Tag Archives: increasing yield

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.

Increasing yield for RIRP and a Cattles bonus

Increasing yield for RIRP and a Cattles bonus

Increasing yield for RIRP and a Cattles bonus. As regular readers will know, the capital performance of the Rising Income Retirement Portfolio is very much of secondary importance to my principal objective: securing a dividend stream which rises by more than the cost of living through increasing yield. But once a year, mainly just out of interest, I check to see how the capital is doing.

When I wrote a year ago, the portfolio was showing a 10% gain, helped by the traditional Santa Claus rally which had taken the FTSE above 6,000. Despite another seasonal rally this year, the index still needs to climb another 7% or so to wipe out its losses for the year.

Yet again the portfolio is still showing a 10% profit on the book value, which itself increased by investment of some £14,000 new money over the year. Together with the projected 14.5% rise in the increasing yield from last year’s 4.8% to over 5.5% this confirms my long-held belief that if you concentrate on the dividend income stream, the capital eventually takes care of itself.

From now on, in response to reader requests, I am adding an extra line to the table to show the latest reported annual increase for the higher of the CPI or RPI, set against a calculation of the increase in this year’s projected fund yield against the previous year’s.

In the last article at the beginning of November I complained that it had been a fallow period for company results and dividend increases, but the following two months have more than made up for that. Six companies — whose dividends are shown in bold in the table — have announced payouts up by an average of 6% over previous payments or expectations. Vodafone is to pay nearly two and a half times what was paid out the previous year, primarily because of the special 4p dividend representing their maiden receipt from their joint holding in Verizon Wireless.

Increasing yield
Increasing yield in the Rising Income Retirement Portfolio

This month I am making further top up purchases of Sainsbury whose price is still only a fraction above our average purchase cost, and GlaxoSmithKline whose price is up nearly 10% since our first purchase, but still yielding over 4.7% on new money.

Cashback from Cattles

And Santa has brought a little Christmas cheer for long-suffering holders of Cattles shares. In a rare example of successful shareholder power, shareholders who had ignored the company’s misleading guidance on how to vote on the 1p a share offer and subsequent Scheme of Administration, and who instead followed the guidance on the dissident shareholder website and made claims under the two creditor schemes, have succeeded in forcing the Scheme Administrators to consider these claims seriously.

Investors who claimed for losses of less than £20,000 are being offered between 27% and 30% of the value of their claim, paid monthly from February or March, or a lump sum one-off settlement of some 10% less. I suspect the lump sum offer will have been calculated very much to the company’s advantage and would myself opt for the drip feed. But so far as the RIRP is concerned, for ease and speed, when the lump sum is quantified I will accept the lump. At well over 50 times what the company hoped it could fob shareholders off with a year ago, I consider this quite a result, and thank all readers who sent in proxies as suggested in support of the dissidents. There may yet be more to come if Cattles is successful in its legal action against the former auditors.

Disturbingly, however, the administrator is not admitting any legal liability in the current offer, and just before Christmas shareholders with claims of more than £20,000 were sent a series of tiresomely nit-picking supplementary questions with an arbitrary deadline to respond by January 10th. By the time you read this the dissident website http://cattlesshares.co.uk hopes to have guidance on how to respond without putting your legal foot in it.

The next feature on the RIRP will be one month later than usual in the April issue.

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