Category Archives: IFL

Income for life Dividend cuts force strategic rethinking

Income for life Dividend cuts force strategic rethinking

A sense of deja vu surrounds me as i write, mingled with absolutely no Schadenfreude. Three months ago I wrote that “a surprise cut in the dividend of what had been one of my star performers …. forced me to apply dramatic surgery to the Rising Income Retirement Portfolio”. I then went on complacently to explain how nevertheless everything would come out rosy for the full year, and went on to apply similar dramatic surgery to the newer Income for Life portfolio.

In doing so I had chosen to ignore Sainsbury’s further small cut to its dividend, and had sadly overlooked its restated dividend policy. What I had not anticipated was that a month after the last article, Pearson’s new regime would be quite so ruthless in doing what the collapse in the share price had been screaming at me was likely: cutting the interim dividend by 72%, and with the likelihood of more cuts to come.

So it’s time for the pruning shears again, never mind the squeals: overall the RIRP garden is healthy enough to withstand some more surgery.

Essential action

If I did nothing – which is the avowed purpose of the RIRP, and intended to require minimal management now it is nearly 10 years old – the combined effect of these two dividend cuts would have reduced my underlying income this year by more than 6% from £6,332 to £5,937. Special dividends and realised net capital profits would admittedly have boosted that by more than 7%, nearly twice the latest 3.9% RPI inflation rate; but the whole purpose of this portfolio is that it should be invested in shares whose underlying income is likely to rise by more than the rate of inflation without what I still regard essentially as window dressing in the form of strategic realisation of capital profits.

So I am forced again to take another look at the dividend growth prospects of some of my underperformers. Assuming a similar cut in the final dividend is on the way Pearson may only yield around 1.6% next year on its original purchase cost. Pearson claim the cut will enable them to pursue a “sustainable and progressive dividend that is comfortably covered by earnings”. The original RIRP rules required me to junk Pearson (and GLIF – see update opposite). But another lesson I have learned rather late in life is that nowadays holding on in these situations can make sense: as Legal & General and United Utilities have proved, if they get it right – and the stronger choices in the portfolio can carry them for a while – companies which have cut their dividends often subsequently deliver above average dividend growth. But I will be keeping a close eye on promises versus delivery.

The same is not true of Sainsbury, who have now delivered 3 years of gently declining dividend payments, leaving them yielding less than my low-dividend growth stock Reckitt Benckiser which has at least been delivering double digit growth from its pathetic start, and has allowed me to scalp some life-saving capital gains. Sainsbury’s have redefined their dividend policy as being to pay out half of earnings, but this is just the sort of unpredictability that I don’t want from a sector where Lidl has now become the biggest player – albeit only at the cost of a huge profits squeeze. As a privately owned German company, the owners can afford the long view, but some of us have rising post-Brexit bills to pay, so with many regrets, I have to eject Sainsbury, at 238p for a loss of £1,347, in the full knowledge that there is a possibility that I may be selling right at the bottom of its cycle.

Cash in the Bankers

To make up for the loss I shall repeat my previous raid on the shares of one of the several companies whose share price has shot ahead from the purchase price. I am selling one sixth of the shares we hold in Bankers Investment Trust. At 813p, on paper these are showing me an astonishing capital gain of 137%, though some of this reflects the too clever accounting in the early days of the RIRP when I used realised capital profits to deflate the purchase price of my reinvestments. I have become more transparent since.

This sale yields me a profit of £1,375 on the original investment, £28 more than the Sainsbury loss. Taking capital profits this way goes against the grain of the whole of my investment philosophy developed over the past 50 years since I first rashly invested some of my university grant in buying entirely unsuitable speculative commodity shares which fortuitously benefited from a surge in commodity prices on the outbreak of the Arab-Israeli 3 day war; I now realise I probably have almost as much to learn now as I did then.

Rolling the dice

Nevertheless I am taking a bit of a gamble with the proceeds, and reinvesting the six £1,000 Sainsbury units into Barratt Developments, the country’s biggest housebuilder. As shown by my previous inclusion of Galliford Try in the sister Income for Life portfolio, I do not share the post Brexit gloom for the housing sector, since I – perhaps naively – believe addressing the lack of housing supply will define the success of this and future governments. The gamble is that the business is notoriously cyclical and there is a danger I am buying in at the top of the cycle. The business has just delivered a near 20% rise in profits from its highest sales volume for nine years.

The chart shows the recent spectacular dividend growth – but also the dangers when things go wrong as happened after 2007. The shares go xd at the end of this month, which means we only capture some two thirds of the underlying dividends this year, but this is more than compensated for by the special dividend.

The sales of Sainsbury and Bankers produce £7,022 cash, so with an eye to boosting underlying dividend growth next year I am putting the remaining £1,000 into Lloyds whose dividend paying capacity I think still has some way to go, for all the reasons explained in Peter Shearlock’s lead article. To make up for the £97 dividend losses this year from the two sales, I am raiding some of the £173.52 special dividends which we will get from Barratt in November to include in this year’s underlying income.

Even so as Table 1 shows, despite all the companies shown in bold in the last column which have increased their dividends since the table was last published, total underlying dividend income is still some 2.7% down on last year, although of course more than compensated for by special dividends and realised capital profits.

