Tag Archives: investing for rising income

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

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.

Investing for rising income

Investing for rising income portfolio

A blip for the RIRP – but 2014 prospects look good

Investing for rising income. As I decide how to invest the remaining six £1,000 units of the £100,000 notionally available to the RIRP when I launched it at the start of 2008, I don’t know whether to laugh or cry at the extent to which I now find myself a victim of both my previous successes and conservative accounting.

The last published table in July showed that the overall growth in dividends over the years had raised my initial return on capital by 50%, more than twice the rate of inflation, from 4% to 6%.

But this means that when I make a new or top-up investment, unless I now invest in something which will give me over 6% in the remaining 5 months of the accounting year — which is clearly impossible — my reported return for the year on the funds invested must by definition fall for each new investment I make. This is one of the pitfalls of investing for rising income.

Higher divis, but a falling yield

My two most recent investments in Direct Line and Reckitt Benckiser highlight the problem. Their latest dividend announcements mean each of them will pay me at least 5% more than had looked likely when I made my first investment. But because my first dividend from them is only the interim, they each only yield around a third of their full annual return in the rest of this accounting year.

And since they have now paid their interims, any top-up investment will now yield nothing until next year.

In retrospect I should probably have adopted an annual time apportionment in calculating the return on newly invested capital, but I rejected this at the outset, partly because the maths is a nightmare, but mostly because what is important for investors is dividend flow, not clever accounting.

In previous years this hasn’t mattered because the organic dividend growth from previous investments had more than made up any slack. But this year has been my annus horribilis, with a dividend cut from RSA and total suspension of dividends and a rights issue at FirstGroup forcing me to eject the latter and crystallise some capital losses.
My end-year performance is not helped by two companies which have not raised their dividends this year.

In Balfour Beatty I seem to have picked about the only UK construction company not to be confirming the green shoots of economic recovery. There had even been fears the company’s new CEO might have decided to cut the dividend to provide a fresh start, and the fact he hasn’t is interpreted by the market as encouraging. In normal times I can carry a sleeper or two, and though these are not normal times, the unattractive reinvestment alternatives means BB stays in, but on sufferance for the time being.

I am also starting to think I may have made a nasty mistake with BP. Despite having set aside a compensation fund the size of the combined GDP of a dozen of the United Nations’ smaller members, the Gulf disaster claims keep coming in, and the US government continues to threaten punitive fines.

The progressive restoration of the dividend towards previous levels on which I had predicated my investment has ground to a halt this year, and insult has been added to injury by the “sterling effect”: the dividend is declared in US cents, and at the dates on which the last two sterling payments have been calculated, the pound has been relatively strong, so slightly reducing our income.

I have considered various measures to try and boost this year’s income to achieve our target of at least matching inflation. But even though I could engineer an inflation-beating rise in the actual income received by investing all the remaining funds in shares still to pay dividends before end-February, my method of accounting means that I would still be showing a fall in the yield on the total capital invested.

Investing for rising income portfolio.
% year dividend growth from the Rising Income Retirement Portfolio

So I have decided to put aside the hair shirt, remind myself that my dividends over the 5 years are up by more than twice the rate of inflation, and stick to the fund’s basic Investing for rising income rules which have more than proved their value so far.

BP: pay more, please

These are to top up those companies where I do not yet hold my minimum 5 units of investment, whose fundamentals have not changed, and whose share price is below my average purchase price to date. I am ruling out BP because unless and until they can prove otherwise by resuming dividend growth, I assume their fundamentals have changed. This leaves only Direct Line and Reckitt Benckiser meeting the criteria to qualify for new money, so they each get another £1,000.

Because they have now both paid their interim dividends for this year, the fund’s accounting problems are highlighted in spades because we have to wait until next summer to see any return at all on this new money.

The projected cash income for the year is slightly higher than last year, despite this year’s disasters, but the higher capital employed reduces it as a percentage. The RIRP needs nearly another £400 income to meet this year’s inflation target.

I continue to wrestle with this issue and am hopeful that in the January issue I can present a solution.

My consolation is that next year none of this should matter, and will just seem a blip with investing for rising income. The fortuitous distribution of cash by Vodafone and a full year’s income from Direct Line and Reckitts should more than compensate for this year’s travails. And who knows, we may even get our maiden dividend from Lloyds.

Investing for rising income portfolio.
The RIRP summary

This allows me to view with equanimity the Labour conference pledge to resurrect the Command Economy by imposing price controls on the energy companies. SSE and United Utilities make up over a tenth of the portfolio, and any rewriting of the acceptance by government of a need for a proper return on capital would indeed undermine the logic for holding such investments. But in investment terms the 2015 election is still far enough away for such posturings to be seen as random noise — at least for the moment.

First published in The IRS Report on 5th October 2013.

