Tag Archives: Income boost

Income for life trying to sit on my hands as the world wobbles

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.

july-2016-dm
Table 1 & 2

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

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.

Income For Life makes post-election purchases

Income For Life makes post-election purchases

Income For Life Portfolio makes post-election purchases. I launched the new Income For Life portfolio last April when most of us had been led to believe that the country faced 5 more years of uneasy coalition of one sort of another, and because of this I was deliberately cautious in my initial selections.

I chose to invest only £20,000 of the £100,000 theoretically available to the Income for Life Portfolio, even though my targets are to deliver a net income to beat something in excess of 5% from the bank (if you could still get such a return), and an actual return of over 4% net in the first twelve months.

My thinking was driven by uncertainty over how the markets might react, not least in useful potential growth-of-income sectors such as utilities.

As so often the case, I need not have worried, as markets as a whole are lower now than they were then, helped as we go to press by events in Greece. Followers of the original Rising Income Retirement Portfolio will know that this pleases me at this stage of constructing the fund, since it makes topping up most of my shareholdings more attractive now.

Utility companies, though, are a bit higher instead of quite a lot lower as they might have been on the expected election result. An exception is National Grid whose price has dropped despite being one of the three shares to have raised its dividends since April.

The first selections in April were driven by those shares going xd beween April and now, so as to maximise income during the fund’s most difficult period, its first few months. The last column in Table 1 shows the problem.

Whereas the annualised income from the 10 original stocks suggested in the initial April report was 5.3%, my best efforts at dividend date manipulation will only result in the fund receiving £482 between inception and end-August.

This represents an entirely respectable 2.4% of the £20,000 invested in the Income for Life Portfolio, equivalent to over 5.7% annualised, but it represents a yield of under 0.5% of the total I have to invest before next April.

Income for Life Action plan

So my strategy this quarter is

  • to purchase up to the maximum number (5) of £1,000 investment units in those shares which will be going xd again in the coming quarter, such as GSK, or which have fallen significantly without any apparent change to the underlying investment merits, such as BAE, National Grid, and Shell
  • top up other shares by one or two units so as to allow maximum benefit of pound-cost averaging and maximum dividend capture over the coming 9 months
  • identify new shares going xd in the coming quarter which meet the underlying criteria.

The result is 4 new shares, only one of which, BATS, is a duplication from the original RIRP, a modified and accelerated version of whose philosophy drives the IFL. BATS are a classic illustration of what rising income investment is all about. When I originally bought it for the RIRP it was among one of the lowest yielders, barely scraping in above my 4% minimum target.

The Income For Life Portfolio
The Income For Life Portfolio at 50% invested

Now, as Table 2 shows, at 7% it is among the leaders in terms of yield on the original capital invested, but unlike others where dividends have grown even faster, like BT or Legal & General, the share price has “only” kept pace with the dividend increases, meaning new investors can still get in on the game.

Rising Income Retirement Portfolio constituents
Rising Income Retirement Portfolio constituents

A safer HSBC?

Of the others, as with both portfolios, these are shares I hold myself but which still seem to be underrated by the market and likely to deliver rising payouts. I agonised a while over HSBC, as all my fingers have burn scars resulting from my unwillingness to believe the banking system was as bust as it was revealed to be in 2008. But I conclude that HSBC’s new focus and potential Midland Bank spin-off should enable it to continue to deliver rising payouts for shareholders in one form or another.

I can see nothing in anything that esure has released which can explain why it should be yielding so much above the sector average, and similarly I cannot see why Kier is rated at a discount to (for example) Costain, if only because of its large involvement in Crossrail.

The net result of all this is that at £48,000 the IFL is now nearly 50% invested, and I hope to be able to discipline myself so that I shall still have around £25,000 uninvested at the beginning of January.

Meanwhile the original RIRP continues to excel. Table 3 shows that nearly all companies have now announced that they will be paying out more this year than last, bringing the rise in the fund’s underlying income to nearly 5%.

Of the shares which show no rise, GLIF was bought as an income booster in troubled times for the fund, with little short-term expectation of growth; Lloyds and RSA have only returned to the dividend lists this year and so no percentage increases can be calculated.

Doubts over Infinis

I may have taken my eye off the ball with Infinis: I originally bought it around the IPO offer price because I did the maths on their £55m cash dividend forecast and reckoned a yield of 7% was too good to miss. But the latest figures show that this is likely to be short earned this year, or as the market seems to think more likely, cut.

