Dividends - Where There's Stodge There's Brass

We live in strange times. Interest rates are scraping along the floor, and the stock market is performing exuberant aerobatics daily. Where does the risk-averse average Joe or Joess put his or her cash for a couple of years without worrying too much about it?

There are lots of possibilities, like gilts (government debt) or corporate bonds (loans to companies). But one that is often overlooked is investing for dividends. Dividends are paid by companies to shareholders when they wish to pay out some profits (assuming they've made any). Dividend yield is the latest annual dividend divided by the share price. For example, a company with a share price of 200p that's paid out a dividend of 15p has a dividend yield of (15 / 200) = 7.5%.

So a high dividend yield means a company is paying good profits relative to its share price; and the dividend yield is effectively your rate of return. Be careful though! High dividends can tell another story; sometimes a high dividend yield can mean that the share price is depressed, which in turn may mean that the company is underperforming. And an unprofitable company won't be paying any dividends at all, regardless of what it paid in the past.

Dividends are simple, but like many things financial, are surrounded by jargon like EPS and dividend cover, designed to put you off so that you'll rely on some overpaid underperforming 'professional' instead. Don't be discouraged. If you want to know all you need to here is an old but excellent primer from the top people at The Motley Fool.

Some of our dullest companies pay a good dividend, year-in, year-out. You simply buy the shares and wait for the cheque to arrive. So which company to choose? In the good old days banks were stolid and uninteresting, and always profitable. How times change. Some of the banks look cheap now, but our objective today is to find something unexciting.

British American Tobacco (LSE:BATS) might be a good choice, if you're happy with an outfit whose long-term aim is to give lung cancer to every child in the Far East. But there are even duller companies. My strategy is to choose household names who I feel will be around for a year or two, and do a bit of basic research including looking at their web-site. Utilities like Scottish and Southern Energy (LSE:SSE) are paying good dividends. Even here you need to do your research. For example, look at United Utilities (LSE:UU.) who look good at first glance; until you start looking at their recent press. If you're feeling a bit tastier how about BP (LSE:BP.)? We'll always need oil. Right?

So there are no easy answers, and your own research and gut feel are critical. So where do you research beyond simple press articles? The LSE web-site is a mine of information; and there are sites like Dividend Investor which provide a free basic service.

And where do you buy your shares? The web is a good place to start; there are many execution-only (i.e. no advice) sites. They'll charge about a tenner, and you pay 0.5% stamp duty to Gordon and Alistair, bless 'em. It's a mild pain because you'll have to open an account and deposit funds before you trade. If instead you want to talk to a human being, or failing that a trader, most banks provide a (more expensive) share-dealing service, such as Nationwide's.

If you do decide to invest for dividends, plan to hold on to them for a while; it'll take some time to wipe out the cost of buying and selling the shares, and if you've chosen right, you may even get a bit of capital growth as the shares grow in value. Good hunting.

(Slim) bonanza for the over-50s!

Today's the day. You lucky older peeps can now put £5,100 each year into a cash ISA if you wish. And there's no shortage of choice. There are plenty of great Q&A sheets and comparison sites on the web that'll put you in the picture, and answer any question you may have.

Except this one. Why do the rates stink?

You may well ask. The average cash ISA rate is now a ghastly 0.41%. Adverts for cash ISAs all read something like "Pick up a great tax-free rate with instant access!" Well, I don't call 0.41%, or even 2-3% if you shop around, a great rate, tax or no tax.

So what's going on? I have a theory. Have you tried to open or move an account recently? The bonkers money-laundering rules that the government have spent years embellishing have made it ridiculously difficult; you will generally need to send off two pieces of identification including passport, if you trust the Royal Mail (which I don't) or a notarised copy of your passport.

Obtaining these is time-consuming and expensive, and therefore a barrier to changing at all. Banks love inertia. They have long used accounts which gradually erode your rate of interest; witness Nationwide's e-Savings, which now pays virtually nothing; if you want money you'll have to open e-Savings Plus or the slightly barmy Champion Saver. And next year something different, no doubt.

So ISAs are a godsend to them. You can't take your money out or you lose the tax advantage; and as already noted accounts are difficult to shift between banks. If you don't put money in each year then you'll lose the tax shelter for that year; so banks, ever logical, are offering rates less than those you'd get if you paid the tax on a normal savings account.

So what to do if you want to stick to cash? Shop around. There are still a few reasonable rates, particularly if you're happy to lock your money up for a while. Bradford & Bingley 2 Year Fixed Rate Postal ISA offers 3.75% for example. Now I'm not offering advice, and rates can go down as well as up etc., but I think two years is long enough. These woeful rates can't last for ever. Can they?