Positive change

The summary Table 2 for IFL shows that the changes made three months ago are succeeding in their aim of keeping underlying average dividend growth comfortably ahead of inflation.

However the figures in blue show those payments made in dollars or euros where the effect of foreign currency moves can produce some quite perverse results, as in the case of HSBC; though as Shell and Vodafone prove, it is very much a case of swings and roundabouts.

Douglas Moffitt, October 2017

Income For Life portfolio Brexit creates house builder opportunities

Income for Life portfolio – Brexit creates house builder opportunities

The Rising Income Retirement Portfolio and its more recent offspring the Income for Life Portfolio were designed as a selection of shares requiring minimum maintenance once fully invested, delivering dividend increases above the rate of inflation.

The RIRP was constructed over a 7 year period through drip investments, designed to maximise the benefit of pound cost averaging, and has been fully invested since 2015. Table 1 shows it is more than fulfilling its mandate.

RIRP portfolio

Projected underlying income for the year to next February will be nearly 5% up on last year, and that’s before non-recurring items – which I now treat as “bonuses” – which bring the total rise in income for the year to 13%. This compares with the 1.8% rise in inflation according to the RPI over the most recent 12 months. The underlying yield on the sums originally invested is up by more than 50%, from 4% net after basic rate tax to 6.3%.

The IFLP on the other hand was built from scratch from April 2015 in just twelve months. It also had a more demanding initial yield target of around 5% in its first full year of investment. It will comfortably exceed that in its first full year to March 2017.

However this meant making some compromises between the fund’s need for an income significantly higher than is available from the FTSE 100 (and way ahead of anything on offer at any reputable bank), and its long term aim – the same as the RIRP, to deliver dividend increases which exceed the rate of inflation.

I made no secret of the fact that once fully invested it was likely I would have to revisit some of the shares initially bought just as income-boosters, but whose growth of income was likely to prove a drag on the fund’s longer term performance.

Table 2 shows how the dividends this year of the twenty current components of the fund compare with those declared the previous year. Until the most recently reported dividend increases from Kier, Manx and Sky, the reductions at GLIF meant the average underlying rises were barely keeping pace with the 1.8% inflation rate.

income for life portfolio

Well ahead of inflation

Now it is clear that we will finish the year usefully ahead of any likely inflation rate, but for the longer term any shares showing lower dividend rises than the current inflation rate obviously require re-examination as to whether it makes sense to keep them.

Some caution is needed: the IFL is only half way through its accounting year, so some – such as De La Rue – have not yet declared both their dividends for the year. On the other hand, Centrica has done, and is clearly not going to keep our spending power from being squeezed in future unless it ups its game next year. It was admittedly a risky candidate for inclusion in the first place because it had previously cut its dividend, but history shows that if you buy such companies after the nasty medicine, they can sometimes outperform – in dividend and capital terms – as both United Utilities and Lloyds have proved within the RIRP. I will watch any such underperformers carefully next year.

It walked like a duck…

The big scar in both portfolios is of course GLIF, the classic illustration of something looking too good to be true and turning out to be precisely that. A boardroom coup has already seen the dividend halved, and now the company says from 2017 dividends will be fully covered by sustainable operating income plus the proceeds of any sales of investments, which must imply another cut.

The only silver lining is the suggestion that this will provide the basis for the payment of a “progressive dividend”, which is what both portfolios are all about. The original guidelines for the RIRP disqualified any company which had a history of dividend cuts, and by implication required me to eject any company which did so after I had bought, but this proved too rigid in the testing times following the banking crisis during which the portfolio was launched. I am leaving GLIF in both portfolios for the time being as examples of how even the odd disaster can be absorbed, even within only a 20-share portfolio.

The RIRP was actually launched on a disaster I would rather now forget, and has been carrying Lloyds Banking Group almost since launch, and RSA for several years recently. In investing no one is infallible, and while I obviously prefer not to choose lemons, history shows that when I have done, jettisoning them too hastily is often a costly error – not least because the “replacement cost” is often very high. For instance, on its current reduced payout, GLIF still yields 4.4% on its original investment, but because the share price has been understandably punished, I would need to get over 10% on any new investment to avoid a reduction in ongoing income.

Similarly the original RIRP guidelines required me to ignore capital ups and downs as random noise behind the sole objective of delivering rising dividends, and by and large I did.

But the shorter timeframe and need to underpin growth means I cannot be so intellectually detached with the IFL. So when I see UIL, one of my star income boosters but with no history of rising dividends, showing a capital gain of over 66% for reasons I cannot imagine from any published information, I have to look at how I might benefit.

I bought UIL at 111p to yield 6.8%, but at the current market price of 187p its dividend yield for new investors is just 4%. So if I can find a share with the prospects of dividend growth which currently yields that or more, I would be quids in selling UIL and reinvesting.

House builders remain cheap

I am therefore going to sell enough UIL shares to buy £2,000 of Galliford Try. As a Brexiteer I have never understood why the doom-mongering should apply to housebuilders, since I do not accept that post Brexit Britain will see us all living in caves.

Galliford is one of many good companies whose shares have not recovered from their immediate post Brexit markdowns.

