Tag Archives: rising income portfolio

Finally time to use RIRP as was intended

Finally time to use RIRP as was intended

I launched the Rising Income Retirement Portfolio (RIRP)  ten years ago this coming March after phasing myself out, as planned, from the private companies I had sold two years earlier. One reason was that well wishers advised me that as I had been a notorious workaholic I should get involved in some other activities to prevent myself curling up and dying from boredom; resuming writing after many years broadcasting was one of several commitments I undertook.

I soon realised that the advice – although well meant – was based on a wicked puritan lie. Now as I approach my 72nd birthday I have decided to wind down all my outside activities. I find I am quite capable of passing my time very agreeably without getting the slightest bit bored. My ideal retirement is an extended version of my working-life definition of a holiday: a time when I never have to look at my watch or meet a deadline; my various commitments are now increasingly frustrating this ambition.

So in this final review of the RIRP and its younger offspring, the Income for Life Portfolio, I am distilling the main lessons I have learned during this fifth decade of my life as an active investor; they may also act as pointers for anyone wishing to continue or emulate a portfolio such as these.

If my original aims had been fully achieved, there should be nothing for them to do unless a company gets taken over, cuts its dividends, or goes bust.

Lessons start here

But the first main lesson is that even for a “buy and hold” investor like me, all portfolios require a greater degree of active management than I now want to provide, other than to my own investments. The second lesson is that the original concept – finding shares with a likelihood of delivering above-inflation dividend increases – is entirely possible, as the RIRP proves; but the second part of the plan, to be able to largely forget about them, is not practicable, and not least because of the distorting effect of special dividend payments, to which companies seem increasingly attracted.

The third lesson is one every honest journalist or fund manager knows, but is easily tempted to forget: however experienced we may think we are, none of us is infallible. Although most of my RIRP shares are those I started with, various unforeseen failures – ranging from a change from rising to gently declining dividends, such as Sainsbury’s, through big cuts such as Pearson recently, to outright suspension such as Balfour Beatty and Interserve – have combined with successful or unsuccessful takeovers such as Sky to produce more changes over the years than I had ever anticipated.

But even given the impact of my most recent manifest error, GLIF, overall I can claim considerable success. The total income available this year from the RIRP equates to a yield of over 7.2% on the sums originally invested, and even the three year old IFL could distribute over 6.7%. But in both cases some of this comes from a combination of special dividends or realised capital gains, which were very much not part of the original plan.

Income growth is king

The real test for me is the growth in the underlying income, the first bold figure in the penultimate columns of tables 1 and 2. For the current year the RIRP only squeaks in just ahead of inflation, and that only thanks to an adjustment I made last year from my “bonus” fund when I was facing a short term income reduction from reinvesting halfway through the dividend year. But the overall rise is despite the complete collapse in dividends at GLIF, which I greedily included in both portfolios, compounded in the RIRP by the massive cut in Pearson’s most recent dividend. In both cases the full impact will not be felt till the forthcoming accounting years. The fact that special dividends and realised capital gains boost the total available income of both funds well above any measure of inflation only disguises the failure this year to achieve the core investment aim.

Excluding the party poopers, the underlying dividend growth for the other shares has been strong: 11.2% in the RIRP and 5.8% in the younger IFL. Over the decade the RIRP’s underlying income is up 56% on its initial 4% target, while underlying projected full year income from the existing shares in the IFL represents growth of nearly 6% on the initial 5% target yield.

I have always claimed that so long as the dividend targets were achieved, I could afford to be entirely indifferent to changes in the capital value of the portfolio. In the long term, market values should rise at least in line with dividend payouts, and so it has proved with the RIRP. In this final appraisal I am showing the market value of each of the shares, and their percentage rise or fall from their original purchase price. The RIRP’s 37% increase in market value has marginally exceeded the rise in the RPI over the decade shown in Table 3.