The capital value of the shares is also down because of uncertainty over future government subsidies for renewable energy, and the residual 70% shareholder has told the world it wants to sell.

I had great difficulty getting hold of the latest Infinis report and accounts from their internet site, and its remarks about future dividend prospects are at best Delphic. I was tempted to reinvest some or all of the GLIF holding into Infinis on the grounds that at the current price around 200p the dividend – due to be paid in August – represents an immediate return of over 6%, and whatever any subsequent rebasing may entail seems more than discounted at the current price.

But no: I am committed not to make any changes to the old RIRP until my annual January review, which will coincide (I hope) with final top-ups for Income for Life.

Rising Income Retirement Portfolio overall performance
Rising Income Retirement Portfolio overall performance

Far ahead of target

The luxury of the mature RIRP is that I can sit out some short-term disasters, as Infinis may turn out to be in rising dividend terms, as the regular reports on the first 7 years proved; all the more so following Direct Line’s capital reconstruction and special 27.5p dividend which, together with Standard Life’s even bigger similar exercise back in April, brings my projected “bonus” for the year ahead to over £2,700, over 40% of the fund’s projected underling income.

Those of a more nervous disposition may want to use some of this windfall to make up for the capital loss you would create if you crystallise your Infinis book loss now.

The latest, bigger, measure of inflation, the RPI, shows it running at 1%, and as I concluded last time, a rise in the RIRP’s underlying income of what is now over four times that is good enough for me, even before the “bonus” income, bringing the projected rise in income for the year to over 25%. Indeed, “trebles all round”!

First published in The IRS Report on 4th July 2015.

Income boost through new RIRP purchase

Income boost through new RIRP purchase

Income boost through new RIRP purchase. This time last year I drew attention to the main disadvantage of relying on shares for income, as I do with the Rising Income Retirement Portfolio (RIRP): the often significant fluctuations in monthly receipts. This is because of the bunched timetable in which most companies declare their results and pay their dividends. As an extreme example, the payments the RIRP received this March and April represent under 4% of the projected income for the whole of the coming fifth year — see panel below. This leaves certain times of the year in need of an income boost.

KEY POINT  How the RIRP works
The RIRP was launched in February 2008 with up to £100,000 notionally to invest and a target yield of 4%. The aim is for the portfolio to contain between 10 and 20 shares when it is fully invested.
Purchases are in units of £1,000 over a period of time, to benefit from pound cost averaging and to smooth out market cycles. Additional units are bought so long as dividends are maintained or increased and the prospective yield is over 4%.
The only measure of success is to grow the income by the greater of the percentage increase in the CPI and the RPI.
The fund should require minimal maintenance once fully invested. For this reason, large capital profits are actually unwelcome, since they involve re-appraisal judgements and action. (See IRS Report Issue 315).

I am afraid some of the changes I have made over the past year have actually worsened this statistical disadvantage.

I have been reducing the RIRP’s holding of the RSA Preference shares, which really should have no place in a portfolio designed to generate a growing income. The investment was made at the depths of the 2009 market crash, and the idea was to make up for the loss of income from the two bank stocks which we then held and which cut their dividends to zero. My expectation was that bank dividends would have been resumed well before now, and also well before the portfolio was over 88% invested, as it is now. (Readers will note that I have since topped up the Lloyds holding, and sold Barclays.) The RSA holding drags the portfolio down in two ways: firstly by providing no growth in income, and secondly by providing an above-average yield. This means that when I sell part of the RSA holding, I have to run faster to make up the lost income.

The effect is shown in the RIRP’s income account for the first two months of its accounting year. The table shows we have only netted a little over £200 since the start of March: this time last year we had received over £300, the difference being dividends of £240 from the 5 units of the RSA Preference we held then. But at the risk of more transitional grief in October, when the next interest payment would be due, I am selling the remaining two RSA units at some 10% more than I paid for them.

Income boost through new RIRP purchase
Income boost through new RIRP purchase

The reason that I am relaxed about losing this income is that my projections for the year ahead — based on dividends already announced for my current holdings — show I will more than make up the loss of October’s preference income through growth in dividends from my equities, and still end up with another increase of more than 10% in the yield on my sums originally invested, from 5.5% to over 6%.