The company recently released a splendid set of results and boosted the year’s total payout by over 20%. Despite the 17% rise in its share price since the announcement, the shares still yield over 6% assuming the payout can be maintained; I have every expectation that it will be increased further until the housebuilding cycle goes into decline.

I don’t expect that to happen in the foreseeable future. While I have no special insight into the minds of Messrs May and Hammond, I do know that if they are serious about capturing the true centre ground of British politics, they could do far worse than do all in their power to see as many houses as possible built between now and the next election.

But I shall wait for the November Autumn Economic Statement before committing myself further.

Simple maths; simple decision

UIL has just paid the second of its quarterly dividends, so any shares I sell now will only lose me half a year’s income. The Galliford shares don’t go exdividend until October 27 so this year I will pick up their final dividend, more than two thirds of the annual payout.

The maths is a no-brainer. If I sell enough UIL shares to buy £2,000 Galliford Try I lose £40 UIL income this year, but gain £86 from Galliford; in the full year next year the Galliford dividends will be well ahead of UIL assuming there is no increase, which is unlikely.

I have thus converted high yielding shares with little or no dividend growth prospects into shares with dividend growth prospects, and given the current year’s income an additional small boost. In capital terms I will have sold shares which cost me £1,186 and acquired new shares costing £1,997.

These changes will be reflected in the table with the next article in January, when I will look at some of the other dividend laggards in my list such as GSK. If they are still showing capital gains, I will see if I can repeat the trick, though in reality it is unlikely I shall be able to switch from all the higher yielding underperformers without some short term cost to my income.

Douglas Moffitt, October 2016

Income for life trying to sit on my hands as the world wobbles

Trying to sit on my hands as the world wobbles Income for Life

The late, much maligned but consistently entertaining stockmarket commentator Bob Beckman used to claim that the most difficult thing any investor has to learn is the art of “masterly inactivity”. I know just what he means.

Even before the referendum vote and its shock result, I had been tempted to indulge in some tinkerings to take advantage of juicy situations thrown up by the stockmarket’s gyrations. I thought I might take the opportunity to chuck out some of the income boosters held in both the original Rising Income Retirement Portfolio (RIRP) and its more recent successor, the Income For Life Portfolio (IFLP), and reinvest in a couple of companies I have come across recently which are still pledging to raise dividends anything from 4% to 15% and whose depressed share prices would actually give the portfolios a further income boost.

Why I shouldn’t trade

In fact there are three good reasons not to do this.

• Both portfolios were intended to be low-maintenance, partly as an insurance policy against the day when I may be less mentally capable of tinkering, even if I wanted to. So my shares are designed as investments to “buy and hold”. If there isn’t a compelling reason to do something, don’t.

• It is not as if my selections aren’t providing what I intended. Both portfolios are more than delivering their stated aims. Without lifting a finger, and only one third of the way through its accounting year, I know that the original RIRP will deliver a 3.7% rise in underlying income for the year. This represents a return of over 6.2% on the original capital invested, and we have also pocketed a special dividend which brings the actual rise to over 7%. Similarly, within just one year I have constructed the IFLP whose dividends in its first full year will slightly exceed the targeted 5%. So, as neither portfolio looks broken in any way, why fix it?

• There is also a more practical reason, and that is that as we go to press the market has had only a few trading days in which to respond to “Independence Day”, and frankly it could still change its mind as violently as it did on the Day After. My head and experience tell me that only an idiot would make major changes in those circumstances.

But Beckman was right. Masterly inactivity is difficult when you can see opportunity staring you in the face. In both portfolios I have shares in companies whose dividend growth has stalled or disappointed, even if they have not forced me to act by cutting their dividends. In most such cases, especially with the more recently constructed IFLP, this means to sell these stocks now would mean crystallising a loss, which goes against the grain: even in the new 20-share IFLP, I can carry some sleepers if I have to. But some of my laggards are actually showing useful capital gains – don’t ask me why, I long ago stopped trying to impute any rationale to stock market valuations.

I have a further disincentive to tinker, and that is second column in Table 1 which shows the historic yield on the original cost of the RIRP shares. There are question marks over the short term dividend growth potential for GSK, Interserve, Pearson and United Utilities, but you need compelling reasons to oust shares mostly still yielding more than my 6.2% RIRP average.

july-2016-dm
Table 1 & 2

This would clinch the decision, were it not for the fact that most of the shares in the RIRP have risen in value by more than the rises in their dividends, and so anyone buying now gets much lower yields. To show the effect, I have created a new column for both tables showing what the yield is on the current value of the shares. It shows that new investors in the RIRP now get a lower yield than my initial IFLP target of 5%.

Because I launched the IFLP when the market was near its all-time high, I naturally have capital losses there. The result is that the similar current yield column in Table 2 shows an investor buying all the IFLP shares today would now get a yield approaching 5.5%.

Will RIRP deliver better dividend growth?

The logical conclusion from this would be to switch the whole of the RIRP into the IFLP — assuming the dividend growth prospects of the IFLP are as good as those of the RIRP. Because of the stocks I had to choose to maximise my first year income for the IFLP this would surprise me. And I am, as always, ignoring dealing costs. So I am not suggesting that anyone should do this. But monitoring the comparison between the RIRP and IFLP will be an interesting intellectual exercise for the future.