So I have preserved the real value of my capital while seeing my underlying income rise from an initial 4% by nearly double the 30.4% rise in the RPI.

The IFL currently fares less well, but may be excused to some extent since it was constructed within one year with an ambitious first year fully invested yield target of 5%, which it exceeded.

But the fact the year ended with the (unrepresentative) FTSE 100 index at an all time high means I cannot ignore the fact that these selections are living proof that a rising tide does not necessarily lift all vessels equally. I find I am ending the year with paper losses in nearly half of the IFL shares, which makes it all the more impressive that overall the portfolio shows a tiny capital gain. In neither case should this be relevant, except that I have previously resorted to realising some capital profits to make up for the mistakes I have not been clever enough to avoid.

In providing some guidance for the future, quite apart from GLIF I cannot ignore the doubts the market clearly has over Centrica, Connect, Kier and Marston’s. Normally I would take comfort from the fact all these companies except Centrica raised their dividends this year; but equally I remember that in the year before the banking crash all the UK banks rashly raised their dividends by an average of double figures.

You do the maths

The final lesson I take away for the last decade is a mathematical formula for resolving the dilemma of whether and how to reinvest in such cases. The problem is always how to preserve the underlying income flow when the capital value has collapsed. To take a current example: if Centrica merely maintains its dividend, it is still only yielding me 4.7% on my original investment against a higher portfolio average of 5.3%. But if I sell it, at its current diminished market value I need 8.7% just to suffer no fall in income, and that is simply unobtainable from anything I know of which shows any prospects of dividend growth. The only way to plug such a gap is to use the capital profits generated by reducing the stake in one or more of the star capital performers, such as HSBC or BATs, which in both cases requires sacrificing shares with record-breaking dividend growth, helped in HSBC’s case by declaring its dividends in US dollars.

Maintaining control

I’m aware that people who do not know me may conclude I am chucking everything in at the first signs of problems. To restore the balance I must boast that I have come out well against some of the “control” shares which we built into the RIRP, to make sure I was not reinventing the wheel. Early on I included Bankers IT, the only investment trust I could find whose aim was the same as mine: dividend increases above inflation. A surprise 12.2% dividend spurt over the past 12 months coupled with the RIRP’s below par performance means they have finally fractionally beaten the RIRP: their dividend increases over the decade are 60% against my 56%; and although my earlier slightly creative reinvestment accounting means the table overstates the rise in Bankers’ capital value, it has significantly outpaced the RIRP, even though it has had to bear transaction and administration expenses which my portfolios ignore.

But there is a cost: just as its starting yield was well under my minimum 4% target, so anyone thinking of buying today has to make do with a 2.1% yield against 4.5% from my mature portfolio. If in the future any capital gains are needed in the RIRP for any reason, this is clearly a prime candidate.

The same is true of Reckitt Benckiser, added at the same time as the much higher yielding Direct Line, in response to some subscribers’ suggestion that I should include a lower yielding “growth” share as a comparator.

To my pleasant surprise its 25% rise in underlying dividends only marginally beats DL, so RB is still only yielding half as much on the original cost of its shares as Direct Line. DL has therefore paid out twice as much actual money to the RIRP as RB. My income from DL has been further boosted by regular special dividends which far outweigh the benefit received from RB’s spin off of Indivior, which I sold and treated as a special dividend.

The last column of each table shows why I am content to take my curtain call with every reason to be confident that the coming year will prove that the changes I made last year will restore the underlying dividend growth in both portfolios. The only caveat has to be the possibility that the three big share price falls (apart from GLIF) in the IFL are accurately predicting disasters ahead, rather than a temptation to top up: in which case the same sort of surgery which saved the RIRP from its earlier scars in the immediate aftermath of the financial crisis are still available, with similar medium term prospects of success.

