Tag Archives: Dividend strategy

IFL off to a cracking start

IFL off to a cracking start

Exactly a year ago I launched the Income For Life (IFL) portfolio, which is an attempt to recreate for more recent subscribers the success of my Rising Income Retirement Portfolio (RIRP), now in its ninth year. I had set myself some pretty ambitious targets for the IFL – not least to be fully invested within a year. The result so far is a bit of a curate’s egg, but definitely with more good than bad.

In January I completed investing all my notional £100,000 with twelve top-up purchases, shown in red in Table 1.

378 table1

Although less than £50,000 was invested throughout the full year, dividends received since last April totalled over £2,300 net of basic rate tax. That’s equivalent to nearly 3% pre-tax from a bank on the full £100,000, and more than you are likely to find from any savings institution with the exception of the likes of Bank of Baroda.

Forecast divis at 5% net

Even better are the red figures in the dividend column. These highlight companies which are paying more than was expected at the time of my last article about the IFL in October. However the rises shown for HSBC and Shell are entirely due to the weakness of sterling and could just as easily be reversed this year. Clearly too, these companies’ prospective yields suggest that the market has some doubts about the sustainability of their dividends.

But at the moment, projected dividend income for the 12 months ahead is a fraction over 5% net. And that is despite two partial failures.

GLIF has halved its projected payout, though even after that it is still delivering the equivalent of 5.5% pre-tax interest on the original investment (and over 9% on its current price). My forecast for the coming year’s income includes the reduced payment. GLIF is a useful reminder that although I have now been investing for over 50 years, and writing about it for nearly as long, “even I” still periodically forget that if it looks too good to be true, it almost certainly is. I beat myself up about GLIF quite enough in the January issue, so I will not do so again. I am hoping a progressive dividend policy might replace the previous income-kicker attractions, but will certainly be keeping more of an eye on it than most of the other stocks.

Insurer esure has also disappointed, though here I am partly to blame for nurturing unrealistic expectations. The company’s stated policy is to pay out 50% of underlying earnings in dividends, plus special payments depending on circumstances. I own shares in esure, like all others in both portfolios, and it has provided me with a healthily rising income in the past. For the RIRP, the unpredictably distortive effects of special dividends have been a persistent problem, but I assumed they could only be a bonus in the initial stages of building the IFL.

With esure, underlying earnings are down over 25% this year. Despite paying out an extra 20% of earnings in a (reduced) special, actual dividends for the past 12 months are down from 16.8p to 11.5p per share. The forecast income for the year ahead is based on the actual dividends declared during the past 12 months.

Mixed results from drip-feeding initial capital

Paradoxically esure is one of the 7 shares out of my 20 to show an overall capital gain for the year. As regular readers will know, so long as dividends are maintained or increased, I regard capital movements as largely random noise – unless I want to rearrange my holdings, which by and large it is my aim not to do.

In taking 9 months to become fully invested – instead of the several years I took to complete investing the funds for the RIRP – I had hoped to reap some of the benefits of the pound cost averag-ing which had served me so well with the RIRP. In retrospect this was a mixed success, to really benefit from pound cost averag-ing you need to use a longer drip-feed period than 12 months – ideally over a full market cycle.

I started the IFL with the FTSE flirting with its all-time highs, around 12% higher than now, and if I had invested all the cash at the start, all my current selections would have cost more then than my average buying price apart from esure and Manx Telecom. For me this is a clear win – the lower the average purchase price, the higher the resulting yield. My only regret is that having restricted myself to only dealing once a quarter when the articles appeared, I was unable to benefit from the severe shakeout in mid-February as I might otherwise have done.

On the other hand, almost inevitably, having started with the index so much higher than now, our shares are on balance currently worth less than we paid for them, as Table 2 shows.

377 table2

If this worries you, you should not be contemplating following my sort of strategy – indeed arguably you should not be buying shares at all. But a typical fund manager would claim that a fall of under 5% against a market decline of 12% is something to boast about. In my case I am just sad I am not launching the fund now so we could buy all the fallers at today’s prices. Someone doing just that would get a prospective yield of nearly 5.5%; if they bought the whole portfolio at current prices the prospective yield is 5.25%.

RIRP income motors ahead

The aim of the IFL is to be able to sit back and watch the dividends roll in at an increasing rate so as to keep overall income well ahead of inflation – as the original RIRP has done. In fact the RIRP is now delivering in spades – its underlying income is already projected to rise by over 3% in the year ahead. Statistically the star dividend increases – of over 100% each – come from two legacy failures, Lloyds and RSA; but both of course are starting from only nominal bases, and still contribute little in absolute terms to the fund’s total income. Legal and General stands out with a 13% projected rise already under its belt, bringing its return on the original capital invested to a splendid 17.5%. Together with BT and Interserve, consistent above-average dividend growth from these three shares mean they yield an average of 12.75% on the amounts originally invested. For income-focused investors, it is figures like these – not paper gains – that are evidence of success.

My quest for as much income as possible in the first 12 months from the IFL means that some of my selections may not possess the long-term inflation-busting potential which I need, and I fear I will have to do some unwelcome tinkering over the year ahead to have any hope of delivering underlying growth matching the RIRP.

Take steps to avoid extra dividend tax

Additionally, shareholders face a googly this coming year: if the value of your dividends held outside an ISA or SIPP comes to more than £5,000, you will be liable to pay the Chancellor’s sneaky 7.5% dividend tax surcharge announced in last year’s Budget. It will not actually become payable until end-January 2018. But even if you had to give the Chancellor 7.5% extra on the whole of next year’s projected IFL income, what you are left with is the equivalent of 5.8% from a bank. I believe it will in fact turn out to be higher than that after another year of rising dividend announcements – assuming no nasty surprises from HSBC or Shell. Or anyone else!

You can now read every article on the RIRP and IFL portfolios from inception at RIRP.co.uk.

First published in The IRS Report on 2nd April 2016.

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.