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.
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