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By Richard Evans If you need a regular income from your savings but would like the possibility of some capital growth as well, you'll need to look beyond simple deposit accounts from banks and building societies. And it's always worth remembering that if you So what are the options for investors who want to earn an income but also protect their capital? Here's a quick guide to some of the most popular. Shares Well established, profitable companies usually pay their shareholders a twice-yearly dividend from the earnings they have left over once they have met all their expenses and made any investments they deem necessary for the future. Unless things go badly wrong, these payments are usually fairly predictable, and often rise from one year to the next. If you pick the right shares, therefore, you will have a regular income.with some protection against inflation built in. And, if the company is well managed and the dividends do rise, there is every chance that the share price will too. Just as deposit accounts have interest rates, shares have "yields" - the ratio of the dividend to the share price. These yields vary from zero (when companies cannot afford a dividend or choose to reinvest all their profits) to perhaps as much as 5 or 6 per cent among mature businesses in the FTSE100 index. Unlike the interest rate on a deposit account, the yield on a share varies all the time as the share price fluctuates. "Among the shares with decent dividend payouts at the moment are Royal Bank of Scotland, Vodafone and BT," says Keith Bowman of Hargreaves Lansdown, the stockbroker. "And all these shares are rated positively by the market, meaning that the consensus among City analysts is that the share prices are more likely to rise than to fall." At the time of writing, Royal Bank's shares were yielding 4.75 per cent, Vodafone's 4.2 per cent and BT's 4.57 per cent. As yields are normally quoted net of basic-rate income tax, such rates of return compare well with the interest on most cash savings accounts. View Royal Bank of Scotland stock pages View Vodaphone stock pages View BT stock pages Other blue-chip companies that offer decent yields and get the thumbs-up from City analysts, says Mr Bowman, include Barclays (4.2 per cent), National Grid (3.7 per cent) and Aviva, the insurance group that owns Norwich Union ( 3.74 per cent). But picking a good income stock is not always a simple matter of buying the share with the highest yield. "Don't be dazzled by the very highest yields," says Mr Bowman. "Ask yourself, has the share price dropped for a reason?" If a share price falls, the yield rises in proportion - but you won't see any benefit if the dividend is cut next time round. A falling share price is often the market's way of saying that it expects the company to reduce the dividend. One way to assess the safety of the dividend is to look at the "dividend cover". This is the number of times that the company could pay the dividend from its profits. A dividend cover of 2 means that the firm could afford the dividend twice over. If the figure is 1, the company can only just afford the dividend - if it ran into problems, a cut in the payout would be almost inevitable. "In other words," says Mr Bowman, "the higher the dividend cover, the safer your income from the shares. Look for cover of 1.5 times or better if possible. If it's less than this, start to question whether the dividend is sustainable. "Among popular stocks, Royal Bank of Scotland, for example, has a dividend cover of about 2.1." United Utilities, on the other hand, has a generous yield of 5.7 per cent, but the cover is less than 1 - it is paying out more in dividends than it earns in profit. "This is why the City rates the stock less highly, somewhere between a hold and a sell," he adds. Equity income funds Even if your research uncovers the perfect income stock, with an attractive yield and healthy cover, it would not be a good idea to put all your savings into it. The best-run companies can hit unexpected problems that can affect their profits and send their shares tumbling. Diversifying, by buying a number of different shares, spreads the risk and means you will suffer less if one of your stock picks turns out to be a dud. You can, of course, buy a basket of shares yourself. But dealing charges mount up and administration is time-consuming. So you could entrust the job to a professional fund manager. There are plenty of funds on the market that aim to buy shares in companies with good, sustainable yields - they are called "equity income" funds. "Yields on these funds are typically 3 to 3.5 per cent after tax, which is comparable to the interest rate on deposit accounts," says Mark Dampier of Hargreaves Lansdown. "But dividends can keep on growing, whereas deposit account interest will only experience short-term ups and downs. Also, equity income funds have some of the best managers around." He suggests investing in more than one fund for extra diversification and recommends Invesco Perpetual, Jupiter, F&C, PSigma, Axa Framlington - whose equity income fund is one of the few to offer the option of a monthly income - and Artemis. View funds managed by Invesco View funds managed by Jupiter View funds managed by F&C View funds managed by PSigma View funds managed by AXA Framlington View funds managed by Artemis To research other funds, visit Yahoo!'s Fund section You should also buy (as an Isa if possible) from a fund supermarket such as Skandia, Cofunds or FundsNetwork, or his company's own, rather than directly from the fund manager, Mr Dampier says. This will save on commission and make administration and switching easier. "And don't forget investment trusts," he adds. "Unlike unit trusts, they can trade at a discount to the value of the shares they own, so you get more for your money. They are often well managed as well. Perpetual Income & Growth and City of London are two of my favourites at the moment." Some equity income funds concentrate on overseas shares; Schroder Global and Jupiter European are two of Mr Dampier's picks. "Where else but equity income would you go for the potential for income growth and capital growth?" he asks. "You'd struggle to find another asset. Equities are still relatively unloved, everyone wants property - so be contrarian and go for shares." Bonds Bonds are essentially IOUs, issued by companies or governments, that are repaid at a predetermined date and pay a set return - hence their other name, "fixed interest" securities. They are traded on the financial markets so their price fluctuates, but there is limited scope for capital gain as they are redeemed at face value. "When considering bonds, ask yourself: what is the extra return I get relative to a risk-free asset such as cash," says Darius McDermott of Chelsea Financial Services, the independent financial adviser. "At the moment, this 'risk premium' is insufficient, so we think you would be better off in cash. "But bonds do have a place in a long-term, balanced portfolio of assets," he adds. "Our buy list of bond funds includes Aegon Sterling, which currently yields 4.77 per cent, Aegon Global (5.05 per cent), Henderson Strategic ( 4.25 per cent) and Legal & General High Income (5.67 per cent)." The yield on the L&G fund is so much higher because it invests only in riskier securities known as sub-investment grade or "junk" bonds, he adds. Cash If you don't want to take any risks with your savings or need them available at short notice, cash is hard to beat. Among the best accounts available, according to Susan Hannums of AWD Chase de Vere, are Icesave's Easy Access, an internet-only account paying 5.95 per cent on balances of £250 or more, Anglo Irish Bank's seven-day notice account (5.9 per cent, by post or telephone, minimum £500) and the same bank's fixed-rate bonds (one-year 6.45 per cent; two-year 6.35 per cent, minimum £500). Among cash Isas, she picks out National Savings & Investments' Direct Isa, which pays 6.05 per cent tax-free if you deposit at least £1,000. "Alternatively, NS&I's index-linked savings certificates are fantastic for higher-rate taxpayers, and still pretty good for those on the basic rate," she says "They pay 1.35 per cent plus inflation on the RPI measure. They are tax free, so with RPI currently at 4.6 per cent the effective interest rate is 9.75 per cent for higher-rate taxpayers or 7.31 per cent for basic-rate taxpayers. But you must hold the certificates for at least a year to get these benefits." 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