Dividend strategy brings more income

Dividend strategy brings more income

Dividend strategy brings more income for RIRP. Since the usual slow start to our accounting year, in the last two months the dividends have started rolling in — over £1,700, compared with under £230 for March and April. As the table shows, one third of the way through the Rising Income Retirement Portfolio’s accounting year we are well on our way to the projected full-year revenue of nearly £5,600, which will represent a 6.15% return on our capital invested so far, an 11.9% increase on last year. Even before the latest reported falls in the annual inflation rate, we were clearly in no danger of missing our sole measure of success: to increase our income each year by more than the rise in the RPI or the CPI, whichever is the greater.

Our current year projections are helped by the fact that no less than 5 companies have reported their results since early May, and have raised their dividends by an average of over 8%, shown in bold in the table below.

Dividend strategy brings more income for RIRP.
Dividend strategy brings more income for RIRP.

All the trading statements are as optimistic as can be expected with the continuing uncertainties around the euro; most of the RIRP represents shares of companies supplying what are regarded as nowaday’s near necessities of life, and so should manage to preserve their share of the national cake, short of a terminal collapse of capitalism which I judge to be only a remote possibility.

Consistent dividend growth sustained over a period of years can produce results which start to look unbelievable. When I check what is now my self-select ISA, I still look with delight each time at my holding of SSE inherited from an investment made years ago by Halifax’s managed ISA before I retired and had time to take control of my own investments. I hold 400 shares with a book value of just over £1,000. This coming year they will yield me £320 in tax-free dividends, equivalent to over 50% pre-tax. Just as I hope to live long enough to witness the second coronation of my life and the opening of Crossrail, so I hope to live the further decade or less which it will take for SSE to be yielding me 100% pre-tax or more each year.

Buying more Sainsburys and GSK

This month I continue with my notional £1,000 unit purchases of companies meeting my yield criteria where I do not yet hold between 5 and 7 units, or whose share price stands below my average purchase price to date. This means another unit of both Sainsbury and GlaxoSmithKline.

The table also contains a small correction to the dividend information for Bankers Investment Trust. I owe them an apology for previously understating their dividends, albeit only by £10 for last year. I rely heavily on the website Digital Look for dividend information and have generally found it reliable, but for some reason which they have not yet been able to explain, this has not been the case with Bankers. So I will rely in future on the information on the trust’s website, now reflected in last year’s receipts and this year’s projected payment. I note without crowing that even with the adjustments their payouts this year “only” look like being up some 5%, and even that is not fully covered by current revenue, a luxury I am not allowed.

Dividend strategy to defeat rising inflation

Quite a few IRS Report subscribers have joined us over the past year, so the Editor has suggested that I should set out again the basis on which the RIRP has been constructed. It is based on my own investment philosophy, and my own investments — my own portfolio contains all the shares shown here, designed to provide me with an income which protects me against what my lifetime experience suggests is my biggest risk in my retirement: inflation. It aims to do that by illustrating how owning up to 20 shares can deliver that with minimum maintenance once invested.

I am a “to have and to hold” investor for two reasons. One is that the only people who predictably make money out of constant buying and selling are the brokers; and the second is that, while I currently know I am more than capable of constructing such a portfolio with the proceeds of the sale of my private companies in early 2008, I want investments which will largely take care of themselves if my own mental powers start fading, as they may well do if I live as long as one of my parents.

Why I use drip-feed buy method

Key to the construction of the portfolio has been the principle of drip feeding the investment cash, which is part of the growth dividend strategy. In its fifth year the portfolio has still only invested around 90% of its notional £100,000. This is because after nearly 45 years writing and broadcasting about finance, one thing I have learned is that I know that I am not clever enough to reliably call market tops and bottoms — and have yet to find anyone else who can. An example of what this means in practice is shown in the panel and chart below.

KEY POINT  How the RIRP drip-feed system works
When the RIRP made its first investment in FirstGroup exactly two years ago, the shares stood at 375p, but by the time of my fifth purchase the price was in the low 320s. But as I did not perceive that the fundamentals had changed I was happy about this: it reduced my average purchase price to 361p, and had the effect of increasing my prospective yield from 5.5% to just under 6%.
In 2012 the market took fright at the triple whammy of squeezed consumer spending, reduced government transport subsidies and question marks over the future of their rail franchises. This gave me another buying opportunity after I decided to hold fewer than 20 shares, and raised my maximum investment in any one share to 7 units. None of these threats was unknown when I originally invested, nor to the board who have maintained their commitment to raise dividends by 7% each year, at least till 2013. The prospective yield on the last tranche of my investment was over 10%. This suggests the market does not believe the yield is sustainable, but Mr Market is not always right.
Dividend strategy
How RIRP staggered purchase of FirstGroup

So drip feeding rules out my emotions — there is a lot about this in the SPI Lesson Building Capital from Income. Or at least that is what I thought I was doing until the Editor referred me to some of the less unreadable works on behavioural investing. He suggests that what I am doing is avoiding “fear of regret” — concentrating on dividends means I do not give myself a hard time if my shares go down, or for not buying more if they do go up, or for not taking my profits at the top.

He may of course be right. But all I know is this. When I do my shopping the checkout till girls are not interested in me showing them a share certificate for a share which has doubled. What they want is the proceeds of the dividend cheque.

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

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.

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.

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.

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.