Douglas Moffitt, January 2018

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

RIRP – Flexing the rules now to save for that rainy day

RIRP – Flexing the rules now to save for that rainy day

Three months ago a surprise cut in the dividend of what had been one of my star performers, Interserve, forced me to apply dramatic surgery to the original Rising Income Retirement Portfolio (RIRP)  in order to Brexit-proof it for the inflationary challenges then only just starting to appear.

Three months on and the inflationary pace has accelerated to 3.7% by the highest measure – and I am expecting a peak of at least 5%, confirmed by the fact the come-on 3-for-1 offer of one of my favourite beers at Tesco has just gone up 5%.

Table 1 shows the portfolio is likely to come out smiling.

Table 1 RIRP

The average full year yield on the sums invested is up to 6.4%, 60% up on the original 4% target 10 years ago, and more than twice the highest measure of inflation over that time. The last figure of column 2 shows the shares have already increased their underlying dividends by more than 5% over the previous year even though we are less than half way through the current accounting period. So with the extra bunce of some special dividends, I anticipate the RIRP will resume its original brief of being a low maintenance have-and-hold portfolio.

For most of its life, low inflation means I was able to carry a few failures and sleepers in the RIRP, but rising inflation now forces me to be less indulgent. I shall be keeping a beady eye on companies unable or unwilling to raise their payouts, regardless of their high yields.

Paring out the dead wood

This time I must perform a similar exercise on the newer junior portfolio, the Income for Life, constructed over a one year period designed to deliver at least 5% income rising so as to beat inflation. The first was a deliberately ambitious challenge, and the second is increasingly becoming so.

Table 2 shows that in its second year, and its first year being fully invested, the underlying return on the £100,000 capital was over 5.2%, boosted to over 6% by special dividends and an enforced share sale.

Table 2 RIRP

But just like Interserve in the RIRP, one of my holdings has turned into a cuckoo; and just like the takeover of Alternative Networks forced me to sell a share at a time not of my making, so the Fox bid for Sky is effectively forcing me to do the same. I have always justified my professed indifference to my shares’ capital values with the argument that the value of my share certificates does not pay the bills, but the dividend cheques do. And the nasty small print in the Fox bid is that Sky pays no dividends this year. The sex scandals at Fox are again raising concerns as to whether the UK should consider it a “fit and proper person” to own such an influential broadcaster outright, and frankly I cannot any longer afford to forgo any return on one twentieth of the portfolio.

So entirely aware that I am throwing away the chance of a 5%+ capital gain if and when the bid does go through, I am selling all my Sky shares for a small capital loss.

Building a war chest

To compensate for this I am selling another chunk of the formerly high-yielding UIL, whose big capital gains have actually reduced the return on its current share price to under 4.6%. I am similarly cashing in £2,000 of the investment in De La Rue which still has to generate the dividend growth I want, but which for reasons I find as difficult to understand as UIL’s valuation, has risen by 50% since I bought it; since even I cannot resist banking a £1,000 capital gain to provide a war chest against future possible dividend disappointments.

All this generates nearly £9,000 cash of which I am using £8,000 to buy 4 units of two very different shares, each something of a gamble in their own way.

The first is what I hope will be a solid but unspectacular provider of income which will rise at least to match inflation: HICL Infrastructure, launched by HSBC back in 2006 as the first of what are now many infra-structure companies listed on the stock exchange. The nature of their contracts effectively allows investors a guaranteed inflation-linked return, unless the management lose track of their costs. Dividends have risen from 6p at launch to a target of 7.8p for the current year, bang in line with inflation over the period. Dividends are paid quarterly, which means this year we will only get three quarters of the projected 4.7% full year yield. In keeping with the lessons I have learned late in life about sometimes dipping into capital gains when they seem too good to be true, I am using the De La Rue and UIL profits minus the Sky loss to further boost the “bonus” line, already standing at nearly £500 because of which a welcome surprise special dividend from National Grid last month.

Building in the bonus

And for all my railings about the distortive effect of special dividends, I am buying my second share very much in the hope it will continue the pattern of the past 5 years by further supplementing its above average underlying dividend growth by generous regular special dividends. It is ITV which after some difficult years has found ways to continue to generate viewers and revenue despite the huge changes in viewing habits.