The principle underlying the creation of these portfolios is that they are based on my own investments, and are my best choices of what I have ended up in my own portfolio since I sold my companies in 2008. And despite Bob Beckman’s good advice, I have been unable to resist topping up my own holdings of Berkeley Group and Lloyds, which seemed to me to have been knocked back disproportionately, and where my holdings were below my average size.

So I am going to deny “masterful inactivity” for the IFLP as well – but with just one holding.

Out with esure, in with Alternative Networks

Even before the vote I had my eye on another of my own holdings as a possible substitute for esure in the IFL. As discussed in April, this company not only cut its special dividends – on which I had been relying for an initial dividend boost, but also its final. Yet the share is still showing a capital gain, and I cannot resist the temptation to sell the shares (crediting the £100 capital gain to my “bonus” line), and reinvest £5,000 in Alternative Networks.

The company delivers IT products and services to businesses, ranging from cloud computing, managed hosting, fixed-line voice, software development, mobile, systems, IP networks and various other things like “virtualisation” which are beyond my understanding. But what I can understand is the 64% rise in dividends over the past 5 years. The shares have almost halved from their all-time high when their yield was too low to come up as a possible choice for the IFLP, but at their current price will yield nearly 6% in a full year. I can see nothing in June’s interim report to justify this rating; what I can see is the commitment to raise dividends a further 10% this year.

We have unfortunately missed the xd date for the July dividend, so will only get the final in January in this accounting year. But together with the dividend already received from esure, the special dividend from GSK and the capital profit from esure, this means the actual cash flowing in up to next April will represent a yield of over 5.25% on the £100,000 notionally originally invested, against the underlying first full year yield of just under 5.1%.

After this, perhaps I can resist the temptation to deal for a few months.

The post-BREXIT outlook for my portfolios
When the Editor asked me to “comment on the outlook for the types of companies in the portfolios”, my response was to suggest that at this stage any rational judgement on individual company or sector prospects is likely to be about as helpful as the Treasury’s “calculation” that average household gross domestic product (not income) would be £4,300 less than it might otherwise have been by 2030.
All depends on the renegotiation, which is unlikely to be finalised before 2019, assuming we have not had a new election and a National Government first. But whatever the uncertainties, political or economic, I can’t see the logic for bashing the construction sector; banks will only suffer if the euro collapses, and that might have happened anyway. Cynics may think that companies currently subject to EU price caps, like Vodafone, might have an opportunity to exploit their customers once we are out, whereas pharmaceutical companies based in the UK may suffer a regulatory disadvantage.
Most of my companies earn most of their money in the UK and so might be best placed eventually to benefit from less EU regulation. It’s difficult to see how my utility and oil companies are likely to be affected either way, except in the way that all companies with significant non-sterling earnings will benefit from the lower pound.

Douglas Moffitt, July 2016

IFL off to a cracking start

IFL off to a cracking start

Exactly a year ago I launched the Income For Life (IFL) portfolio, which is an attempt to recreate for more recent subscribers the success of my Rising Income Retirement Portfolio (RIRP), now in its ninth year. I had set myself some pretty ambitious targets for the IFL – not least to be fully invested within a year. The result so far is a bit of a curate’s egg, but definitely with more good than bad.

In January I completed investing all my notional £100,000 with twelve top-up purchases, shown in red in Table 1.

378 table1

Although less than £50,000 was invested throughout the full year, dividends received since last April totalled over £2,300 net of basic rate tax. That’s equivalent to nearly 3% pre-tax from a bank on the full £100,000, and more than you are likely to find from any savings institution with the exception of the likes of Bank of Baroda.

Forecast divis at 5% net

Even better are the red figures in the dividend column. These highlight companies which are paying more than was expected at the time of my last article about the IFL in October. However the rises shown for HSBC and Shell are entirely due to the weakness of sterling and could just as easily be reversed this year. Clearly too, these companies’ prospective yields suggest that the market has some doubts about the sustainability of their dividends.

But at the moment, projected dividend income for the 12 months ahead is a fraction over 5% net. And that is despite two partial failures.

GLIF has halved its projected payout, though even after that it is still delivering the equivalent of 5.5% pre-tax interest on the original investment (and over 9% on its current price). My forecast for the coming year’s income includes the reduced payment. GLIF is a useful reminder that although I have now been investing for over 50 years, and writing about it for nearly as long, “even I” still periodically forget that if it looks too good to be true, it almost certainly is. I beat myself up about GLIF quite enough in the January issue, so I will not do so again. I am hoping a progressive dividend policy might replace the previous income-kicker attractions, but will certainly be keeping more of an eye on it than most of the other stocks.

Insurer esure has also disappointed, though here I am partly to blame for nurturing unrealistic expectations. The company’s stated policy is to pay out 50% of underlying earnings in dividends, plus special payments depending on circumstances. I own shares in esure, like all others in both portfolios, and it has provided me with a healthily rising income in the past. For the RIRP, the unpredictably distortive effects of special dividends have been a persistent problem, but I assumed they could only be a bonus in the initial stages of building the IFL.

With esure, underlying earnings are down over 25% this year. Despite paying out an extra 20% of earnings in a (reduced) special, actual dividends for the past 12 months are down from 16.8p to 11.5p per share. The forecast income for the year ahead is based on the actual dividends declared during the past 12 months.

