Tag Archives: Inflation beating income

Bankers IT first collective purchase

Bankers IT becomes first collective purchase

Bankers IT first collective purchase. I thought that the cliché “uncharted waters” had been done to death after the global financial crisis, but it has been revived again by those trying to assess the impact of the Comprehensive Spending Review (CSR). And so far as the Rising Income Retirement Portfolio is concerned I can see why.

Who would have thought that stockmarkets would judge one of the biggest gainers to be FirstGroup, a company whose government subsidies are going to be cut by “only” 20% over the next five years; or that — with the ink hardly dry on the CSR — Interserve, much of whose UK revenues are dependent on government and local authority spending, would be announcing that it had won three new schools contracts; or that one of the first companies to report falling volumes attributed to squeezed consumer spending would be British American Tobacco, the very embodiment of defensive, addiction-driven spending.

Carry on investing

All of this confirms that the uncertainty we have seen since 2008 is not about to magically dissipate, especially since there is still no consensus on the actual impact of the CSR on the economy or the UK’s private sector. I see no reason to abandon my strategy of ignoring the roundabout of opinions. I shall continue to follow my policy of buying shares in sound businesses that give me a yield of over 4%, with the important proviso that there must be a strong probability of dividend increases exceeding the rate of inflation.

BATs have performed strongly since I made my first purchase, and is in danger of pricing itself out of my new 4.3% “new money” dividend yield target. It is also warning that the dollar’s weakness may mean some of previous currency gains may be unwound in the fourth quarter, so I shall bide my time before making my fifth top-up purchase. But FirstGroup and Interserve both merit another £1k purchase.

Tate & Lyle is due to report its latest figures after we have gone to press this week, as is FirstGroup, and I am hoping we shall see proof that its new CEO is maintaining its previous progressive dividend policy, which has run into the buffers over the past couple of years. The yield on new money invested is still just above my new target even though the share price is some 40% higher than my average to date.

I must get more dividends

I have bent a lot of my rules to accommodate the extraordinary circumstances since I started this portfolio, but I need to get tougher on companies which don’t give me the steadily rising income which is the whole point of this strategy. So I am adding another £1,000 Tate & Lyle now, but if the interim figures don’t include a raised dividend I shall be jettisoning them some time after they go ex-dividend in early December.

So far as a new addition to the portfolio is concerned, I have a nasty suspicion that many companies I might otherwise be adding to the portfolio, such as Vodafone, will be finding the going getting tougher over the next two years, as the incomes of most public sector employees who retain their jobs are progressively squeezed. Temperamentally I want to wait a bit for the smoke to clear.

So now is the time for me to do what the editor suggested when we first talked about this strategy, and that is to include a collective investment which has the same aim as my portfolio — to raise dividends by more than the rate of inflation. The idea is that we can compare our performance.

My problem has been that I have had difficulty in finding an investment trust that actually commits to this ambition — I excluded unit trusts and OEICs because of my aversion to their high charges. For many years Murray Income had a splendid record in beating inflation, but it only commits to a “rising income”, and has failed to beat either the CPI or the RPI since February 2008, the lifetime of the RIRP. So I am going instead for the Bankers Investment Trust, which despite its name is managed by Henderson.

Bankers IT first collective purchase
The RIRP at 70 per cent invested

Bankers IT first collective purchase is an inflation beater

It has been going since 1888, and has raised its dividends every year for over 40 years. Since I launched my portfolio, the Bankers payout has gone up by more than 11%, comfortably ahead of both inflation measures. Only one of its top 10 holdings — BAT — duplicates anything currently in my portfolio.

If all of this sounds too good to be true, there is indeed a major snag. It doesn’t yield the 4.3% I should be getting on new money. In fact it doesn’t even yield my minimum 4%. This is surprising, since the shares are trading at a discount of around 7% to net asset value, and this should boost shareholder income by a similar percentage — minus management charges, which are not excessive — when compared with investing directly in the underlying shares.

But the projected yield on my portfolio is currently so far ahead of my original 4% net yield target that I am making the sacrifice of investing in this stock for a yield of only just over 3%, in the hope of higher growth in the future. This will have the added advantage of showing just how much superior growth a low-yielding share needs to deliver to catch up with more pedestrian higher yielders.

I do not envy the trust manager, Henderson’s Alex Crooke, the challenge, since Bankers needs to increase its dividends by 33% more than I get on my shares just to catch up with my yields, let alone make up the difference in cash actually received between now and when it does catch up.

All of which reminds me why I decided to create my own rising income portfolio for my retirement rather than simply rely on professional managers to do it for me.

First published in The IRS Report on 6th November 2010.