ITV chart

Underlying dividends have increased by two and a half times over just the past 5 years, and the projected percentage yield in the table is based on last year’s basic dividends. But the special dividend last year boosted the yield by more than two thirds. Unfortunately we will get only one dividend in our current year, but I am hoping for a bumper bonus next May.

The table shows we have some way to go to get underlying full year income even back up to last year’s £5,215. I am hoping GLIF will provide at least something to help narrow the existing £129 gap, but in view of the current share price around 14p I am not holding my breath. Clearly this is going to be a year when I shall have to dip into the war chest.

I realise of course that in doing so I am spending the two sources of money which I claim not to want, special dividends and realised capital gains. But when needs must, it is surely a fool who feels constrained by his own dogmas. And to salve my conscience I am pretty sure that by the year end next March I shall not have had to boost the income figures by more than last year’s £828 bonus, which prudent investors should have kept aside for precisely such a rainy day; but which I fully realise most of us will have spent.

Douglas Moffitt, July 2017

RIRP pays double the inflation rate as IFLP demands my attention

RIRP pays double the inflation rate as IFLP demands my attention

As with most new arrivals, the Income for Life portfolio which I launched less than two years ago has occupied more of my attention than I intended. As a result, its predecessor, the Rising Income Retirement Portfolio (RIRP) – nine years old in February – has effectively been ignored for the second 12 months in a row. Again no changes have been made to the portfolio, and this is exactly what was intended when it was constructed: a low maintenance selection whose dividend increases would comfortably outstrip inflation.

To be frank, this has not really been a very demanding target over the past few years, and even though the most recent annual inflation rate for the RPI has risen to 2.2%, as Table 1 shows the fund’s underlying income went up by 5.5% – two and a half times faster.

I no longer include special dividends in the basic calculations, rather treating them separately as “bonuses” because they are so unpredictable: this year’s specials from Direct Line, Glaxo and Lloyds provide a further £468, equivalent to nearly 0.5% on the original investment, but in fact the total bonus sum is nearly £2,300 less than the previous year’s truly exceptional and clearly unrepeatable receipts.

The future will be harder

But life is going to be tougher for the next couple of years. Since June and for most of the coming year, dividends of companies designated in dollars or euros, such as BP, HSBC or Vodafone, or with significant international earnings such as BATs or Reckitt Benckiser, will benefit from the fall in sterling which the foreign exchange markets so obligingly gifted the Brexiteers. But by the same token imported inflation will increasingly start showing through, so I must look carefully at some of the small print behind my funds’ performances.

The last column of Table 1 shows the actual rises or falls in income compared with the year before. The fact the market is around all time highs means the RIRP has unrealised capital gains approaching 40 per cent which means I now need to have pretty good reasons not to weed out shares which have gone ex growth or cut their dividends. The next article in April may see me jettison Pearson, Sainsbury and the two utilities unless they can raise their games.

IFLP beats its target in year 1

Table 2 shows that the junior portfolio, the Income for Life, will complete its first fully invested year in March with flying colours, delivering an underlying yield of over 5.2% on the original capital, usefully above the original 5% target.

There have been a lot of changes to the IFL since the last full table was published 6 months ago. Not only does it now reflect my post-Brexit decision to realise some of the inexplicably large capital gains at UIL and reinvest in what seemed to be the unreasonably depressed Galliford Try, but also the rather surprising year-end takeover of Alternative Networks.

Alternative profits

When I originally bought Alternative Networks for the portfolio in July I was attracted by the rising dividend record on the basis of which I had myself invested when the share price was significantly higher and the yield correspondingly lower and so below the IFL’s initial targets. This was reinforced by the company’s confident forecast of a further 10% dividend increase this year.

