Tag Archives: Inflation beating income

Income for life Dividend cuts force strategic rethinking

Income for life Dividend cuts force strategic rethinking

A sense of deja vu surrounds me as i write, mingled with absolutely no Schadenfreude. Three months ago I wrote that “a surprise cut in the dividend of what had been one of my star performers …. forced me to apply dramatic surgery to the Rising Income Retirement Portfolio”. I then went on complacently to explain how nevertheless everything would come out rosy for the full year, and went on to apply similar dramatic surgery to the newer Income for Life portfolio.

In doing so I had chosen to ignore Sainsbury’s further small cut to its dividend, and had sadly overlooked its restated dividend policy. What I had not anticipated was that a month after the last article, Pearson’s new regime would be quite so ruthless in doing what the collapse in the share price had been screaming at me was likely: cutting the interim dividend by 72%, and with the likelihood of more cuts to come.

So it’s time for the pruning shears again, never mind the squeals: overall the RIRP garden is healthy enough to withstand some more surgery.

Essential action

If I did nothing – which is the avowed purpose of the RIRP, and intended to require minimal management now it is nearly 10 years old – the combined effect of these two dividend cuts would have reduced my underlying income this year by more than 6% from £6,332 to £5,937. Special dividends and realised net capital profits would admittedly have boosted that by more than 7%, nearly twice the latest 3.9% RPI inflation rate; but the whole purpose of this portfolio is that it should be invested in shares whose underlying income is likely to rise by more than the rate of inflation without what I still regard essentially as window dressing in the form of strategic realisation of capital profits.

So I am forced again to take another look at the dividend growth prospects of some of my underperformers. Assuming a similar cut in the final dividend is on the way Pearson may only yield around 1.6% next year on its original purchase cost. Pearson claim the cut will enable them to pursue a “sustainable and progressive dividend that is comfortably covered by earnings”. The original RIRP rules required me to junk Pearson (and GLIF – see update opposite). But another lesson I have learned rather late in life is that nowadays holding on in these situations can make sense: as Legal & General and United Utilities have proved, if they get it right – and the stronger choices in the portfolio can carry them for a while – companies which have cut their dividends often subsequently deliver above average dividend growth. But I will be keeping a close eye on promises versus delivery.

The same is not true of Sainsbury, who have now delivered 3 years of gently declining dividend payments, leaving them yielding less than my low-dividend growth stock Reckitt Benckiser which has at least been delivering double digit growth from its pathetic start, and has allowed me to scalp some life-saving capital gains. Sainsbury’s have redefined their dividend policy as being to pay out half of earnings, but this is just the sort of unpredictability that I don’t want from a sector where Lidl has now become the biggest player – albeit only at the cost of a huge profits squeeze. As a privately owned German company, the owners can afford the long view, but some of us have rising post-Brexit bills to pay, so with many regrets, I have to eject Sainsbury, at 238p for a loss of £1,347, in the full knowledge that there is a possibility that I may be selling right at the bottom of its cycle.

Cash in the Bankers

To make up for the loss I shall repeat my previous raid on the shares of one of the several companies whose share price has shot ahead from the purchase price. I am selling one sixth of the shares we hold in Bankers Investment Trust. At 813p, on paper these are showing me an astonishing capital gain of 137%, though some of this reflects the too clever accounting in the early days of the RIRP when I used realised capital profits to deflate the purchase price of my reinvestments. I have become more transparent since.

This sale yields me a profit of £1,375 on the original investment, £28 more than the Sainsbury loss. Taking capital profits this way goes against the grain of the whole of my investment philosophy developed over the past 50 years since I first rashly invested some of my university grant in buying entirely unsuitable speculative commodity shares which fortuitously benefited from a surge in commodity prices on the outbreak of the Arab-Israeli 3 day war; I now realise I probably have almost as much to learn now as I did then.

Rolling the dice

Nevertheless I am taking a bit of a gamble with the proceeds, and reinvesting the six £1,000 Sainsbury units into Barratt Developments, the country’s biggest housebuilder. As shown by my previous inclusion of Galliford Try in the sister Income for Life portfolio, I do not share the post Brexit gloom for the housing sector, since I – perhaps naively – believe addressing the lack of housing supply will define the success of this and future governments. The gamble is that the business is notoriously cyclical and there is a danger I am buying in at the top of the cycle. The business has just delivered a near 20% rise in profits from its highest sales volume for nine years.

The chart shows the recent spectacular dividend growth – but also the dangers when things go wrong as happened after 2007. The shares go xd at the end of this month, which means we only capture some two thirds of the underlying dividends this year, but this is more than compensated for by the special dividend.

