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I reckon any parents out there need to open a Stocks and Shares ISA. That’s because I’ve just looked at a survey that says it costs an average of £13,830 a year to raise a child. Expressed another way, it will take nearly £250,000 to support them until they are 18.
To be honest, I think these studies are a bit silly. Why? Well, I know a couple with four children. If these figures are correct, it’s going to cost them £1m before their kids become adults. I don’t think so.
And with the average family having 1.7 children, cash-strapped parents will need £314,318 in an ISA if they are to find the £23,511 (1.7 x £13,830) a year needed to support their offspring. This assumes they achieve an annual return of 7.48%, the current (5 December) yield of the five most generous FTSE 100 dividend shares. I don’t reckon many people thinking about starting a family will have access to a fund of this size.
But that doesn’t mean we should – excuse the pun – throw the baby out with the bath water. Opening an ISA and stuffing it full of dividend shares might be a way of parents supporting their children later in life. It could help them contribute towards the cost of a university education or pay for the deposit on a property.
Some numbers
A relatively small sum invested over 18 years could help achieve this. For example, putting £500 a year into an ISA yielding 7.48% would grow to £19,136. This assumes all dividends are reinvested buying more shares.
But a stock with a high yield could be an indication of trouble ahead. The FTSE 100 is yielding 3.15% so the top five are currently returning over twice this level. Generally speaking, investors are likely to demand a higher return for holding a share that’s perceived to be more risky.
However, this doesn’t mean all shares offering generous dividends are too good to be true. Although there can never be any guarantees that high yields will be maintained, a well-run company — one that’s generating lots of cash and has a strong balance sheet – is in a good position to maintain an above-average payout.
Any examples?
That’s why, in my opinion, I believe Land Securities Group (LSE:LAND) is worth considering by parents and non-parents alike. It’s a real estate investment trust (REIT) which means it must return 90% of its tax-exempt rental income to shareholders each year to retain certain tax advantages. It’s presently yielding 6.64%, over twice that of FTSE 100. This is the fifth highest on the index.
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But there are risks. The commercial property sector is notoriously cyclical. And a UK economic downturn could put rents and occupancy levels under pressure.
However, the REIT has an impressive portfolio of shopping centres and offices. And it’s moving into residential properties. Most of its contracts provide for rental income to rise in line with inflation. Also, its share price presently trades at a discount to its net asset value.
For these reasons, I think it’s one of many attractive UK shares available at the moment.
