Whatever happened to yield and the investors and savers who relied on it?

Today I wish to look at a concept of investing and indeed saving which has seen quite a few changes in the credit crunch era. This has been brought to my mind by this piece of news this morning from the Financial Times about Lloyds Banking Group.

In a boost to investors, the bank revealed a full-year dividend payment of 2.25p per share, up from 0.75p per share last time, amounting to a total payout of £1.6bn. It also unveiled a special dividend payment of 0.5p, amounting to £400m.

This yield boost as seen the share price rise some 5 pence to 68 pence and at such a level it represents a yield of 4% for this year and 3.3% after that. Of course looking forwards using a dividend to calculate a yield has the issue that it is by no means guaranteed. Indeed one might be wondering already if Lloyds can afford it going forwards with numbers like these.

Pre-tax profits fell to £1.6bn for 2015, from £1.8bn the previous year, dragged down by the PPI provision in the fourth quarter.

A lot of it depends on whether you believe that the new extra Payments Protection Insurance write-downs are sufficient as this has been a road where we have heard from the bank Europe many times.

It’s the final countdown
The final countdown

There are also the issues of the banking sector itself which has had a troubled 2016 already. It was only on Tuesday when I discussed HSBC which may struggle to maintain its dividend and Standard Chartered which axed its final dividend payment. This of course follows on from Royal Bank of Scotland which announced yet more problems a few weeks ago. Still someone seems able to plan for his own higher dividend.

However, António Horta-Osório,Lloyds chief executive, has received a 6 per cent salary increase this year taking it to £1,125,000, in his first pay rise since joining the bank in 2011. He is to be granted a deferred bonus of 723,977 shares, which was worth £450,314 at Wednesday’s closing price of 62.2p.

The Guardian are more bullish on his pay deal claiming it is £8.5 million but they do not break it down.

If we look back I recall that many of the bank shares were considered to be “dividend” stocks and that Lloyds yielded 7% for a while. Of course that then hit trouble as share prices collapsed and dividends were axed. More recently one might have considered oil companies to be providers of a safe dividend which remains us we need to be very careful about the concept of a safe haven.

However let me move on by quoting the UK FTSE 100 dividend yield which was 4.09% at the end of January according to the London Stock Exchange.

What about savers?

Back in September of  2010 Bank of England Deputy Governor Charlie Bean.told us this on Channel 4 News.

At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

The current Bank of England data series starts just after then in January 2011 when it records the ordinary deposit savings rate as 1.3% as opposed to the January 2016 rate of 0.47%. So savers may ask Mr.Bean or rather Professor Sir Charles Bean how good his Forward Guidance was? Also how long they will be expected to do this?

Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.

The Bank of England has stopped publicising the value of senior executive pension pots – I wonder why! – so let me do the maths and point out that the 2014 annual accounts imply a value of £4.5 million for our knighted professor. Accordingly it will be quite some time or more likely never that he has to eat into his own capital a bit.

In the counterfactual world of Mr.Bean everyone is better off as QE saved the economy and prevented their savings being eaten by the dragon Smaug from the Hobbit or such like.

What about bond yields?

It was only yesterday that I pointed out the issue of the fast disappearing bond yield in the UK.

The heat is on here as the UK ten-year Gilt yield has fallen to 1.37% this morning…….. The five-year yield has dipped to 0.71% which if maintained will lead to cheaper fixed-rate mortgages.

So there is little yield to be found there and whilst it ebbs and flows the trend appears to still be downwards. There was a time that people would laugh at forecasts of the ten-year US Treasury Note yield going below 1% but its drop after a rise in official short-term rates has quieted that. Especially if we note that Germany has one of 0.16% and Japan has seen its dip into negative territory again. Indeed the German bond yield universe has this problem according to @fwred.

Frankfurt, we got a problem. New record high 45% of Bund universe trading below ECB’s depo rate, not QE eligible.

That’s below -0.3% as opposed to 0%. Of course this leads to trouble elsewhere as investors look to markets which do at least have a positive yield.


These have particular trouble as longer dated bond yields are used and they have plunged in yield as described above. If we look for the impact then according to Sharing Pensions pre credit crunch a basic ( no indexation in fact no add-ons) would have provided a yield of 7.9% for a 65-year-old and now provides 5.6% which is quite a cut. Frankly if Gilt yields remain where they are then we can expect further falls. A reason why they have not fallen further is that annuity providers have invested elsewhere but this too comes with problems. This lead Legal & General to announce this earlier this month.

Of our LGR annuity bond portfolio 0.7% (£266m) is in sub-investment grade Oil & Gas and 0.1% (£38m) in sub-investment grade Basic Resources.