This projection includes SSE’s recent guidance that after the 7% rise in the interim payment we have just received, we can look forward to a further rise of around 6% in the final dividend in September. So I am using half the proceeds from the sale of the RSA Prefs to buy a further tranche of SSE at a book value of £1,000: I explained my reasons for this method of accounting in Issue 315. The RSA profit means I can credit the portfolio with 84 SSE shares, instead of the 75 which £1,000 would have bought me in the market.

Another GSK top-up

Similarly I am topping up with another £1,000 unit of GlaxoSmithKline before it goes ex dividend again next week. Its next payout goes up 6% despite first quarter results slightly below expectations.

I was feeling pretty smug about the RIRP’s projected achievement of a 50%+ increase over my initial yield target 4 years ago until I read that dividends from FTSE listed companies jumped 25% in the first quarter, a new record for this time of year. The rise was distorted by a lot of large special dividends: without them the underlying rise was only 6.6%. But I too have benefited from special dividends from both Verizon/Vodafone and Glaxo, so it seems that I am not doing as much better than the market average as I thought. Still, this should also be irrelevant. The RIRP is an investment for life, not for a few quarter’s statistics, and so long as income growth remains well ahead of inflation, I shall live comfortably and sleep well.

First published in The IRS Report on 5th May 2012.

Income boosting top ups

Income boosting top ups but with less enthusiasm

Income boosting top ups but with less enthusiasm. I know the facts in support of “Sell in May and go away” are far from conclusive, but I always feel a little apprehensive about buying around now. To be doing so ahead of the results of the most important election since 1979 tempts me to paraphrase Mark Twain: May is one of the most dangerous months to invest; the others are the other eleven.

So this month I am not significantly increasing the overall sums invested in the Rising Income Retirement Portfolio. Instead I am paying for my latest income boosting top-up purchases by selling 4 units of the RSA preference. They are only in the portfolio to help keep my target yield up after several of my initial choices let me down early on, when capitalism seemed in danger of collapsing. The RIRP’s aim is to grow income by more than inflation, and preference dividends don’t grow.

It is scant consolation that 2009 is now officially on record as the worst year for dividend cuts since the 1930s. Registrars Capita estimate that total payouts actually fell by some 15%, but as I managed to get out of both Barclays and National Express at a small overall capital profit, I think it is time to jettison the cushion of some of this short-term artificial income boosting holding.

Income boosting RSA Prefs provuide future income

Fortuitously this generates a capital gain of over 10%, and I am using this largely to pay for a long overdue £500 top-up of United Utilities, yielding an income boosting 5% on new money.

Although the capital performance of the portfolio is almost entirely irrelevant to me so long as the overall income grows, I am pleasantly surprised to see that despite the total loss on Cattles, and current market dislike of utility shares, the overall portfolio is actually up by a few thousand pounds.

In addition to the top-ups in Balfour Beatty, Interserve and Standard Life which I made in April, I am adding a further £1,000 this month to the first two. Balfour Beatty continues to report a stream of new orders, and Interserve’s full year figures contained nothing to explain the market’s low valuation of the company, producing an exceptionally attractive yield. Four of the directors recently spent £200,000 between them to bring their overall holdings to over £1m.

Legal & General surprised everyone by raising its dividend by 33%, after cutting it last year. So although the shares are some 30% higher than my average purchase price to date, I still get an income boost from the average yield of over 5% by buying another £1,000 worth at 86p.

Income boosting top ups for RIRP
Rising Income retirement Portfolio income boosting top ups

Ahead of yield target

My original income target when I started the RIRP in early 2008 was a yield of 4%. Since that time both the CPI and the RPI excluding mortgage interest have risen by a little less than 7%. This means my target yield for the year ahead needs to be over 4.3% to have kept ahead of these indices. I am delighted to report that the projected full year annualised yield on the current investments is a full percentage point ahead of that.

I am also buying a further £1,000 of BAT shares. At £21.40 this will also raise my average purchase cost. But I don’t want the price to run away from me in the way Kingfisher did – it has also raised its dividend, but the share price has risen so far it is now out of my yield range. BATs still yield over 4.3% on new money at anything under £23 a share, even in the improbable event of no increase in the September payout.

The table shows my actual dividend income for the four months to end-June, giving an artificially high actual – not annualised – yield of over 2.5% on the total invested to date, even though none of my purchases this month qualify for the latest dividends.

As I have said many times, so long as the dividends keep rolling in, I can live with volatile share prices and indeed a market setback would give me more good top-up opportunities.

First published in The IRS Report on 1st May 2010.