Rising income portfolio: tough decisions for RIRP

Rising income portfolio: tough decisions for RIRP

Rising income portfolio: tough decisions for RIRP. The Rising Income Retirement Portfolio was conceived as a way of building up over several years of drip investment a selection  of shares designed to produce a rising income likely to outpace inflation each year, and which would require minimal maintenance once fully invested.

The importance of minimal maintenance in the rising income portfolio is that as I approach my eighth decade I am realistic enough to recognise that either my enthusiasm or capability of dealing with investment choices may wane.

But just as the portfolio became fully invested, I now find myself having to decide what to do with RSA, the second of my investments within two years to make a rights issue and suspend its dividends; my two utility companies are finally threatened by the sort of governmental interference I had feared when I first invested in them; and all this on top of having to apply my mind to what to do with the cash windfall generated by my sell-off of the shares in Verizon which were spun off by Vodafone as part of their unprecedentedly huge return of capital to shareholders.

Gambling on RSA

Last issue I admittedly tempted fate by writing “so long as [RSA] do not resort to a right issue and suspension of dividends I can weather [the storms] with equanimity.” I had already assumed in my dividend projections for the year ahead that they might not pay anything, but even though I now have the bonus from the sale of Verizon shares (representing an effective return of over £2,000 of the £5,000 I had originally invested in Vodafone) I am loathe to commit new money in the rising income portfolio to RSA.

According to the RIRP’s original rules, I ought just to kick RSA out. But having stuck with it this far I am inclined to take a gamble and retain it since I believe, perhaps naively, that Stephen Hester will turn it round. The 3-for-8 issue at 55p has been priced sufficiently realistically that the rights have a value of around 31p each in the market, so what I propose to do is “tail swallow” — sell enough of the rights in the market to be able to take up my remaining entitlement.

My existing holding entitles me to 2,099 rights; if I sell 1,342 of them for £416 I am left with 757 shares, which will cost me a few pence over £416. This will bring my existing holding up to 6,355 at no extra cost, and so reduces my average purchase price from 125p to 110p a share — though this is still well above the price the shares are likely to command after the rights issue. This also entails some dilution of my holding, but as it was one of my biggest investments I am not going to worry about that.

Dividend growth is still satisfactory for rising income portfolio

My overall dividend forecasts for the rising income portfolio for the current year are lower than they would otherwise have been because in order to compensate for last year’s lack of dividend growth following cuts or suspensions at RSA and FirstGroup, I decided to “borrow” some money in advance from the Vodafone payout.

rising income portfolio
RIRP dividend growth

If it were not for that, projected dividend growth this year would already be over 6%: as it is, it is only currently showing a small projected growth for the year, even though since January six of the shares have already announced higher dividends than last year.

I am paying the price this year not only of the absence of dividends from RSA, but also of Standard Life’s special dividend last year, which will not be repeated and which contributed several hundred extra pounds last year.

I have every reason to believe that dividend increases across the rising income portfolio will accelerate in the year ahead, barring fresh disasters amongst my choices. The 2-point reduction in corporation tax to 21%, which comes into effect this year, had been pre-announced in last year’s Budget, like so much else these days, and so got no publicity this year. It means that even a company with unchanged pre-tax profits will see its after-tax earnings — and hence its dividend-paying potential — rise by more than the projected 2% increase in the CPI for the year ahead.

 rising income portfolio
The Rising Income Retirement Portfolio constituents and performance

When it comes to how to reinvest the Verizon cash, the Editor has suggested that I should consider including a collective investment in overseas markets, since the portfolio is so UK based. I have three problems with this:

  1. At least six of my shares have huge non-UK income and all but BP present their accounts in sterling;
  2. BP shows the problems with non-sterling dividends when sterling is strong: their latest quarterly dividend is unchanged in dollars, but the sterling payout is nearly 2% lower; and Reckitt Benckiser is paying out 1p less in final dividends than their previous record might have led us to expect.

But most importantly of all (3) with over £99,000 previously invested and a £2,000+ windfall from Verizon which appears to cost me nothing, I think we deserve now to include what most investors have somewhere in their portfolio, a silly “fun” investment that we could afford to lose, but which we secretly believe we are clever enough to identify as a potential winner that the market has overlooked.

An off-piste stock

Nearly everyone who follows the markets from time to time comes across such a company which just feels undervalued, but which is so far off the wall that they do not stand up to rational inclusion. I had toyed with adding shares in bombed-out annuity specialist Partnership, since for all the post-Budget froth annuities will remain the right solution for many pensioners.

I have bought some myself, but because there is a question over how profitable annuities will be in future for the providers, instead I am buying for the rising income portfolio two £1,000 units in an AIM-listed Guernsey-based provider of loans to small and medium sized businesses in the US and UK.

GLI Finance, formerly Greenwich Loan Income Fund, has had a chequered history, but since passing the dividend in 2008 has restored it from 3p in 2009 to the previous 5p, when the shares were trading around 100p.

At the end of last year it embraced a new investing policy, designed to transform it into a leading alternative provider of finance to SMEs in the UK and US through non-banking platforms, but with the centre of the business remaining firmly in the UK, “reflecting the sterling investor base, share price and dividend policy.”

The stated aim is to “to produce a stable and predictable dividend yield, with long-term preservation of net asset value”, currently 50p. Admittedly the 1.25p quarterly dividend currently has skimpy cover, which is probably the main reason the shares yield nearly 8.5% at the current 59p.

But the dividend was raised last year, which encourages me to believe it is safe, and with an xd date later this month, we will start getting an income from June. I am also using under £300 to top up the remaining Vodafone share stake to a round number of £1,000 book price purchase units following their consolidation after the capital refunds.

There is probably little prospect of significant dividend growth from GLI, and in that respect its inclusion in the RIRP is a sort of challenge to the basic philosophy: it is the only share in the RIRP which I have bought with the intention of selling if it generates useful medium-term capital profits.

If peer-to-peer lending — soon to be eligible for inclusion in New ISAs — takes off as the board hopes, I think this is the sort of share which might well attract more widespread attention.

Respectable institutional shareholders already own over 60% of the company; one of my reservations is the relatively low direct director shareholding at under 2%, worth only around £1m between three of them.

Like all other shares in the rising income portfolio, I already have a small personal stake in this company among my own shares, acquired in the past few months.

I should however add a note of caution for newer subscribers: the last share I had this sort of gut undervalued feeling about, one which similarly seemed poised to exploit a gap in the financial marketplace, was Cattles, which became my first casualty when it went spectacularly and fraudulently bust.

I shall reserve until next time further discussion of the apparent threats to my utility and life assurance holdings posed by politicians and the Competition Commission.

First published in The IRS Report on 5th April 2014.

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