The sales of Sainsbury and Bankers produce £7,022 cash, so with an eye to boosting underlying dividend growth next year I am putting the remaining £1,000 into Lloyds whose dividend paying capacity I think still has some way to go, for all the reasons explained in Peter Shearlock’s lead article. To make up for the £97 dividend losses this year from the two sales, I am raiding some of the £173.52 special dividends which we will get from Barratt in November to include in this year’s underlying income.

Even so as Table 1 shows, despite all the companies shown in bold in the last column which have increased their dividends since the table was last published, total underlying dividend income is still some 2.7% down on last year, although of course more than compensated for by special dividends and realised capital profits.

Positive change

The summary Table 2 for IFL shows that the changes made three months ago are succeeding in their aim of keeping underlying average dividend growth comfortably ahead of inflation.

However the figures in blue show those payments made in dollars or euros where the effect of foreign currency moves can produce some quite perverse results, as in the case of HSBC; though as Shell and Vodafone prove, it is very much a case of swings and roundabouts.

Douglas Moffitt, October 2017

Income For Life portfolio Brexit creates house builder opportunities

Income for Life portfolio – Brexit creates house builder opportunities

The Rising Income Retirement Portfolio and its more recent offspring the Income for Life Portfolio were designed as a selection of shares requiring minimum maintenance once fully invested, delivering dividend increases above the rate of inflation.

The RIRP was constructed over a 7 year period through drip investments, designed to maximise the benefit of pound cost averaging, and has been fully invested since 2015. Table 1 shows it is more than fulfilling its mandate.

RIRP portfolio

Projected underlying income for the year to next February will be nearly 5% up on last year, and that’s before non-recurring items – which I now treat as “bonuses” – which bring the total rise in income for the year to 13%. This compares with the 1.8% rise in inflation according to the RPI over the most recent 12 months. The underlying yield on the sums originally invested is up by more than 50%, from 4% net after basic rate tax to 6.3%.

The IFLP on the other hand was built from scratch from April 2015 in just twelve months. It also had a more demanding initial yield target of around 5% in its first full year of investment. It will comfortably exceed that in its first full year to March 2017.

However this meant making some compromises between the fund’s need for an income significantly higher than is available from the FTSE 100 (and way ahead of anything on offer at any reputable bank), and its long term aim – the same as the RIRP, to deliver dividend increases which exceed the rate of inflation.

I made no secret of the fact that once fully invested it was likely I would have to revisit some of the shares initially bought just as income-boosters, but whose growth of income was likely to prove a drag on the fund’s longer term performance.

Table 2 shows how the dividends this year of the twenty current components of the fund compare with those declared the previous year. Until the most recently reported dividend increases from Kier, Manx and Sky, the reductions at GLIF meant the average underlying rises were barely keeping pace with the 1.8% inflation rate.

income for life portfolio

Well ahead of inflation

Now it is clear that we will finish the year usefully ahead of any likely inflation rate, but for the longer term any shares showing lower dividend rises than the current inflation rate obviously require re-examination as to whether it makes sense to keep them.

Some caution is needed: the IFL is only half way through its accounting year, so some – such as De La Rue – have not yet declared both their dividends for the year. On the other hand, Centrica has done, and is clearly not going to keep our spending power from being squeezed in future unless it ups its game next year. It was admittedly a risky candidate for inclusion in the first place because it had previously cut its dividend, but history shows that if you buy such companies after the nasty medicine, they can sometimes outperform – in dividend and capital terms – as both United Utilities and Lloyds have proved within the RIRP. I will watch any such underperformers carefully next year.

It walked like a duck…

The big scar in both portfolios is of course GLIF, the classic illustration of something looking too good to be true and turning out to be precisely that. A boardroom coup has already seen the dividend halved, and now the company says from 2017 dividends will be fully covered by sustainable operating income plus the proceeds of any sales of investments, which must imply another cut.

The only silver lining is the suggestion that this will provide the basis for the payment of a “progressive dividend”, which is what both portfolios are all about. The original guidelines for the RIRP disqualified any company which had a history of dividend cuts, and by implication required me to eject any company which did so after I had bought, but this proved too rigid in the testing times following the banking crisis during which the portfolio was launched. I am leaving GLIF in both portfolios for the time being as examples of how even the odd disaster can be absorbed, even within only a 20-share portfolio.

The RIRP was actually launched on a disaster I would rather now forget, and has been carrying Lloyds Banking Group almost since launch, and RSA for several years recently. In investing no one is infallible, and while I obviously prefer not to choose lemons, history shows that when I have done, jettisoning them too hastily is often a costly error – not least because the “replacement cost” is often very high. For instance, on its current reduced payout, GLIF still yields 4.4% on its original investment, but because the share price has been understandably punished, I would need to get over 10% on any new investment to avoid a reduction in ongoing income.