Mixed results from drip-feeding initial capital

Paradoxically esure is one of the 7 shares out of my 20 to show an overall capital gain for the year. As regular readers will know, so long as dividends are maintained or increased, I regard capital movements as largely random noise – unless I want to rearrange my holdings, which by and large it is my aim not to do.

In taking 9 months to become fully invested – instead of the several years I took to complete investing the funds for the RIRP – I had hoped to reap some of the benefits of the pound cost averag-ing which had served me so well with the RIRP. In retrospect this was a mixed success, to really benefit from pound cost averag-ing you need to use a longer drip-feed period than 12 months – ideally over a full market cycle.

I started the IFL with the FTSE flirting with its all-time highs, around 12% higher than now, and if I had invested all the cash at the start, all my current selections would have cost more then than my average buying price apart from esure and Manx Telecom. For me this is a clear win – the lower the average purchase price, the higher the resulting yield. My only regret is that having restricted myself to only dealing once a quarter when the articles appeared, I was unable to benefit from the severe shakeout in mid-February as I might otherwise have done.

On the other hand, almost inevitably, having started with the index so much higher than now, our shares are on balance currently worth less than we paid for them, as Table 2 shows.

377 table2

If this worries you, you should not be contemplating following my sort of strategy – indeed arguably you should not be buying shares at all. But a typical fund manager would claim that a fall of under 5% against a market decline of 12% is something to boast about. In my case I am just sad I am not launching the fund now so we could buy all the fallers at today’s prices. Someone doing just that would get a prospective yield of nearly 5.5%; if they bought the whole portfolio at current prices the prospective yield is 5.25%.

RIRP income motors ahead

The aim of the IFL is to be able to sit back and watch the dividends roll in at an increasing rate so as to keep overall income well ahead of inflation – as the original RIRP has done. In fact the RIRP is now delivering in spades – its underlying income is already projected to rise by over 3% in the year ahead. Statistically the star dividend increases – of over 100% each – come from two legacy failures, Lloyds and RSA; but both of course are starting from only nominal bases, and still contribute little in absolute terms to the fund’s total income. Legal and General stands out with a 13% projected rise already under its belt, bringing its return on the original capital invested to a splendid 17.5%. Together with BT and Interserve, consistent above-average dividend growth from these three shares mean they yield an average of 12.75% on the amounts originally invested. For income-focused investors, it is figures like these – not paper gains – that are evidence of success.

My quest for as much income as possible in the first 12 months from the IFL means that some of my selections may not possess the long-term inflation-busting potential which I need, and I fear I will have to do some unwelcome tinkering over the year ahead to have any hope of delivering underlying growth matching the RIRP.

Take steps to avoid extra dividend tax

Additionally, shareholders face a googly this coming year: if the value of your dividends held outside an ISA or SIPP comes to more than £5,000, you will be liable to pay the Chancellor’s sneaky 7.5% dividend tax surcharge announced in last year’s Budget. It will not actually become payable until end-January 2018. But even if you had to give the Chancellor 7.5% extra on the whole of next year’s projected IFL income, what you are left with is the equivalent of 5.8% from a bank. I believe it will in fact turn out to be higher than that after another year of rising dividend announcements – assuming no nasty surprises from HSBC or Shell. Or anyone else!

You can now read every article on the RIRP and IFL portfolios from inception at RIRP.co.uk.

First published in The IRS Report on 2nd April 2016.

Lower share prices are good for the IFL portfolio

Lower share prices are good for the IFL portfolio

Lower share prices are good for the IFL portfolio. This is my third instalment of my new Income For Life (IFL) portfolio, launched as a successor to the highly successful Rising Income Retirement Portfolio (RIRP), now in its eighth year.

The good news is the markets have fallen since I launched the IFL portfolio in April; the shares I bought then are now worth on average some 7% less than I paid for them.
I am particularly pleased that the average share price fall since April is almost exactly 7.5%, since arithmetical magic means that as I invest the rest of the portfolio it will yield some 8% more than originally envisaged last April, so largely offsetting the Osborne “We now really are in it together” 7.5% hike in dividend tax which comes into effect next April.

The bad news is I had set myself a very high target for IFL’s first-year yield – “as close as possible to 4% net of basic rate tax”. The first year is always the most difficult when building a portfolio from scratch because of the gap between companies’ ex-dividend dates and actually receiving the first payouts.

I wanted to try and replicate the benefits from pound cost averaging which worked so well for the precursor of this portfolio, the Rising Income Retirement Portfolio.

Struggling to gain cost averaging benefits

But the RIRP took 7 years to get fully invested, and the 12-month time limit for the construction of the IFL portfolio is frankly not long enough to reap the full benefits; pound cost averaging only really comes right over a full market cycle. Although the market is usefully lower now than it was when I started, in the short term I have sacrificed first year income for only slightly higher long-term higher yields.

As an example, one of my biggest fallers is Centrica, in which I had invested £4,000 of my guideline £5,000 maximum by last July at an average price of 267p with a yield of 4.4%. Now they are down to 225p, giving new investors a yield of over 5.3%.

