Rising dividends from my RIRP strategy

Rising dividends from my RIRP strategy

Rising dividends from my RIRP strategy. Since the last article on the Rising Income Retirement Portfolio (RIRP) appeared three months ago, there has been a longer gap than usual, so there is a lot of catching up to do. Most of it is highly satisfactory.

The RIRP ended its fourth accounting year at the end of February with a flourish, as shown in the table below. Another £700 worth of dividends in the first two months of 2012 brought the dividend income for the year up to the projected 5.5% return on capital invested at year-end, a 14.5% increase on last year’s yield and way ahead of any measure of inflation during the period, and since inception.

Rising dividends from my RIRP strategy
The rising dividends show the value of my RIRP strategy

Every one a winner

That is what the fund is all about, and I am reassured to report that every company making an announcement during the past three months has indicated rising dividends; higher payments than previously. The figures in bold in the dividend column show the companies concerned, representing more than half the shares in the portfolio. Insurer RSA negated ill-founded market rumours of a possible cut, probably based on an uninformed assessment of their exposure to euro sovereign debt.

The last column shows how the actual dividends paid by each company during the reporting year compared with the same payments a year previously. The 10% average increase is lower than that for the RIRP because the fund has not been fully invested and often times its purchases cleverly around the ex-dividend dates so as to maximise the percentage value of its first dividend receipt. Two things to note:

  • The huge rise by Legal & General only takes the dividend a little above the 2007 level from which it was cut shortly after we made our first investment. This serves to offset the cut which United Utilities inflicted on shareholders last year when it “rebased” its future payments in the light of the latest Ofwat constraints. I should have chucked UU out when they announced that, and may yet revisit their status as the lowest-yielding share in the portfolio.
  • Bankers Investment Trust “only” raised its dividends by a little over one third of the RIRP average. The investment trust is included at the editor’s request to reassure us all that the RIRP is not an unnecessarily arcane reinvention of the wheel. Bankers is the only investment trust I could find which has as its target precisely the same aim as the RIRP: rises in dividends at least to match inflation. So far clearly it is: “Advantage: RIRP”; but the investment trust has been around a lot longer than the RIRP so it is far too early for me to crow.

The most pleasant news is of a payout by the Scheme Administrators of WFSL, part of the bankrupt Cattles company. Pleasant because it rewards a lot of work by myself and others in the dissident shareholder group that goes some way to establishing a principle not previously clear in UK law — that shareholders who are misled by information published by companies and signed off by auditors may have an equal claim with other creditors, such as the banks, in any subsequent Scheme of Arrangement designed to salvage something from the wreckage.

The Administrators have accepted in full the face value of claims under £20,000, such as the fund’s. Payments of around 27p in the pound are expected over up to six years, or a one-off lump sum settlement at a 10% discount. In view of the relatively small sums involved this clearly makes sense, and is what I am notionally accepting on behalf of the fund. The £1,079 payment compares with the £24.23 previously banked from accepting the derisory 1p per share offer which Cattles’ lawyers had advised the board was all they needed to pay to get rid of the shareholders. This moral, if not legal, fraud very nearly succeeded, but for the actions of the dissident shareholder group.

Speculating with Cattles windfall

For me the payout is pleasant for another reason: from the next issue I can remove once and for all the continuing reminder in the table of this disastrous investment (I will personally have lost a five figure sum, and at least one elderly private shareholder lost millions). The fund’s £4,000 investment was written off long ago, which means in accounting terms the payout represents a windfall. So I am going to depart from my normal conservative straightjacket and do something irrational in pursuit of rising dividends.

Our continuing Lloyds holding is the only other legacy of the early casualties in the portfolio — all the others were exited without loss. I am using the Cattles payout to top up the Lloyds holdings at no apparent cost to the fund, and so significantly reduce the average cost of the Lloyds shares we hold. This follows the accounting principles I apply in dealing with reinvested capital profits.

The purchase itself is irrational because averaging down for its own sake is usually a recipe for disaster (as contrasted with my normal policy of buying at lower prices if the fundamentals have not changed), and I frankly have less idea now what the prospects for the merged BOS/Halifax/ Lloyds/TSB behemoth really are than when I put them in the RIRP before the awful financial truths were known. The top-up is a straight gamble on Lloyds eventually coming right and the government getting out at a profit.

My only disappointment is that another company has followed Vodafone in declaring a special dividend. Glaxo is supplementing its highly satisfactory 7.6% rise in underlying dividend payments with a 5p special dividend, representing the proceeds of the sale of the company’s North American OTC brands in January. This will bring the payouts for the twelve months to mid-April 2012 more than 15% above last year’s.

But because the RIRP has only recently started investing in Glaxo it won’t feel or look like that to us — indeed our first two purchases were ex-dividend, so as the table shows we actually get nothing from Glaxo until the April payout. But with only two £1,000 units invested in Glaxo so far, I am making a further purchase at a price only a little above our average to date, though there will be no income from this latest tranche until the July quarterly payment.

Give me more regular divis!

So why should I be complaining? Of course it is nice to have more than you expected when you invested, but from a purely selfish professional standpoint, unless the special dividend is repeated next year too, I am likely to have to report the RIRP starting with a higher income from Glaxo in year 1 than it will get in year 2 — not at all what the portfolio is supposed to be delivering.

Similarly Vodafone is not certain of getting a continuing dividend from its joint venture with Verizon, which funded their recent special dividend and which in turn boosted the fund’s income from them by over 50%. Of course in an ideal world I should regard both the specials as just a little bonus, and lie back and enjoy them. But such payouts introduce an unwelcome element of unpredictability as to what I might expect in future, and one major virtue of the RIRP for someone of my essentially cautious — some may say lazy — disposition is its relative predictability.

Two more top-ups for rising dividends

Hunting for rising dividends meanwhile, I see no reason not to add another unit to our holding of Sainsbury, although now trading above our average purchase price, but still yielding over 4.8% on new investment. And the market continues to punish FirstGroup, knocking the shares back savagely after its latest trading statement. This showed lower than expected revenue growth from the bus franchises in Scotland and the north of England, which accounts for 60% of total revenue, and with lower subsidies and rising fuel costs this means margins will fall next year by one third. But the statement also says that the group continues to drive cash generation to support capital investment, debt reduction and dividend growth of 7%.

The company has told brokers that it regards the dividend as a long-term statement of how the board feels about the company and its ability to turn around the under-performing businesses. So, admittedly with some trepidation, I am making a top-up investment at 225p in the hope they will succeed, not least in retaining the Great Western rail franchise which expires in April next year, where they face stiff competition.

Assuming the directors mean what they say about the dividend, the yield on this new investment will be a shade over 10 per cent. But remember the old saying “the higher the yield, the greater the risk.”

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

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