Similarly the original RIRP guidelines required me to ignore capital ups and downs as random noise behind the sole objective of delivering rising dividends, and by and large I did.

But the shorter timeframe and need to underpin growth means I cannot be so intellectually detached with the IFL. So when I see UIL, one of my star income boosters but with no history of rising dividends, showing a capital gain of over 66% for reasons I cannot imagine from any published information, I have to look at how I might benefit.

I bought UIL at 111p to yield 6.8%, but at the current market price of 187p its dividend yield for new investors is just 4%. So if I can find a share with the prospects of dividend growth which currently yields that or more, I would be quids in selling UIL and reinvesting.

House builders remain cheap

I am therefore going to sell enough UIL shares to buy £2,000 of Galliford Try. As a Brexiteer I have never understood why the doom-mongering should apply to housebuilders, since I do not accept that post Brexit Britain will see us all living in caves.

Galliford is one of many good companies whose shares have not recovered from their immediate post Brexit markdowns.

The company recently released a splendid set of results and boosted the year’s total payout by over 20%. Despite the 17% rise in its share price since the announcement, the shares still yield over 6% assuming the payout can be maintained; I have every expectation that it will be increased further until the housebuilding cycle goes into decline.

I don’t expect that to happen in the foreseeable future. While I have no special insight into the minds of Messrs May and Hammond, I do know that if they are serious about capturing the true centre ground of British politics, they could do far worse than do all in their power to see as many houses as possible built between now and the next election.

But I shall wait for the November Autumn Economic Statement before committing myself further.

Simple maths; simple decision

UIL has just paid the second of its quarterly dividends, so any shares I sell now will only lose me half a year’s income. The Galliford shares don’t go exdividend until October 27 so this year I will pick up their final dividend, more than two thirds of the annual payout.

The maths is a no-brainer. If I sell enough UIL shares to buy £2,000 Galliford Try I lose £40 UIL income this year, but gain £86 from Galliford; in the full year next year the Galliford dividends will be well ahead of UIL assuming there is no increase, which is unlikely.

I have thus converted high yielding shares with little or no dividend growth prospects into shares with dividend growth prospects, and given the current year’s income an additional small boost. In capital terms I will have sold shares which cost me £1,186 and acquired new shares costing £1,997.

These changes will be reflected in the table with the next article in January, when I will look at some of the other dividend laggards in my list such as GSK. If they are still showing capital gains, I will see if I can repeat the trick, though in reality it is unlikely I shall be able to switch from all the higher yielding underperformers without some short term cost to my income.

Douglas Moffitt, October 2016

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.

Inflation beating income: RIRP keeps on winning

Inflation beating income: RIRP keeps on winning

Inflation beating income: RIRP keeps on winning. This is the seventh year I have reported on the performance of the Rising Income Retirement Portfolio, and for the seventh year I am able to report an increase in income significantly greater than inflation, both during the year and since inception, despite a much greater number of disasters on the way than I had anticipated.

The portfolio still contains two shares which paid no dividend last year, one of which never has paid one since I bought it – Lloyds. And my latest disappointment is dear old Sainsbury’s, which has signalled it will cut its dividend this coming year because of the cost of the price war with Lidl and Aldi.  Not what I want to deliver inflation beating income.

According to the original rules I should junk Sainsbury’s and switch into something yielding more, but the fall in its share price means it will probably still yield well over 5% on what the capital is now worth. So partly in the spirit of the season I have decided to leave it in.

Another reason is that the result of undertaking a more detailed review of the past 7 years is the realisation I do not need to work nearly as hard as I did to make up for my early failures.

Inflation beating income - RIRP
How the RIRP produces its inflation beating income

This is the first year during which the fund has been fully invested for the whole period. I am not sure whether it is due to the wisdom that comes with maturity, or a fiscal version of the seven-year itch, but I decided it was time to take a longer view, and introduce a simpler and more transparent way to report the inflation beating income produced by the RIRP results from now on.

Readers may have tired of reading every year that the fund’s rise in income has consistently been more than double the rise in the cost of living. To achieve this both year on year and cumulatively has admittedly required some complicated accounting adjustments to smooth out the distorting effect of one-off special dividends, and to deal with shares on which I have unwillingly had to crystallise a profit or a loss.

