Double digit dividend growth
Double digit dividend growth. Since my last article two months ago, exactly half the companies in the Rising Income Retirement Portfolio (RIRP) have announced dividend increases averaging over 7%, more than twice the latest year-on-year inflation rate, my only measure of success; but my prediction for my full year’s income before this month’s purchases was down by £68.
The culprit is something I railed against recently (Issue 330) — so-called “special” dividends. I dislike them for precisely the same reasons I concentrate on dividends rather than possible capital profit (or loss): relative certainty.
Two companies in my list paid them this year: GlaxoSmithKline and Vodafone, and it now seems pretty certain that Vodafone will not pay one in my current accounting year, which runs to the end of February.
Vodafone’s 4p a share special dividend last February was the result of their receipt of a maiden dividend from their minority holding in Verizon Wireless: Verizon has said that will not be repeated this year.
The result is that the projected Vodafone dividend for the RIRP’s current accounting year falls from 13.52p a share to 9.52p. On our holding of 3,624 shares this costs us over £145 and is not what a portfolio designed to deliver rising income should be seeing.
Two options for top-up
The fact that all my other holdings have been declaring healthy increases means the overall return on capital this year will only fall from 12% to 10%. Few salaried people will see rises of over 10% in their income for this year, which maybe just shows what high standards the RIRP has set itself. But it still leaves me pondering the best way to make up the “lost” ground.
There are in fact only two of my existing stocks, FirstGroup and RSA, in which I can now invest new money at a higher yield than my projected yield of just over 6% for the year ahead. That is because most of the RIRP’s shares, which as the table shows produce mouthwatering yields on the original capital invested, have been rewarded with comparable rises in their share prices — which I neither show in the table nor particularly care about.
My investing equivalent of “taking care of the pennies” is my belief that if you take care of the dividend growth, the capital value takes care of itself.
So now I have to decide whether I trust my rules sufficiently to make FirstGroup my biggest single holding with yet another purchase yielding a prospective 9.6% on new money at the current price, or whether I should heed the market hint that the bigger the yield, the greater the risk.
My rules stipulate that if the fundamentals have not changed, if a share falls below my average purchase price to date, I should top up to the maximum automatically. My current maximum is seven £1,000 units, so I have a get-out if I want one.
Keeping an eye on director share sales
And I could argue the fundamentals have changed too. Since my last purchase, FirstGroup has wrested the West Coast Mainline contract from arch showman Richard Branson’s Virgin, but at more than twice the price he bid. He in turn has thrown a hissy fit, declaring FirstGroup’s bid will bankrupt them; FirstGroup have responded that Sir Beardie is just peeved because he can no longer go on “cashing cheques on Necker Island like there was no tomorrow”.
I have no more idea how to run a railway than Mussolini, and have already been stung once as a shareholder in National Express who famously overbid for the East Coast franchise which they eventually surrendered to avoid incurring ongoing losses. But I judge FirstGroup’s railway and general management expertise to be somewhat ahead of National Express, and their perception of what is a fair shareholders’ return may be more modest than Sir Richard’s — though in his case no one really knows what he was making from his rail interests because of his arcane corporate ownership structures.
The one thing that worries me about FirstGroup is the relatively small size of director shareholdings — only two directors have share stakes in the company worth more than £250,000. Although director dealings are frequently unreliable guides, I shall be looking carefully for any evidence of early cashing in of FirstGroup options in future.
So I am trusting my rules to the extent of establishing a new maximum holding of 8 units with a further £1,000 purchase of FirstGroup in the hope of double digit dividend growth. I am not increasing my holding of RSA, partly because we are too late for the November dividend, and partly because it has only been raised by 2%. Instead I am buying another unit of Interserve in time for the 6.6% rise in its interim dividend next month. These purchases have the effect of restoring my projected rate of increase in yield for the year ahead to over 11%.
First published in The IRS Report on 1st September 2012.