I do not want to scare monger as L&G can cover that but it does at least beg a question of where the race for yield is going?

The whole concept of long-term saving hits all sorts of problems with low and negative yields. Places which use present value calculations will watch it head towards infinity or perhaps more accurately become undefined. It was only Monday that I pointed out a consequence in Japan.

The Bank of Japan’s negative interest rate decision has started affecting the life insurance market, with sales of some products such as whole-life insurance policies being suspended following the announcement.

Buy To Let

For foreign readers this is the UK term for buying a property and renting it out. This provides quite a “yield” these days although much of what is considered a yield is in fact a capital gain or asset price rise. From Your Move.

Taking into account both rental income and capital growth, the average landlord in England and Wales has seen total returns of 12.0% over the twelve months to January…..In absolute terms this means that the average landlord in England and Wales has seen a return of £21,988 over the last twelve months, before any deductions such as property maintenance and mortgage payments.

The gross rental yield is estimated at 4.9%.


What we have seen in the credit crunch era is a reduction in the interest-rate or yield on what were traditional savings products which were considered to be relatively safe. First we saw official interest-rate cuts hitting deposit savings rates in a trend which continues although 0% has been something of a Rubicon in many places so far anyway. Then we saw QE style pressures push bond yields and long-term interest-rates lower as failure in one area did not lead to a rethink but an Agent Smith style “More…..More” instead. Along the way we see that products such as whole of life insurance and annuities have been hit hard.

Such financial repression pushes investors and savers into riskier investments such as equities and in the UK in particular property both to own and rent out. The catch is in the riskier bit especially as policy after policy emerges to boost house prices which means for new buyers the risk continues to rise. The situation gets more highly charged.

You may wonder why I have left the concept of a real yield to the end but it has been deliberate as you see it is so misunderstood and has been so volatile I am not sure that we know what it means going forwards. Let me give you an example from the UK Debt Management Office from this week.

The United Kingdom Debt Management Office (DMO) announces that the syndicated offering of £2.75 billion nominal of 0⅛% Index-linked Treasury Gilt 2065 has been priced at £163.728 per £100 nominal, equating to a real gross redemption yield of -0.8905%.

So if inflation shoots up the UK taxpayer cannot lose? Oh hang on…….

Oh and those who believe that the Consumer Price Index is a more accurate guide to inflation than the Retail Price Index have just given up a gap that is currently of the order of 1% per annum.






9 thoughts on “Whatever happened to yield and the investors and savers who relied on it?

  1. “…is in sub-investment grade Oil & Gas and 0.1% (£38m) in sub-investment grade Basic Resources.”

    so L&G bought in to the Shale oil ponzi ?

    fools and , well ,our money ,

    bet they still get a bonus reward !


    • Hi Forbin

      Yes it looks like they did. If we take it further it is a sign of the times that of the portfolio some 31% was rated BBB and some 3.2% was BB or below. Putting it another way some 4.3% was banks and 1.9% financial services. Yet on the other side of the balance sheet they have a guaranteed product. What could go wrong?

  2. Hi Shaun
    We have all speculated before on
    the subject of how far will rates fall into
    negative territory.
    I just had a thought, will the word
    “Investment” go into your lexicon in the near
    future? If we reach -2 to -3% then we must be
    approaching a run on the banks or gold
    reaching it’s true value.

    The wise words of Seasick Steve and Ry Cooder
    will still apply ☺


    • HI JRH

      That’s a good point! I think that “investing” in negative yield bonds needs its own sub-category already. There must be more than a few risk committees mulling investing in something which held to maturity guarantees a loss.

      Meanwhile bond prices continue to climb and yields fall. Today with higher equity prices and good durable good figures we see US Treasuries push higher as well.

  3. If you have mortgage and you can pay it off then do so. The rate you are paying out is more than you can ever get saving, especially after tax.

    If you any where south of Chester then get solar panels on your roof. If you have a garden consider a solar heat pump. The savings on electricity and the amount you will generate now return better than what cash savings will give you.

    If you are lucky enough to have excess money it is essentially impossible to save it now especially if you are a higher rate tax payer.

    I had a fascinating conversation with someone in the Insurance industry about how things are changing now they cannot really invest in anything. The whole business is changing to more accurately price risk and it has just simply become a cash flow exercise between payments in and payments out. There is no way to increase the pot now by buying investments so you have to get your pricing of premiums spot on.

    • you forgot about houses

      rent income is great – even if the market tanks you may loose money but not as much as in investments

      mind you I expect that to change in the ever increasing need to bail the Banks out again


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