Inflation fall is a bonus

The latest bigger-than-expected fall in inflation means I turn out to have overreached myself spectacularly this year, always useful when the objective is inflation beating income. As usual at the start of a year, the table shows the known performance of the fund up to the end of its accounting year in February. It shows dividend rises of 6.3% against a rise in the RPI of a fraction under 2% to November.

That looks – and in cash terms is – terrific, but most of this is in fact due to the huge return of capital by Vodafone, some of it in the form of special dividends, which more than compensated for RSA’s passed dividends.

So I have re-cast the figures. I have removed this year’s and last year’s special dividends to better reflect the underlying income growth over the life of the RIRP.

The small table shows what that really means.

Inflation beating income - RIRP
Rising Income Retirement Portfolio performance

This shows that if I do nothing, dividends in 2015 will be some £800 more than I need to keep ahead of the recent RPI inflation rate: 2% dividend growth only represents a little over £100.

Another way of looking at it is to look at the actual dividend growth since inception in percentage terms. It works out at 44.8% – more than twice the rate of inflation. As above, this figure excludes the special dividends from Vodafone and Direct Line in the current year.

So from now on I propose to ignore special dividends entirely in my computation of the fund’s underlying performance shown in the large table, but to aggregate all such payments in a new line called “Annual Bonus”. This will hopefully be enough each year to more than compensate for any dividend storms ahead.

Up till now the RIRP has not declared by how much it aims to beat inflation – I thought I would be doing well enough just to match it. But in the light of the achievement of the past 7 years, I am making a doubling of the inflation measure my aspiration – at least so long as inflation remains at these historically low levels.

Raising the income target

At the moment, based on recent payouts but factoring in a dividend cut for Sainsbury (and nothing from RSA or Lloyds), the RIRP will produce an income rise of only a little over 1% for the coming year, but we have a year of dividend announcements ahead of us.

I gather that some fund managers are becoming increasingly jittery about the sustainability of dividend growth in future, arguing that dividends cannot continue rising indefinitely faster than wages, even though that is precisely what they have done since incomes started being squeezed in 2010. This may be true in aggregate, but is not necessarily true in individual cases. There is no doubt that Aldi and Lidl will be paying their shareholders more this year, at the expense of Sainsbury and Tesco.

More worrying is the renewed fear of deflation. I do not discount the danger entirely, but think the markets are forgetting that much of the current “problem” is caused by a drop in the oil price. Back in the 1980s when Britain was at the peak of its oil exporting history, the Treasury still judged the effect of a falling oil price as on balance benign for the UK, and lower oil prices have always historically been reflationary in their impact on the economies of all except the oil-producing countries.

If deflation were to occur, then if companies were only to cut their dividends by no more than the fall in the general price level, the portfolio would in theory still be delivering its original aim – the preservation of purchasing power through Inflation beating income. But sadly, history suggests this is not what happened last time round.

Although the historical information is far from robust, everything in the best we have, the Barclays Equity and Gilt study, indicates that when prices last fell over a prolonged period in Britain (every year bar one from 1924 to 1932) the dividend payouts from shares fell much faster. But capital values did fall much less than the cost of living, and the value of income shares fell less than the market as a whole, so an equity income strategy still benefited investors.

I think deflation is improbable. I am – so far – only mildly discomforted by the conclusions of a growing body of academics who are claiming that quantitative easing is itself inherently deflationary rather than inflationary, and that is only partly because I lack the patience to follow the economic maths involved.

The RIRP’s approach is based on the premise that the biggest risk to my wealth in retirement is inflation, rather than the fluctuation in capital values inherent in stockmarket investment; and that shares represent the only likely protection against inflation – apart from property, whose management headaches I do not want to get involved in.

Ultimately I believe politicians will choose to inflate away the national debt and its rising interest burden as they always have done in the past, and which Britain will still be able to do so long as we do not join anyone else’s currency union.

How to deal with BT rights issue?

But do not forget the old City warning: “Never forget the 1% chance”. Presumably the only reason for a private investor to hold gilts with taxed redemption yields of under 2% is as insurance against a prolonged period of deflation.

For what it is worth, I am putting my money – or rather someone else’s, and with it my domestic safety – where my mouth is. I have finally convinced my pathologically risk-averse former partner that as his 5-year bank deposits yielding an average of 4.5% mature, the only way to avoid a massive collapse in his income is to embrace the principles of the RIRP.

His income requirements mean I have had to abandon one of the points of the original RIRP – drip-buying over a long period to benefit from pound-cost averaging, which has certainly proved its worth. Instead since November I have been creating a “Son of RIRP” with the additional short-term aim of maximising its underlying income over the coming 12 months.

The editor has suggested that a forward-looking version of this in the next issue could help those subscribers who have joined less than 7 years ago and who fear they might have missed the inflation beating income provided by the RIRP boat.

