Welcome to the fourth instalment of my series of blogs analysing the various forms of savings and investments I am using for a child’s future.  This week I am reviewing a holding of shares in a UK Life Company held on behalf of my goddaughter.  These shares were acquired when the company demutualised in 2006.  At the time the money I had saved was earning little in interest so I thought ‘what is there to lose?’.

The savings account was worth £1000 and this became 457 ordinary shares at a floatation price of £2.19 a share.  Initially the shares rallied strongly and within 6 months were valued at £3.48, a premium of £1.29 and a gain of £617.92.  Things were going well!

Sadly, since these highs the shares have pretty much been on the slide particularly during the credit crunch years of 2008-09.  At their lowest in March 2009 the shares were valued at £1.32, a loss of £0.87 per share or £395.30 overall.

However, share price only represents one side of the coin when it comes to holding shares, the reward for which is normally the payment of an annual dividend.  In the case of this company it has maintained a reasonable level of dividend payments throughout the last 5 years which have ranged between 38.06p and 6.16p per share.  The 2010 dividend was 16p which represents a yield of 7.7% at the current share price.

Furthermore, from outset dividend income has been reinvested into new shares and resulted in an increased holding of 113 shares; at the floatation price this represents a gain of £246.91 or a yield of 24.7% (4.95% pa).  Had I maintained her savings in cash and achieved an ambitious 3% per annum return over the same period she would have earned £159.

Since their low in March 2009 the shares have seen a reasonable recovery increasing from £1.32 to a high of £2.44 on 9th March 2011.  However, the recent dreadful events in both New Zealand and Japan combined with continued unrest in Libya and wider Middle East have shocked the majority of shares across the global downwards.  This situation has been exacerbated for this particular company as it deals in the world of insurance and the current price is £2.08; back below the issue price.

The over all picture, including the dividend payments, if the shares were to be sold today is a gain of £181.35 which marginally beats maintaining the original cash holding.  So did I do the right thing?  With hindsight I am pleased with the dividend yield as this has acted as a hedge against the volatility of the shares; however a quick sell after 6 months would have banked a healthy profit.  Oh for that crystal ball in watching the markets! At this moment in time we are marginally better off than holding cash and if anything the experience has re-emphasised the danger of holding individual shares no matter how highly rated they are.  Remember BP?  Moreover, the journey has dramatically proven the importance of holding a ‘diversed portfolio’ when dealing in any equities.

In the next installment of the series I will take a look into Child Trust Funds.

Mike Tunstall is a paraplanner at Proposito Financial Planning. He joined Proposito in August 2010 following a career spanning 18 years with the RAF