmed as a result of greater interest payments on their loans.

Of course, one of the problems with dividend payments is that they are treated as income for tax purposes. Higher-rate taxpayers face a 32.5 per cent charge on any income they get from dividends, but one way they can protect themselves is to buy shares via a self-select individual savings account (Isa), where dividend payments only attract a 10 per cent charge that is taxed at source (in the 2008-09 tax year, individuals can invest up to £7,200 in an equity Isa).

With the private investor in mind, we have decided to profile only those high-yielding shares that can be held within an Isa – so we have ignored shares quoted on the Alternative Investment Market (Aim).

MORE ON SMALL SHARES, BIG DIVIDENDS...

See the second part of this feature for six shares that not only promise big dividend payments but, we believe, also offer growth over the long term. You'll need to be an IC Advantage subscriber to read this. To take a free, no-obligation trial to IC Advantage, click here.

Or see this week's Investors Chronicle magazine (cover date 2-8 May 2008)

Read more of our cover features here.

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