So with this in mind for April, I am anticipating a period of “masterly inactivity” for the original portfolio: I hope to watch the underlying inflation-busting dividend increases continue to roll in, perhaps supplemented by continuing specials from Direct Line. I hope the only strategic decision I shall have to make will be what to do if BT launches a rights issue to help fund its mobile phone acquisition.

As the RIRP is fully invested I will be forced either reduce my holdings of one or more other shares in order to increase my BT weighting, or to tail-swallow – sell the rights to fund a small take-up. I shall advise my decision on a web update as and when the details are known.

First published in The IRS Report on 10th January 2015.

Dividend cut from RSA

Dividend cut from RSA for RIRP

Dividend cut from RSA. Barely a month after subscribers had been treated to my self-congratulatory New Year review of the Rising Income Retirement Portfolio’s performance, I was rewarded with a nasty dose of hubris.

Despite “solid performance” including a 5% growth in net premiums, a strong balance sheet and a strategy expected to deliver strong premium growth, somehow profits at one of my biggest holdings, RSA, were down a fifth, and the company decided the dividend was unsustainable and cut it by a third.

The effect of the dividend cut from RSA is to knock nearly a couple of hundred pounds off my projected income for the year ahead, and this reduces the projected percentage rise in RIRP income for the year ahead by a couple of percentage points.

In principle there is no place in the RIRP for any share which isn’t earning its keep by paying out more each year. But in practice I have previously found reasons for retaining Lloyds — which has never paid a penny since we bought it — and for not jettisoning United Utilities or Legal and General when they “rebased” (slashed) their dividends.

To an extent this is a luxury resulting from the inflation-beating performance of the rest of the portfolio. But as I described when justifying my maiden purchase of BP, buying into a company which has just cut its dividends can produce a good starting yield with expectations of above-average dividend growth.

This was certainly true with Legal & General, which we happened to start buying just before it announced a dividend cut. As Figure 1 shows it since has delivered some of the fastest dividend growth of any of our holdings, and is now paying out 28% more than it was before the cut, and twice the 2009 payout. Generally speaking the bigger the cut, the bigger the subsequent increases, as Figures 2 and 3 show.

Dividend cut from RSA
Legal and General’s accelerating dividends

Avoiding losses – for now

The argument for retaining a share in which the RIRP is fully invested when it cuts its payout is less easy to justify, as was the case with United Utilities and is with RSA. The problems are compounded when I have a capital loss on the shares, as I do to a small extent with RSA and to a much larger extent with another possible trouble-maker, FirstGroup.

This is a portfolio for investing retirement savings, so my assumption is that we do not have the salary-earners’ luxury of being able to replace investment losses from earned income.

And while capital gains are mostly only of academic interest to me, crystallising a loss causes me grief and might force me to make up my losses by taking some capital profits elsewhere.

I have convinced myself I can avoid these unpleasant choices because two white knights have ridden to the rescue. Firstly Standard Life has said it will pay a special dividend which will almost double its projected income this year, raising the return on the capital I invested in it to double figures, and more than wiping out the loss of income this year afetr the dividend cut from RSA.

I accept that this is completely hypocritical — after all, last year I railed against the special dividends paid by Vodafone and Glaxo on the grounds they artificially inflate income and store up problems for the following year.

My view on special dividends remains the same, but in deciding what to do after the dividend cut from RSA I have to work out what the investment alternatives would be if I cut my losses. The board has made it clear the interim dividend next November will also be slashed by a third, which will cut the return on my investment in the company from nearly 7.5% to just under 5%. So the right way of deciding whether to junk RSA or retain it is to ask what else could I buy yielding nearly 5% with as good dividend growth prospects as RSA.

I am sure some exist, but I suspect RSA’s still relatively new CEO will be keen to outperform in much the same way Legal & General did. On balance I conclude that jettisoning RSA now constitutes a greater risk than the possible lost opportunity of investing elsewhere.

In coming to this conclusion I am also comforted by the projection of an overall rise in income for the RIRP for the year ahead of at least 5%. A lot of this is of course due to the Standard Life special dividend, but also to the 8% increase over previous expectations in the sterling value of our maiden dividend from BP, owing to the weak sterling/dollar rate.

Dividend cut from RSA
RIRP purchases and dividends to date

BP has also announced an $8bn share buyback programme following the sale of its 50% interest in TNK-BP to Rosneft.

This is my least favourite way of “returning cash to shareholders”, since it usually benefits directors on earnings-per-share bonuses rather than dividend-receiving shareholders: I would prefer the cash in dividends, even if they are “special”!

