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Should I swap savings account for high yielding shares?

Retirement | Investment Choice Helpful? 42

Asked by brob20009, submitted 22 July 2013.

Open Quote I am depressed by the low saving rates and seeing my savings capital eroded by inflation.

I have received numerous mailings from Newsletters advising investment in High Yielding Shares. They claim if you purchase the shares they recommend each month then you have a better return and as you hold these shares for 'life' - you do not have to worry about how the share prices of the portfolio perform. You just enjoy the income. There are also suggestions that high yield shares tend to enjoy increasing share price.

Is this a good place to move my savings to as a retired man of 74 years of age. Isn't there a risk of capital loss?

Are there any other drawbacks of a High Yield share Portfolio?
End Quote

Answered by Justin on 23 August 2013

High yielding shares are a very different beast to a savings account and I would avoid unless you are comfortable potentially loosing capital.

The reason most of us have savings accounts is to hold 'rainy day' money in a safe place. So even if markets crash, reducing the value of investments you might hold, you still have a safety net to fall back on.

If your savings are well in excess of the amount of 'safe' money you think you'll need, then by all means consider investing some of the surplus provided you are comfortable with the risks. Otherwise, I would stick with savings accounts despite the depressing interest rates currently on offer.

It is true that the dividends paid by some companies are currently more attractive than savings rates, especially since dividends are deemed to be paid net of basic rate tax. And, since dividends generally tend to rise over time, such shares are a potentially good source of long term income.

However, share prices can fluctuate significantly, with even large companies sometimes seeing their share price drop by 20% or more during turbulent times. If you can afford to sit tight for several years in the hope of recovery you might deem the risk worth taking, but if not then I would be inclined to play safe.

And if you do want to invest then perhaps consider funds investing in higher yielding stocks rather than buying stocks directly. You’ll have to pay fund manager charges, but your investment should be spread far wider and the manager will (in theory at least) be keeping a close eye on things.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (1) - To post a comment please register or login .

Comment by ivanopinion at 1:45pm on 28 Jan 2014:

It depends what your objectives are. If you think you might need to spend your capital at some point, then the risk of share price fluctuation is a real concern. But will you need to buy a house, or holiday/retirement home, or pay for children's house deposit?

For many retired people, their only objective is to generate income to live on, so as long as the dividends don't dip too much, it does not matter one jot whether the share price falls. In that case, take a look at some of the investment trusts with high levels of dividend, such as City of London and Bankers. There are quite a few that have never had a fall in dividends for more than 40 years, through all the crashes of the 70s, 80s, 90s and 00's. (Google "dividend heroes".)