Financial gurus: What do you think of this?

Question

I had some money in a UK bank savings a/c earning 5.85% interest and paying 20% tax.

I have just now used it to buy some shares in Lloyds bank, earning 6% dividend and paying 10% tax. There are also good prospects rising income and capital appreciation. Surely Lloyds bank is safe enough and I can sell the shares and get my money back in 3 days, whenever I want..

Was it not a brilliant idea? You can do it also as long as you drink a toast to my good health.

Oracle, I do not get your point that my deal only works for small amounts. Please explain.

One step..., You made a good point, but few people pay no tax at all and even for them it pays.

One step..., One must be very poor to be able to claim refund of tax on a D/A. But even then one would be better off.

Tringyogel, The price I paid for the shares is not of great relevance. I am satisfied with the 6% yield and will keep them to boost my income, just like a D/A.

Answer 1

Well done. The 6% is a net yield, too - you don't take 10% off it. Of course, you should always expect a higher return from equity investments - otherwise, no-one would bother!

Don't forget to take into account the cost of buying and selling the shares. At £10 a go, this will quickly eat into the interest/dividend differential.

Answer 2

Just to reiterate the point that shares can go down instead of up - look at the link.

How much did you pay for your shares? Remember, at least one person paid over £8 per share in 2002!

Also the dividend is not guaranteed. And the dividend cover is not as high as most of the other mainstream banks. This means that if (or should I say when) their profits fall they will be more likely to cut the rate of dividend.

But, having said that, overall they are not a bad investment.

Answer 3

Well done. On the face it seems like a good move.

However, the value of shares can fall as well as rise and so can the value of dividends (and interest rates). Lloyds TSB looks like a safe bet but again, there have been banks that have gone to the wall.

As long as you are happy with the purchase and it will make you money and make you happy then it's a winner.

All the best.

Answer 4

Well it depends on your tax position.
You can reclaim the tax on the interest, but not on the dividends!

Answer 5

you can get away with deals like this when you dealing with meagre amount of monies.