But in topping them up to the maximum £5,000, this only has the effect of raising the average yield on the total investment from 4.4% to 4.7%, and because the ex-dividend date falls a couple of days before our publishing date, in the current year I lose £53 of income which I could have otherwise booked in the first accounting year to end March. It will take a long time for the higher yield on the latest purchase to make up that £53 deficit.
IFL will hit 5% yield target

Lower share prices are good
The Income for Life Portfolio as yet not fully invested

But we are where we are, and I embark on this latest set of purchases with the portfolio from July (already just over half invested) projected to exceed the full year yield target of 5%.

My strategy this time is to maximise income for the remainder of the accounting year to end March by topping up to the maximum those shares going xd between now and December, and choosing 6 new shares to bring the total portfolio up to its full strength of 20 shares, most of them paying out more than half their annual dividends between now and March.

So I am investing the bulk of the remaining funds now and am topping up every share by at least a single thousand pound unit. To capture any possible future benefit from pound cost averaging, where shares are not going xd in the coming quarter I am making only a minimum £1,000 top-up now. This leaves £12,000 available in January from the notional £100,000 available to top up the remaining shares in which we have not yet invested the maximum £5,000.

New buys have lower yields

Apart from bank note printers De La Rue, my new additions Marston’s, Sky and Real Estate Investment Trusts Hansteen and Tritax all yield a little less than the initial selections, where I naturally went for the higher-yielding low hanging fruit. I have resisted the temptation to compensate by going for BHP Billiton whose dividend for the coming half-year alone comes to 4%, but in researching yield-boosting alternatives I have discovered Utilico Investments, currently standing at a 25% discount to net asset value as it shifts its investment priorities from utilities and infrastructure to technology. I shall now add this to my own portfolio, as hitherto all the shares for both the RIRP and IFL are selections from those I own, and this should be no exception.

Lower share prices are good
The Income for Life portfolio versus open-ended funds

Before this issue’s changes, my projected income to end December came to a little over £1,100 representing a respectable return on the sums invested by July of over 2.2%. After this issue’s new purchases, and top ups, shown in the final column of Table 1, the end December cash projection rises by nearly 50% to nearly £1,600, but as a percentage of the sums invested it falls to under 2%.

That still gives an annualised return of over 2.4%, equivalent under this year’s dividend taxation rules to 3% pre-tax from a bank, which is more than most subscribers are likely to be getting even on maturing long term funds. The full-year projection of yield from the portfolio after these purchases is 5.3%.

Since the IFL’s investment mandate for January, outlined above, is straightforward, I shall devote that month’s article to reviewing the 8th year of the original portfolio, the RIRP. As Table 2 shows, this has quietly continued to deliver dividend increases of over 6% so far this year with absolutely no management from me, in addition to special dividends equivalent to a further 2.7% of the fund’s value.

Summary of the Rising Income retirement Portfolio
Summary of the Rising Income retirement Portfolio

As I have done with the RIRP, I reserve the right to tinker with some of the initial IFL share selections next year when I may jettison some of the initial income-boosters in favour of those with better prospects for dividend growth, but I am already confident that the IFL will deliver similar inflation- beating dividend growth from an even higher first full year yield than I had expected last April.

First published in The IRS Report on 3rd October 2015.

Income For Life makes post-election purchases

Income For Life makes post-election purchases

Income For Life Portfolio makes post-election purchases. I launched the new Income For Life portfolio last April when most of us had been led to believe that the country faced 5 more years of uneasy coalition of one sort of another, and because of this I was deliberately cautious in my initial selections.

I chose to invest only £20,000 of the £100,000 theoretically available to the Income for Life Portfolio, even though my targets are to deliver a net income to beat something in excess of 5% from the bank (if you could still get such a return), and an actual return of over 4% net in the first twelve months.

My thinking was driven by uncertainty over how the markets might react, not least in useful potential growth-of-income sectors such as utilities.

As so often the case, I need not have worried, as markets as a whole are lower now than they were then, helped as we go to press by events in Greece. Followers of the original Rising Income Retirement Portfolio will know that this pleases me at this stage of constructing the fund, since it makes topping up most of my shareholdings more attractive now.

Utility companies, though, are a bit higher instead of quite a lot lower as they might have been on the expected election result. An exception is National Grid whose price has dropped despite being one of the three shares to have raised its dividends since April.

The first selections in April were driven by those shares going xd beween April and now, so as to maximise income during the fund’s most difficult period, its first few months. The last column in Table 1 shows the problem.

Whereas the annualised income from the 10 original stocks suggested in the initial April report was 5.3%, my best efforts at dividend date manipulation will only result in the fund receiving £482 between inception and end-August.

This represents an entirely respectable 2.4% of the £20,000 invested in the Income for Life Portfolio, equivalent to over 5.7% annualised, but it represents a yield of under 0.5% of the total I have to invest before next April.

Income for Life Action plan

So my strategy this quarter is

  • to purchase up to the maximum number (5) of £1,000 investment units in those shares which will be going xd again in the coming quarter, such as GSK, or which have fallen significantly without any apparent change to the underlying investment merits, such as BAE, National Grid, and Shell
  • top up other shares by one or two units so as to allow maximum benefit of pound-cost averaging and maximum dividend capture over the coming 9 months
  • identify new shares going xd in the coming quarter which meet the underlying criteria.

