How to turn shares into your savings

If you can stomach the risk, the rewards can be handsome when you dabble in the stockmarket.

ASX in Sydney

IT’S a tough choice for your money: savings accounts or shares?

Do you choose safe, boring bank deposits that pay little more than inflation, or volatile high-paying investments that test your patience and can destroy your nerves?

Shares are much riskier than cash but a growing number of Aussies are considering using shares as a long-term savings option to combat low interest rates.

The numbers stack up — many of Australia’s strongest companies are paying dividend income above 4.5 per cent, or more than 6 per cent once you add their attached tax credits. Bank accounts are paying below 3 per cent.

However, the shares strategy only works if you can sleep at night when the market swings violently, and if you are prepared to stick with the stocks for at least seven to 10 years to reduce the risk of capital loss.

MAKE THE MOST OF HIGH INTEREST SAVINGS ACCOUNTS

Start your share portfolio with the big banks, Wesfarmers (which owns Coles), Telstra, and BHP Billion

If income is your aim, here are six steps to turn shares into your savings.

1. Research quality companies with a long history of solid dividends, or get a broker or adviser to do it for you. Start with the big banks, Wesfarmers, Telstra, and BHP Billion.

2. Diversify across several high-dividend companies to reduce the risks. You can choose individual stocks or go for exchange traded funds or manage funds that automatically spread your money.

3. Once you have a planned portfolio, contact a stockbroker (who may charge $100 a trade) or sign up with cheaper online brokers. CommSec and Etrade are the biggest in that space.

4. Beware of very high dividends. Some stocks are paying 8, 9 or 10 per cent dividend yields because their share price has fallen sharply and the dividends will soon follow.

5. Hold onto the stocks for several years and watch the dividends rise naturally over time as inflation pushes up company profits. If the dividend income is more than you need consider reinvesting it into more shares, which will only grow the dividend stream further.

6. Don’t be freaked out by sharp falls in share prices. During the GFC the big banks’ shares halved in value but their dividends dipped only slightly. Since then both the share prices and dividends have climbed strongly.

History has showed that when held over very long periods, shares are not as risky as you think.