Despite a further $4bn provision against the Gulf disaster — bringing the total to over $42bn — I take this as evidence of the company’s confidence in its future strategy and ability to deliver earnings and dividend growth. So the RIRP makes its second £1,000 BP purchase, which will qualify for the second quarterly dividend payable in June, yielding a little over 5% at the current exchange rate.

I am acutely aware that these are sticking plaster solutions which I cannot hope to be repeated if FirstGroup also makes the dividend cut which the market is expecting. The RIRP’s dividend growth since inception is more than double the near 18% rate of inflation over the same period, which could in theory enable us to suffer some years with below inflation dividend growth. I am keen to avoid such an outcome if I possibly can.

My aim for the portfolio — as for myself — has to be year-on-year increases in the cash generated to keep ahead of inflation, regardless of past over-achievement. This is a challenge which is likely to become increasingly demanding.

I suppose it is some consolation that the longer it takes for the UK to get its annual budget deficit down, the more desperate the government will be to keep the interest rate it has to pay on its sales of gilts as low as possible for as long as possible, which will continue to make shares look more attractive than bank deposits for the longest period since the 1930s.

First published in The IRS Report on 6th April 2013.

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.

Dividends beat annuities

Dividends beat annuities: Why I expect RIRP to trounce annuities

Dividends beat annuities. Now that both the main measures of the cost of living in the UK are above 5% for the first time in 20 years, the Editor has suggested that this would be a good time to review “the more philosophical aspects of RIRP: longevity for example, comparing the fixed annuity rate for life at your age with the potential income from RIRP”.

It has proved an interesting, if sobering, exercise.

Fortuitously I am in my 65th year, the lowest conventional starting date for most annuity projections. For the illustrations in this article I am also pretending to be a non-smoker with no impairments. It is true that being a sickly smoker would improve the annuity quotations, but as Table 1 shows, any such improvement would need to be pretty spectacular for annuities to make any sense for me.

Dividends beat annuities

What is often forgotten is that annuity projections are quoted gross, but the income is taxable. True, if held outside a pension fund, some of it is regarded as a tax-free return of capital, but at my age the proportion is so low as to make little difference.

The net income comparison is startling. The table assumes that your state pension will use up your tax-free personal allowance, and that you are a basic rate taxpayer. So effectively all your annuity income suffers tax at 20%, while the RIRP tax liability is already discharged by the dividend tax credits you receive on your dividends.

Doomsday inflation

The attractions of the 4% RIRP net income target are immediately clear. It beats everything except a level annuity from day 1.

The impact of a prolonged period of inflation, even at “only” 3%, is shown in the bottom four scary lines. Even inflation around the current level for just 4 years slashes 20% off the buying power of the level annuity.

The maths holds true for higher and top rate taxpayers too. For example, higher rate taxpayers see the first year’s figures (second line of Table 1) slashed to £3,730, £2,708, £2,326 and £3,000.

Obviously I cannot predict what the RIRP will deliver longer term. It aims to achieve dividends which rise in excess of the worst cost of living measure. I am frankly amazed that in the current economic climate a recent survey showed that brokers are expecting the 200 biggest UK companies to raise their dividends by more than 12% both this year and next: I just hope they are right.

To show what a difference the odd percentage point makes, I have projected long-term annual increases for the RIRP at 1% above the 3% inflation assumptions and at 2% above the 5% assumptions — though these are only illustrations, not a forecast!

Table 2 below shows the RIRP goalposts both for the current year and to date since the RIRP’s launch in February 2008. This year’s projected yield on the fund represents an increase of over 40% on the original 4% target used in table 1, so it is comfortably ahead of the 14.6% needed to stand still in real terms.

Dividends beat annuities

Statistically, the RIP date for my RIRP could still be at least 20 years away, given my inherited longevity on my mother’s side and despite my self-inflicted impairments — I smoke cigars occasionally, drink too much, am overweight and am among the growing army of oldies on pills for blood pressure and cholesterol.

And this constitutes much of the rationale behind this issue’s purchase of the first tranche of what will probably be the final addition to the portfolio: GlaxoSmithKline, a global leader in what should be the continually burgeoning healthcare sector.

Booming demand for care pills

I am typical of a generation of baby boomers retiring after a lifetime of dietary over-indulgence and decreasing exercise. Demand in the developed world for the pills which seem to combat the worst effects of these excesses will rise strongly for at least a decade. Meanwhile demand in developing countries is growing too as expanding middle classes care increasingly for the health of themselves and their children.