The result is 4 new shares, only one of which, BATS, is a duplication from the original RIRP, a modified and accelerated version of whose philosophy drives the IFL. BATS are a classic illustration of what rising income investment is all about. When I originally bought it for the RIRP it was among one of the lowest yielders, barely scraping in above my 4% minimum target.

The Income For Life Portfolio
The Income For Life Portfolio at 50% invested

Now, as Table 2 shows, at 7% it is among the leaders in terms of yield on the original capital invested, but unlike others where dividends have grown even faster, like BT or Legal & General, the share price has “only” kept pace with the dividend increases, meaning new investors can still get in on the game.

Rising Income Retirement Portfolio constituents
Rising Income Retirement Portfolio constituents

A safer HSBC?

Of the others, as with both portfolios, these are shares I hold myself but which still seem to be underrated by the market and likely to deliver rising payouts. I agonised a while over HSBC, as all my fingers have burn scars resulting from my unwillingness to believe the banking system was as bust as it was revealed to be in 2008. But I conclude that HSBC’s new focus and potential Midland Bank spin-off should enable it to continue to deliver rising payouts for shareholders in one form or another.

I can see nothing in anything that esure has released which can explain why it should be yielding so much above the sector average, and similarly I cannot see why Kier is rated at a discount to (for example) Costain, if only because of its large involvement in Crossrail.

The net result of all this is that at £48,000 the IFL is now nearly 50% invested, and I hope to be able to discipline myself so that I shall still have around £25,000 uninvested at the beginning of January.

Meanwhile the original RIRP continues to excel. Table 3 shows that nearly all companies have now announced that they will be paying out more this year than last, bringing the rise in the fund’s underlying income to nearly 5%.

Of the shares which show no rise, GLIF was bought as an income booster in troubled times for the fund, with little short-term expectation of growth; Lloyds and RSA have only returned to the dividend lists this year and so no percentage increases can be calculated.

Doubts over Infinis

I may have taken my eye off the ball with Infinis: I originally bought it around the IPO offer price because I did the maths on their £55m cash dividend forecast and reckoned a yield of 7% was too good to miss. But the latest figures show that this is likely to be short earned this year, or as the market seems to think more likely, cut.

The capital value of the shares is also down because of uncertainty over future government subsidies for renewable energy, and the residual 70% shareholder has told the world it wants to sell.

I had great difficulty getting hold of the latest Infinis report and accounts from their internet site, and its remarks about future dividend prospects are at best Delphic. I was tempted to reinvest some or all of the GLIF holding into Infinis on the grounds that at the current price around 200p the dividend – due to be paid in August – represents an immediate return of over 6%, and whatever any subsequent rebasing may entail seems more than discounted at the current price.

But no: I am committed not to make any changes to the old RIRP until my annual January review, which will coincide (I hope) with final top-ups for Income for Life.

Rising Income Retirement Portfolio overall performance
Rising Income Retirement Portfolio overall performance

Far ahead of target

The luxury of the mature RIRP is that I can sit out some short-term disasters, as Infinis may turn out to be in rising dividend terms, as the regular reports on the first 7 years proved; all the more so following Direct Line’s capital reconstruction and special 27.5p dividend which, together with Standard Life’s even bigger similar exercise back in April, brings my projected “bonus” for the year ahead to over £2,700, over 40% of the fund’s projected underling income.

Those of a more nervous disposition may want to use some of this windfall to make up for the capital loss you would create if you crystallise your Infinis book loss now.

The latest, bigger, measure of inflation, the RPI, shows it running at 1%, and as I concluded last time, a rise in the RIRP’s underlying income of what is now over four times that is good enough for me, even before the “bonus” income, bringing the projected rise in income for the year to over 25%. Indeed, “trebles all round”!

First published in The IRS Report on 4th July 2015.

High yield portfolio from scratch

Starting a high yield portfolio: Income for Life builds on RIRP

Starting a high yield portfolio: Income for Life builds on the success of RIRP.

This month’s liberalisation of the UK pension rules means that more investors will be looking to SIPPs – self-invested pension plans – to manage their retirement income and provide tax-free inheritances. Some will be looking at a high yield portfolio.

The sort of inflation-busting dividend increases which my Rising Income Retirement Portfolio (RIRP) has delivered over the past 7 years, coincidentally matched by increases in the capital value of the portfolio, is ideally suited to a SIPP, the sort of thing anyone can use when starting a new high yeld portfolio.

Some recent subscribers have said that while the thinking behind the existing RIRP may be interesting to read about, there is little actionable value from them in reports on the portfolio.

Since average yields on the shares in the RIRP at their current market prices are well below the yields on the original capital invested, is it too late to join the party?

I don’t think so, and so am rising to the challenge of starting a high yield portfolio with similar objectives, though it will differ from the RIRP in several respects. I am calling it the Income For Life (IFL) portfolio to emphasise the fact that I expect it to go on delivering (as does the RIRP) until the investor no longer has any reason to care.

The IFL’s short-term objective differs from the RIRP. It is designed to address the problems faced by investors needing to invest capital to secure an immediate income in a zero-rate environment. Some will be trying to replace fixed-term investments taken out when interest rates were nearer 5% pre-tax than today’s 3%.

