Millions of us deposit our money into our banks’ cash Isa accounts — but might we end up with more if we invested it in the banks themselves instead?
Many are paying out dividends that are higher than the interest we would get on cash savings, with the potential for capital gains, too.
With High Street names such as HSBC looking cheap compared with the FTSE 100, here’s how to get financial exposure inside your tax-free Isa wrapper before the end of this tax year, as well as the bank stocks to consider and those to avoid.
Better than a savings account: Many UK banks are paying out dividends that are higher than the interest we would get on cash savings, with the potential for capital gains, too
An unloved sector
The UK stock market has underperformed compared with the rest of the world of late, and the financial sector is one of its cheapest corners.
One common way of valuing shares is by dividing the profits the bank is expected to make by the company’s share price.
By this metric the financial sector currently trades on 7.2 times this year’s expected earnings, compared with the average for the market, which is 11.
The shares are cheap for a number of reasons, including fears that the cost-of-living crisis might lead to borrowers defaulting on their mortgages and because falling bond valuations last year caused some regional banks to fail, although not in the UK.
Although these concerns are valid, recent positive economic news, such as the lower inflation figures and the fact that we are no longer in recession, ought to be reassuring for bank share buyers.
Jason Hollands, managing director of investment platform BestInvest, says: ‘UK banks are well-capitalised and are awash with cash, so should be able to weather these headwinds.’
Pick stocks
Investors can choose to buy into a number of UK banks or financial businesses such as insurers. Many are returning lots of cash to shareholders via both dividends and share buybacks.
Barclays
Shareholders in Barclays have seen shares up 26 per cent over the past 12 months.
Those who get in now will have a dividend yield of 4.6 per cent, slightly below the best-buy rates on cash savings accounts.
However, some experts believe that the stock has further to go.
The bank has committed to returning half of its stock market valuation to shareholders in dividends and share buybacks in the next three years.
Richard Hunter, head of markets at investment platform Interactive Investor, believes the total amount returned over the next three years will reach £10 billion.
Despite the recent strong run, it’s still the cheapest of the UK banks in terms of valuation, trading at six times earnings.
HSBC
Dividend yield fans could look to HSBC, where income at 7.9 per cent outpaces what you could get in its savings accounts.
Recent profits were strong, despite an issue with Chinese operations that pushed down profits in the final quarter.
Lloyds
Those keen on a more domestic bank might consider Lloyds, with a 5.5 per cent dividend yield.
Hunter says the bank is ‘making a good fist of performing within a difficult environment, with its underlying financial strength underpinning progress’.
Darius McDermott, managing director at fund data group FundCalibre, says: ‘Operations are pre- dominantly domestic and there is less scope for things to go wrong.’
NatWest
The only bank to have seen its shares slide this year is NatWest, after it lowered earning expectations due to an expected fall in interest rates, and fallout from the Nigel Farage ‘debanking’ scandal at its Coutts subsidiary. NatWest now yields nearly 7 per cent.
Investors may want to wait until the summer, when the Government is expected to sell off its stake to retail investors. There may be a discount to persuade investors to buy the shares.
Standard Chartered
Yielding 4 per cent, globally focused Standard Chartered is exposed to the Chinese economy, leaving analysts cautious.
But Hunter believes it is ‘adequately capitalised to withstand challenges’.
Others in the sector
The sector also contains what Hollands calls ‘a mish-mash of exchanges, card firms, asset and wealth managers and insurers’.
Ben Ritchie, head of developed markets equities at fund management group Abrdn, likes the London Stock Exchange Group as a stock that is poised for growth.
Other possibilities include insurance companies Aviva and Legal & General, which have asset management businesses that Hollands believes will benefit from rising stock markets.
Funds for financials
If you prefer to put your Isa into funds, which can make it easier to diversify your portfolio across a range of stocks, there are several with a heavy bank and financial component.
Almost a third of Man GLG’s Income fund is financial, and it holds HSBC, Barclays and Lloyds in its top ten holdings, giving you good exposure to large British banks.
Man GLG has performed well recently and is up 30 per cent over 12 months.
Other possibilities include The City of London Investment Trust, which also has a third in financials, and the Schroder Income fund, which has around a quarter of its holdings in financials.
City of London, run by stalwart Job Curtis, has increased its dividend for 57 years, the longest record of any investment trust, and currently has a yield of 5.12 per cent, more than you will get in most cash Isas.
It’s worth remembering that, unlike putting money into your bank account, the value can go down as well as up.
But over long periods, investments tend to outperform savings, so only those wanting to hold their Isa for the long-term might want to look at bank shares — as well as the cash Isas they offer.