GSK is well positioned on both counts. Sales outside the US and Europe already account for nearly 40% of underlying turnover, more than compensating for a third quarter decline in sales in Europe. The company is focused on bringing new products to the market: over the past 3 years it has launched more products and received more US FDA approvals than any other company.

The balance sheet is strong, with net debt at end-September under £9bn against a market capitalisation around £70bn. Since January 2008 the dividend has gone up by 26%, and the third quarter dividend is being raised 6% to 17p.

Historically this forms the floor for future quarterly payouts, bringing the prospective yield to a shade over 5%. Sadly the shares went xd in the week before publication, which means the RIRP will not get its first dividend from the shares until April.

Dividends beat annuities
How the RIRP trounces annuities

Elsewhere it has been a fallow period for RIRP results but the Greek referendum market jitters triggered further “automatic” top ups of RSA and Balfour Beatty in the week before publication. The interim trading statements from FirstGroup and Sainsbury were encouraging. So the fund makes its third purchase of Sainsbury and takes advantage of our newly amended buying limits to top up with an extra unit of FirstGroup, following what seems to me to be an unwarranted fall for their shares.

Scottish and Southern has decided to waste a lot of money changing its name to the meaningless SSE, but despite the latest political posturings both it and United Utilities say they remain committed to above-average dividend increases and are well placed to continue to deliver them.

First published in The IRS Report on 5th November 2011.

Rising retirement income from RIRP

Rising retirement income from RIRP

Rising retirement income from RIRP. Those of you who — like me — depend principally on your investment income will be all too aware of one of the main disadvantages of a share portfolio: because most companies still pay dividends half-yearly, rather than quarterly as in the US, month-by-month dividend income can vary immensely.

In my own case my best month’s income is more than twice my worst month’s, and there is no doubt this is why many investors prefer funds which make their distributions on a quarterly or even monthly basis.

It seems I have unwittingly replicated this distortion in the Rising Income Retirement Portfolio: income for the first two months of the portfolio’s fourth year (beginning in March) was a measly £327.

But if I look ahead and include payments due in May, the cumulative figure for the year amost trebles to a more respectable £975, with projected income for the full year already nearly one tenth higher than last year.

I believe this cashflow disadvantage is a price worth paying for the benefits of long term share investment. Taking the RIRP companies paying out in the first quarter, British American Tobacco and Pearson had already announced their dividends were to rise by 13 per cent and 10 per cent respectively, and Scottish & Southern had likewise announced a 6.6 per cent rise in its interim payout, and forecast that the total for the year would be at least 6.4 per cent above last year’s, comfortably above inflation by any measure.

The market shrugged off Ofgem’s latest proposals to make the electricity suppliers more responsive to consumers, and liked S&S’s simultaneous sale of some of its wind farms and commitment to further capital investment in the sector — again specifically to “support dividend growth”.

This is the philosophy which explains how my own original holding in the company now yields annual dividends of over 28 per cent on the original sums invested, and all the better for being tax free in my ISA.

Rising retirement income
Rising retirement income from RIRP

Since our last issue Standard Life reported what look to me entirely satisfactory growth in business and profits, reflected in a rise of nearly 7 per cent in the final, and Balfour Beatty, Bankers Investment Trust and Legal & General increased their dividends by 6.2, 5.6 and 25 per cent respectively, though L&G still needs to raise its payout a further 25 per cent to get back to what it was paying before it cut its dividend in the spring of 2009.

Rising retirement income with only one inflation laggard

Of my other choices only one, Interserve, is so far failing to beat inflation. The latest 3 per cent rise in the annual payout comes despite a 30 per cent fall in full-year profits, but the company points out the second half was actually 30 per cent better than the poor first half.

It confirms its target of doubling earnings per share within 5 years, and specifically refers to the raised dividend as confirmation of its commitment to progressive dividend increases. Considering the average yield on the RIRP investment is already over 8 per cent, we can afford to be patient in the expectation it should exceed 16 per cent within the next 5 years.

I have previously explained that my portfolio makes no pretence at sectoral balance. But while the main economic indicators are all over the place, and likely to remain so for months to come because of the combination of strange weather, a late Easter, and two extra bank holidays, I am seriously considering a retailer as my next addition to the portfolio in July.

I am finding current valuations of some of the leading high street retailers hard to resist for much longer, but for now I am content to add to my holdings of Bankers IT and FirstGroup to bring them up to my 5-unit £5,000 maximum.

First published in The IRS Report on 7th May 2011.

Dividend growth beats inflation

Dividend growth beats inflation

Dividend growth beats inflation. The month just ended was significant for two reasons: it was the third anniversary of the launch of the Rising Income Retirement Portfolio, and the month of my first receipt of the state pension. It comes to just £162.28 a week. After tax this just about bought the meal for two I had last night at a modest London restaurant.