As a result, the RIRP’s policy of a long-drawn out drip-feed investment designed to ride out market cycles has to be abandoned. This means investors will have to accept that if the bears are right, the IFL’s capital values could suffer – maybe for a period of years – while (I hope) the income continues to rise regardless. A factor to consider when starting a new high yield portfolio.

For those who worry about the FTSE 100 achieving its previous nominal peak, and who are aware that market peaks tend to attract the stupidest punters, I counter with the fact that to compensate for inflation since 1999 the index should be over 10,000, and that corporate earnings today are nearly twice what they were in 1999 in nominal terms. To my mind, there are no amber valuation lights flashing as there were in late 1999.
Initial 4% yield target

The IFL will invest a notional £100,000 over the coming 12 months, with the aim of delivering an income as close as possible to 4% net of basic rate tax over the coming year (the equivalent of 5% gross in interest), and higher than that in a full year, from shares likely to continue to raise their dividends on balance by the greater of the RPI or CPI.

The income target is a real challenge in the first year, largely because the gap between shares going ex-dividend and actually paying the money means investors cannot get a full year’s income for the first 12 months.

To maximise the first year income, my initial choices will therefore have more higher-yielding shares with poorer dividend growth prospects than my choices later in the year. And my investment timing will largely be determined by the dates on which the shares I select go ex-dividend. To this extent emotion will be removed from the market, at least for most of the initial year’s selections.

As with the RIRP, my selection of shares will always be from among those which I hold myself, some of which may also be duplicated in the IFL. Some may surprise, like Centrica, which recently announced a 30% dividend cut.

My initial rules banned companies that cut their dividends from the RIRP, but experience with L&G and United Utilities has made me revisit this. Now it seems that companies which “rebase” their dividends actually tend to show above-average dividend growth thereafter. The trick is to buy after their announcement, such as Centrica.

I shall aim to invest in no more than 20 shares for the IFL, which means a limit of £5,000 per share. Some investors with more to invest might like to hold more shares, so for this first instalment of the IFL I have provided a selection of 15 stocks to set the ball rolling, all of which are going ex-dividend over the coming three months.

My core selections for the 20-share IFL high yield portfolio I shall be reporting on in future are shown in bold in Table 1. They are a combination of the higher yielders and those I consider most likely to outstrip, rather than merely keep pace with, inflation.

Starting a high yield portfolio; The Income For Life Portfolio
The Income For Life Portfolio opening positions

As when building up the original RIRP we must keep our attention firmly fixed on the income stream we are building up for the future, disregarding what the capital value of the shares is doing: any capital growth is a bonus. This has certainly worked for RIRP: its original £99,442 is now worth around £158,000, with the few losers such as BP, Infinis, RSA and Sainsbury more than compensated for by those which have more than doubled in value such as BT, Interserve, L&G and Pearson.

I will add further stocks to IFL in July.

RIRP income storms ahead

In January I said that now the Rising Income Retirement Portfolio – my original high yield portfolio – had been fully invested for a year, I would adopt a much simpler and transparent method of accounting for its eighth year. The results are in Tables 2 and 3, which capture the fund’s key performance measures.

Column 1 of Table 2 shows the projected yield on the original sums invested for the year ahead, and column 2 shows the percentage increase in yield over the previous year for those companies that have so far announced rises. Table 3 shows what this means in money, but with special dividends and returns of capital now identified separately as “bonuses”.

Rising Income Retirement Portfolio
Rising Income Retirement Portfolio constituents

Last year these came from Vodafone and Direct Line. This year Direct Line has raised its basic dividends while declaring the same special as this time last year; and Standard Life has made a 73p a share return of capital to shareholders, which means the RIRP’s total income will be streaks ahead of last year’s.

Prudent investors will bank these bonuses against a rainy day; most of us will be tempted to spend them while we can enjoy them.

The SL scheme does entail a reduction in the number of SL shares the fund holds through a capital reduction, which I am happy to regard as simply increasing the average original purchase price; even with this self-deprecating accounting, I could still cash in the SL shares for nearly 90% more than my book cost. And clearly I am going to have no problems in achieving my original aim of increasing dividends by at least the higher of the rise in the RPI or the CPI; and my newly adopted aim of doubling the inflation figure looks easily achievable.

Rising Income Retirement Portfolio
Rising Income Retirement Portfolio performance to date

This is despite the fact that I am projecting a one third cut in Sainsbury’s final payout later this year, which may turn out over-optimistic. The return to the dividend lists by RSA and Lloyds so far only make a nominal cash contribution, but with a full year’s income from GlaxoSmithKline and a bumper dividend rise from Legal & General mean the fund’s underlying income will still rise by 2.4% – and we are only one month into the RIRP’s accounting year.

I am relieved that my fear of a rights issue from BT to fund its purchase of EE did not materialise. I am now getting a yield of over 5% on my original investment in this stock – though surprisingly, this is below the average projected underlying yield of 6.5% from the portfolio as a whole. If this year’s capital repayment from Standard Life is factored in, the projected yield on initial capital rises to over 8%.

Since I have chosen to treat these exceptional payments as bonuses from now on, I do not need to try to present this in future as a truly sustainable yield. Income rising at over twice the rate of inflation is good enough for me.

First published in The IRS Report on 4th April 2015.