Sainsbury is a no brainer addition to the RIRP

Sainsbury is a no-brainer addition to the RIRP

Sainsbury is a no brainer addition to the RIRP. Two months ago I wrote that while the main economic indicators were all over the place, I was feeling tempted by some of the out of favour valuations of some of the leading high street retailers. I did not really expect the indicators to be quite so over the place as they have been.

Is private sector employment taking up the shakeout from the public sector; or not? Is it only the financial sector’s contraction which is holding the economy as a whole back? How will those consumers who keep their jobs respond to a “feel bad recovery” — when price rises exceed their pay rises, if any. Which, by the way, is not inflation, despite what all the media constantly scream at us. Inflation is when those price rises start showing through to pay rises not funded by productivity gains. What we are currently seeing is a change in the relative price of goods which is something quite different, though it still of course impacts on everyone’s cost of living.

Austerity message

Worries like these have caused the markets to stage a welcome pause for breath. But what I think we can still be reasonably confident of is that — until the next crisis at least — we retain a capitalist system, and efficient firms will make money out of giving consumers what they need and can afford. Together with housing, food is top of the list.

Traditionally the main supermarkets command ratings which price them out of my 4%+ initial yield criteria, but one which doesn’t and seems a bargain to me is J Sainsbury (SBRY). There is a reason for their comparatively lowly rating: earlier in the decade the company ran into major problems and cut its dividend. But this seems to have a cathartic effect. Dividends this year are 6.3% higher than last year, and have grown by over 50% since 2007. During the same time earnings per share are up over 80%. Both outstrip Tesco, as you should expect from a company still recovering from a fall from grace.

I have been impressed by Sainsbury’s “meals for a fiver” initiative, reminding a whole generation who have forgotten how to cook how much cheaper it is to eat good food you cook yourself rather than instant junk food. Their latest initiative is “Feed your Family for £50 a Week”, claiming to provide a family of 4 with 21 “tasty and delicious home cooked meals” — a fact likely to come as a further revelation to great swathes of the population. This is a company which clearly understands how to talk to customers feeling the pinch.

Sales volumes actually fell in the latest quarter, as they did at arch-rival Tesco, which tells you all you need to know about retailing at the moment. But Sainsbury is maintaining its guidance for an 8% rise in profits for the year.

Even if growth slows down and falls behind Tesco, the mere 1% yield difference between the two stocks makes Sainsbury’s a no-brainer for me for the RIRP — see below.

DM 321b

In addition, for the weak at heart the property portfolio is said to be valued at over £10bn against a stockmarket capitalisation of less than two-thirds that amount — though what would happen to that valuation if Sainsbury were a distressed seller doesn’t bear thinking about.

At the current price the shares give a rare opportunity to buy into a growing 4.6% yield, and so the portfolio is making its first £1,000 purchase. Unfortunately we are too late for the dividend payable later this month and will have to wait till early January for our first payout.

Would we win from lower yields?

Meanwhile the table shows the existing RIRP selections are well on track to meet the projected 10% increase in dividend income this year. Dividends received in the latest two months to end June average over 10% more than this time last year. Five companies reporting their results in the last two months have announced further dividend increases averaging over 7%; shown in bold in the table. One of these is my investment trust comparator, Bankers Investment Trust, whose latest quarterly dividend lags my performance, only 6% higher than the same time last year.

Sainsbury
The RIRP table now featuring Sainsbury

The RIRP has a 4% starting yield target for new investments, a figure which reflects the return I needed on my own retirement funds to preserve my lifestyle. Some readers have asked if I am not being short-sighted: would not a lower starting yield from shares with higher growth prospects make better long-term sense?

Perhaps: it depends partly on the timescale. Although my maternal grandfather lived into his nineties and my mother similarly, the auspices on the other side of the tree are not so encouraging. Given my years of indulgence in an over-rich lifestyle, I am not planning on much exceeding my now statistical 20 more years or so to go. So the question is whether higher dividend growth would benefit me over that 20-year term.

20-year catchup

Most people underestimate how long it takes the income from a low yielder to catch up with a higher yielder. Take the apparently slight 1% yield difference currently available between my choice Sainsbury over its arch-rival Tesco. The table shows the cash dividends (rounded down) from a £10,000 investment in Sainsbury at selected anniversaries, assuming growth of either 2.5% or 5%, set against doubled growth of 5% and 10% at Tesco.

The figures in bold colour show catch-up points when the dividends from Tesco exceed Sainsbury’s for the first time. If Tesco grows twice as fast as Sainsbury, at 5% growth it takes no less than ten years. If the growth rates are 5% and 10%, catch-up occurs halfway through year 5.

But there is more catching up to take into account. For me most interesting is the bottom line. It shows how much cumulative cash will have been paid out by year 10. Tesco is just ahead on the higher growth assumptions, but Sainsbury’s is still well in the lead on the 2.5%/5% assumption. You may be as surprised as I was to find that on this basis it will actually take nearly 20 years for lower-yielding Tesco to catch up.

Of course I may live longer than that, and the inflation assumptions may turn out higher. I shall however sleep happily with this choice.

First published in The IRS Report on 2nd July 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.