The state pension was never going to keep me in the style to which I hope to remain accustomed. That is why I opted out of the SERPS earnings-related benefits for most of my working life as soon as the government started chipping away at the benefits of the original scheme. So I owe it to myself to squeeze at least as much income growth from my investments as the guaranteed inflation linking which I have forgone.

So far I am meeting the inflation challenge as dividend growth beats inflation. The table contains a new column showing how the RIRP dividends declared over the past 12 months compare with those of the previous 12 months. Excluding the distortive effect of United Utilities, on a one-year view we are only a little ahead of the latest 5% inflation rate, but over the past three years we are well ahead.

Beating rising inflation again

The RIRP dividends represent just over 5% of the sums invested, 25% more than my initial 4% target, compared with inflation of under 11% over the three years. For the coming year the overall return on the portfolio is projected to rise to over 5.5%, before any future dividend increases are announced, and is clearly going to keep me well ahead of any likely rise in the cost of living.

I have always believed that quantitative easing would set off the mother and father of inflations, and probably a period of stagflation — a toxic combination for real growth in corporate earnings. So I take great comfort from my two utility shares, and rejoice that I broke my own rules and retained United Utilities after they “rebased” — that is to say, cut — their dividend for the current year after the latest price controls came in.

Well-managed UK utilities have built-in inflation-proofing, and the effect of the cut will be more than made up in just a few years. I have seriously thought about breaking my own rules again and raising my utility investments above the implicit 5 unit maximum, but thought better of it for now.

There are tougher times ahead

However, until the economic picture is clearer I am happier topping up my existing tried and tested holdings than searching for new companies for the sake of it.

I think Ken Clarke is spot on in saying that the middle classes don’t know what is going to hit them as the cuts bite, and I think the same may be true for the stockmarket. But I am happy to make top-up purchases of Vodafone and FirstGroup.

Since the last article in January, four of our shares have increased their dividends. Dividend growth beats inflation at British American Tobacco, which managed to increase both profits and sales despite a fall in volumes. This is an impressive trick only partially explained by the inclusion for the first time of earnings from their Indonesian acquisition.

The final dividend goes up by 13%, and although the shares are up by a greater percentage against our average purchase price to date, they still offer a very acceptable yield of over 4.7% on new money invested. So I am topping up my BATs holding to the £5,000 maximum. The shares don’t go xd until March 9th so we get a near instant return of over 3.3% on our cash, which is rather more than most banks are paying in interest for a whole year.

Profits at insurers RSA fell more than expected after what the company calls a tough year for the industry. The dividend goes up nearly 7% but is only covered 1.1 times by the reduced earnings per share. The company says it expects to deliver “targeted growth in the UK, around 10% in International and double digit growth in Emerging Markets”.

Top-up for Bankers

Bankers Investment Trust have increased their quarterly payout from 3p to 3.1p a share. Like many income trusts, they have been hit by the suspension of dividend payments by their biggest single investment BP. One of the directors invested nearly £20,000 at 420p last week and I am topping up the initial three units with a further £1,000.

Pearson reported another set of sparkling results, lifting earnings per share nearly 20% and the final dividend by 10%.

Lloyds Group also reported better than expected figures, but they are of no use to me until they resume paying a dividend, which cannot be before 2012. Now the portfolio is over 70% invested, I think its dividend growth prospects are strong enough for me to gradually wean myself off the income kicker provided by the RSA preference shares. So I am selling 1087 of these shares, the equivalent of one unit, and will apply the 15% capital gain towards reducing the cost of this month’s top-ups.

Dividend growth beats inflation
Dividend growth beats inflation in the Rising Income Retirement Portfolio

A better deal from Cattles

Finally there is a smidgeon of good news on my wooden spoon investment Cattles. Shareholders accepted the derisory 1p per share offer, but as a result of the actions of the Shareholder Association there is a very real possibility that those of us who invested on the basis of the false accounts which the company now admits it had been publishing will be able to share some of the money under the creditor schemes which the banks were hoping to keep for themselves.

Making claims will be a complicated procedure, and if history is anything to go by the company will do all it can to reject any “incomplete” claims. The Shareholder Association will be providing assistance and I strongly urge you to join up on www.cattlesshares.co.uk.

I shall treat the £24.23 which the 1p per share offer represents as a reduction in our total capital invested, and will account similarly for any sums which may subsequently be paid from the creditor schemes. This could be anything from another penny or two per share to 20p or more. But I do not advise spending any of it until it’s in the bank.

First published in The IRS Report on 5th March 2011.