Dividend growth beats inflation

Dividend growth beats inflation

Dividend growth beats inflation. The month just ended was significant for two reasons: it was the third anniversary of the launch of the Rising Income Retirement Portfolio, and the month of my first receipt of the state pension. It comes to just £162.28 a week. After tax this just about bought the meal for two I had last night at a modest London restaurant.

The state pension was never going to keep me in the style to which I hope to remain accustomed. That is why I opted out of the SERPS earnings-related benefits for most of my working life as soon as the government started chipping away at the benefits of the original scheme. So I owe it to myself to squeeze at least as much income growth from my investments as the guaranteed inflation linking which I have forgone.

So far I am meeting the inflation challenge as dividend growth beats inflation. The table contains a new column showing how the RIRP dividends declared over the past 12 months compare with those of the previous 12 months. Excluding the distortive effect of United Utilities, on a one-year view we are only a little ahead of the latest 5% inflation rate, but over the past three years we are well ahead.

Beating rising inflation again

The RIRP dividends represent just over 5% of the sums invested, 25% more than my initial 4% target, compared with inflation of under 11% over the three years. For the coming year the overall return on the portfolio is projected to rise to over 5.5%, before any future dividend increases are announced, and is clearly going to keep me well ahead of any likely rise in the cost of living.

I have always believed that quantitative easing would set off the mother and father of inflations, and probably a period of stagflation — a toxic combination for real growth in corporate earnings. So I take great comfort from my two utility shares, and rejoice that I broke my own rules and retained United Utilities after they “rebased” — that is to say, cut — their dividend for the current year after the latest price controls came in.

Well-managed UK utilities have built-in inflation-proofing, and the effect of the cut will be more than made up in just a few years. I have seriously thought about breaking my own rules again and raising my utility investments above the implicit 5 unit maximum, but thought better of it for now.

There are tougher times ahead

However, until the economic picture is clearer I am happier topping up my existing tried and tested holdings than searching for new companies for the sake of it.

I think Ken Clarke is spot on in saying that the middle classes don’t know what is going to hit them as the cuts bite, and I think the same may be true for the stockmarket. But I am happy to make top-up purchases of Vodafone and FirstGroup.

Since the last article in January, four of our shares have increased their dividends. Dividend growth beats inflation at British American Tobacco, which managed to increase both profits and sales despite a fall in volumes. This is an impressive trick only partially explained by the inclusion for the first time of earnings from their Indonesian acquisition.

The final dividend goes up by 13%, and although the shares are up by a greater percentage against our average purchase price to date, they still offer a very acceptable yield of over 4.7% on new money invested. So I am topping up my BATs holding to the £5,000 maximum. The shares don’t go xd until March 9th so we get a near instant return of over 3.3% on our cash, which is rather more than most banks are paying in interest for a whole year.

Profits at insurers RSA fell more than expected after what the company calls a tough year for the industry. The dividend goes up nearly 7% but is only covered 1.1 times by the reduced earnings per share. The company says it expects to deliver “targeted growth in the UK, around 10% in International and double digit growth in Emerging Markets”.

Top-up for Bankers

Bankers Investment Trust have increased their quarterly payout from 3p to 3.1p a share. Like many income trusts, they have been hit by the suspension of dividend payments by their biggest single investment BP. One of the directors invested nearly £20,000 at 420p last week and I am topping up the initial three units with a further £1,000.

Pearson reported another set of sparkling results, lifting earnings per share nearly 20% and the final dividend by 10%.

Lloyds Group also reported better than expected figures, but they are of no use to me until they resume paying a dividend, which cannot be before 2012. Now the portfolio is over 70% invested, I think its dividend growth prospects are strong enough for me to gradually wean myself off the income kicker provided by the RSA preference shares. So I am selling 1087 of these shares, the equivalent of one unit, and will apply the 15% capital gain towards reducing the cost of this month’s top-ups.

Dividend growth beats inflation
Dividend growth beats inflation in the Rising Income Retirement Portfolio

A better deal from Cattles

Finally there is a smidgeon of good news on my wooden spoon investment Cattles. Shareholders accepted the derisory 1p per share offer, but as a result of the actions of the Shareholder Association there is a very real possibility that those of us who invested on the basis of the false accounts which the company now admits it had been publishing will be able to share some of the money under the creditor schemes which the banks were hoping to keep for themselves.

Making claims will be a complicated procedure, and if history is anything to go by the company will do all it can to reject any “incomplete” claims. The Shareholder Association will be providing assistance and I strongly urge you to join up on www.cattlesshares.co.uk.

I shall treat the £24.23 which the 1p per share offer represents as a reduction in our total capital invested, and will account similarly for any sums which may subsequently be paid from the creditor schemes. This could be anything from another penny or two per share to 20p or more. But I do not advise spending any of it until it’s in the bank.

First published in The IRS Report on 5th March 2011.

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