Get your cash out of the bank — and put it in banks

Their savings rates are lousy. Is it better to buy their shares instead?

If you have savings languishing in a deposit account paying interest as low as 0.01%, the dividends that Britain’s biggest banks announced last week might seem a little annoying.

While £1,000 in HSBC’s best savings account will pay just £7 this year — before tax — the same sum held in the bank’s shares over the past 12 months would have given you an income, from the dividends, of £89— and your shares would now be worth £1,445.

So should you be investing your hard-earned cash in the bank’s shares instead?

Buying shares can be a good way to generate income from savings. However, share prices can be volatile and there is a much greater level of risk involved. Unlike cash deposits, your holdings are not protected by the Financial Services Compensation Scheme, which covers up to £85,000 of your money in a savings account.

Justin Urquhart Stewart, director and co-founder of the stockbroker 7IM, said banks could be useful for dividends: “As the worst of the financial storms and squalls subside, so the banks are trying to return to their position of being a more reliable dividend payer to their main investors.

“So at last we are seeing some recovery in dividend payments. However, investors should remember that although the shares have been recovering, there is still a lot of risk around and the share prices are still sensitive . . . For those willing to take individual company risk then they can be attractive, but you are being paid to take that risk.”

Laith Khalaf, a senior analyst at the investment group Hargreaves Lansdown, said: “The banks are by no means a homogeneous proposition at the moment, as share price performance shows. HSBC and Barclays have prospered of late, while the two taxpayer-backed banks, Lloyds and RBS, have fallen behind.”

HSBC
Last week HSBC’s full-year results showed profits for the year were down more than 60% at $7.1bn (£5.7bn), because of some one-off costs. As a result, the shares slid 6.5% to 666p on Tuesday and closed on Friday at 651p.

However, the shares had surged 58% over the past 12 months before last week’s wobble. At this price, the shares are paying a 6.2% return, which trumps the bank’s best deposit account, paying just 0.7%, according to the website Savings Champion.

Khalaf said: “HSBC is a shining example of how the decline in sterling has bumped up the price of some of the UK’s largest companies, without much progress in underlying profits. HSBC on the face of it looks like it offers a healthy dividend but there are concerns it is unsustainable, and the bank is still making very poor returns. Meanwhile the share price has shot up significantly because of the weakening pound. Probably best to avoid.”

Lloyds
This is the bank that both Urquhart Stewart and Khalaf tip if you are trying to choose between lenders. The government, which rescued Lloyds during the financial crisis, has been gradually selling its shares and now owns less than 4%. It has recovered more than £19bn of the £20.3bn injected by taxpayers into Lloyds.

Last week the bank announced that full-year profits were up 158% to £4.2bn before tax. The full-year dividend is 2.55p. A special dividend of 0.5p a share will also be paid on May 16, giving a current yield of 4.4%.

You will receive both dividends as long as you hold the shares on April 5, even if you buy them tomorrow.

Urquhart Stewart said: “If you are willing to take the risk, go for the one who has best cleaned out their filthy stables — and that would be Lloyds.

“They had none of the investment and American issues the others had, but had to manage fiascos, such as the payment protection insurance (PPI) mis-selling scandal. Those look mostly cleared now.”

Khalaf said: “Lloyds is the pick of the banks, particularly for income seekers. It’s a low-risk bank that looks set to generate healthy amounts of cash, and that means dividends, though it is deeply plugged into the UK economy so any downturn here will be hard felt.”

Barclays
Barclays’ dividend is not as attractive. Last week it announced a final dividend of 2p, taking the year total to 3p, less than half the 6.5p paid in 2015. Barclays shares have risen by more than 40% in the last year and closed at 226p on Friday, yielding 1.3%. To get the dividend, you must buy shares by March 1.

Barclays has announced full-year profits of £3.2bn before tax, a sharp rise from the £1.1bn it reported last year. Khalaf said: “Overall Barclays is in better shape than it was, and I think is a buy for recovery investors who are happy to take a long-term view and are willing to see things get worse before they get better.”

Royal Bank of Scotland
Then there’s Royal Bank of Scotland (RBS). The bank, which is still 72.3%-owned by the taxpayer, posted more massive losses last week. It lost £7bn last year, making this stock suitable only for the more adventurous investor.

Khalaf said that, like Barclays, it would suit recovery investors happy to accept that things may get worse before they get better.

It has not paid a dividend since 2008. As the chief executive Ross McEwan said on Friday: “This is a bank that has been on a remarkable journey. We still have further to go.”

Khalaf said: “RBS is still paying for the sins of the past, though it is now saying that 2017 is going to be its last year in purgatory, and shareholders can look forward to a brighter, more profitable year in 2018.

“That may well be the case. There is a decent bank inside RBS struggling to get out, but it’s those ‘one-off items’ which pop up with such alarming regularity which keep pushing the bank deep into the red.”

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