Dividend strategy brings more income

Dividend strategy brings more income

Dividend strategy brings more income for RIRP. Since the usual slow start to our accounting year, in the last two months the dividends have started rolling in — over £1,700, compared with under £230 for March and April. As the table shows, one third of the way through the Rising Income Retirement Portfolio’s accounting year we are well on our way to the projected full-year revenue of nearly £5,600, which will represent a 6.15% return on our capital invested so far, an 11.9% increase on last year. Even before the latest reported falls in the annual inflation rate, we were clearly in no danger of missing our sole measure of success: to increase our income each year by more than the rise in the RPI or the CPI, whichever is the greater.

Our current year projections are helped by the fact that no less than 5 companies have reported their results since early May, and have raised their dividends by an average of over 8%, shown in bold in the table below.

Dividend strategy brings more income for RIRP.
Dividend strategy brings more income for RIRP.

All the trading statements are as optimistic as can be expected with the continuing uncertainties around the euro; most of the RIRP represents shares of companies supplying what are regarded as nowaday’s near necessities of life, and so should manage to preserve their share of the national cake, short of a terminal collapse of capitalism which I judge to be only a remote possibility.

Consistent dividend growth sustained over a period of years can produce results which start to look unbelievable. When I check what is now my self-select ISA, I still look with delight each time at my holding of SSE inherited from an investment made years ago by Halifax’s managed ISA before I retired and had time to take control of my own investments. I hold 400 shares with a book value of just over £1,000. This coming year they will yield me £320 in tax-free dividends, equivalent to over 50% pre-tax. Just as I hope to live long enough to witness the second coronation of my life and the opening of Crossrail, so I hope to live the further decade or less which it will take for SSE to be yielding me 100% pre-tax or more each year.

Buying more Sainsburys and GSK

This month I continue with my notional £1,000 unit purchases of companies meeting my yield criteria where I do not yet hold between 5 and 7 units, or whose share price stands below my average purchase price to date. This means another unit of both Sainsbury and GlaxoSmithKline.

The table also contains a small correction to the dividend information for Bankers Investment Trust. I owe them an apology for previously understating their dividends, albeit only by £10 for last year. I rely heavily on the website Digital Look for dividend information and have generally found it reliable, but for some reason which they have not yet been able to explain, this has not been the case with Bankers. So I will rely in future on the information on the trust’s website, now reflected in last year’s receipts and this year’s projected payment. I note without crowing that even with the adjustments their payouts this year “only” look like being up some 5%, and even that is not fully covered by current revenue, a luxury I am not allowed.

Dividend strategy to defeat rising inflation

Quite a few IRS Report subscribers have joined us over the past year, so the Editor has suggested that I should set out again the basis on which the RIRP has been constructed. It is based on my own investment philosophy, and my own investments — my own portfolio contains all the shares shown here, designed to provide me with an income which protects me against what my lifetime experience suggests is my biggest risk in my retirement: inflation. It aims to do that by illustrating how owning up to 20 shares can deliver that with minimum maintenance once invested.

I am a “to have and to hold” investor for two reasons. One is that the only people who predictably make money out of constant buying and selling are the brokers; and the second is that, while I currently know I am more than capable of constructing such a portfolio with the proceeds of the sale of my private companies in early 2008, I want investments which will largely take care of themselves if my own mental powers start fading, as they may well do if I live as long as one of my parents.

Why I use drip-feed buy method

Key to the construction of the portfolio has been the principle of drip feeding the investment cash, which is part of the growth dividend strategy. In its fifth year the portfolio has still only invested around 90% of its notional £100,000. This is because after nearly 45 years writing and broadcasting about finance, one thing I have learned is that I know that I am not clever enough to reliably call market tops and bottoms — and have yet to find anyone else who can. An example of what this means in practice is shown in the panel and chart below.

KEY POINT  How the RIRP drip-feed system works
When the RIRP made its first investment in FirstGroup exactly two years ago, the shares stood at 375p, but by the time of my fifth purchase the price was in the low 320s. But as I did not perceive that the fundamentals had changed I was happy about this: it reduced my average purchase price to 361p, and had the effect of increasing my prospective yield from 5.5% to just under 6%.
In 2012 the market took fright at the triple whammy of squeezed consumer spending, reduced government transport subsidies and question marks over the future of their rail franchises. This gave me another buying opportunity after I decided to hold fewer than 20 shares, and raised my maximum investment in any one share to 7 units. None of these threats was unknown when I originally invested, nor to the board who have maintained their commitment to raise dividends by 7% each year, at least till 2013. The prospective yield on the last tranche of my investment was over 10%. This suggests the market does not believe the yield is sustainable, but Mr Market is not always right.
Dividend strategy
How RIRP staggered purchase of FirstGroup

So drip feeding rules out my emotions — there is a lot about this in the SPI Lesson Building Capital from Income. Or at least that is what I thought I was doing until the Editor referred me to some of the less unreadable works on behavioural investing. He suggests that what I am doing is avoiding “fear of regret” — concentrating on dividends means I do not give myself a hard time if my shares go down, or for not buying more if they do go up, or for not taking my profits at the top.

He may of course be right. But all I know is this. When I do my shopping the checkout till girls are not interested in me showing them a share certificate for a share which has doubled. What they want is the proceeds of the dividend cheque.

First published in The IRS Report on 7th July 2012.

Leave a Reply

Your email address will not be published. Required fields are marked *

Blue Captcha Image