I can only conclude the directors suffered a collective case of terminal post-Brexit depression, because they have since unanimously recommended a cash takeover from one of their biggest rivals. A reference to “Brexit uncertainty” is the only new factor I can discern in the lengthy statement of recommendation which makes any sense at all. For all the talk about how the group has created long term value for shareholders, unless – like the IFL – you were lucky enough to buy between the end of May and the beginning of September this year, there is precious little profit for anyone who bought the shares after mid 2013, and losses for anyone who bought during 2014 or 2015 – as I did. The all time high in 2014 was 570p – 70% above the recommended takeover price.

So I think the IFL is very lucky to be able to book a 15.5% profit, even though it is deprived of the forecast £188 initial January dividend. I am applying some of the gain to replace the lost dividend.

I dislike takeover bids for two reasons. They sometimes force me to crystallise a paper loss I might have been happy to live with, as I was with my personal holding based on the dividend and pre-Brexit forecasts. But even when bids crystallise a gain they force me to make reinvestment decisions at a timing which is not of my choice.

I thought about using the Alternative Networks bid proceeds to bring in a new share, but because the portfolio was constructed in the space of 12 months it has never been able to benefit to any significant degree from the multi-year pound-cost-averaging drip investment technique employed to create the RIRP.

Top-ups win over new shares

So I have applied the RIRP rules, and topped up on shares whose fundamentals seem unchanged from when I originally bought them, but whose share prices are either still around or below my original purchase price. To my surprise and delight one of the qualifying candidates was Galliford Try, so my maiden £2,000 investment is now topped up to the standard 5 units, and the remaining £2,000 is split between Connect and Marston’s. All three shares are yielding more than the fund’s current average 5.2%. I have booked the capital gain minus the £188 dividend to the “bonus” line.

The IFL will face the same challenges as the RIRP as inflation starts rising, but with the disadvantage of initially having been forced to invest in higher yielding shares, the corollary to which is normally lower dividend growth longer term. Like the RIRP it also faces a further dividend cut from GLI Finance, but even if GLIF pays no other dividend this coming year than the remaining quarterly to which it is committed in March, the full year dividends from Galliford Try and my other increased holdings already largely make up the loss.

I also admit I quite like leaving a failure in if I can afford it. There are two reasons: sometimes they come right, if you can wait long enough; and meanwhile they are an enduring reminder that none of us gets it right all the time, and should therefore not beat ourselves up too much for our failures.

Douglas Moffitt, January 2017

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.

Rising income portfolio: tough decisions for RIRP

Rising income portfolio: tough decisions for RIRP

Rising income portfolio: tough decisions for RIRP. The Rising Income Retirement Portfolio was conceived as a way of building up over several years of drip investment a selection  of shares designed to produce a rising income likely to outpace inflation each year, and which would require minimal maintenance once fully invested.

The importance of minimal maintenance in the rising income portfolio is that as I approach my eighth decade I am realistic enough to recognise that either my enthusiasm or capability of dealing with investment choices may wane.

But just as the portfolio became fully invested, I now find myself having to decide what to do with RSA, the second of my investments within two years to make a rights issue and suspend its dividends; my two utility companies are finally threatened by the sort of governmental interference I had feared when I first invested in them; and all this on top of having to apply my mind to what to do with the cash windfall generated by my sell-off of the shares in Verizon which were spun off by Vodafone as part of their unprecedentedly huge return of capital to shareholders.

Gambling on RSA

Last issue I admittedly tempted fate by writing “so long as [RSA] do not resort to a right issue and suspension of dividends I can weather [the storms] with equanimity.” I had already assumed in my dividend projections for the year ahead that they might not pay anything, but even though I now have the bonus from the sale of Verizon shares (representing an effective return of over £2,000 of the £5,000 I had originally invested in Vodafone) I am loathe to commit new money in the rising income portfolio to RSA.

According to the RIRP’s original rules, I ought just to kick RSA out. But having stuck with it this far I am inclined to take a gamble and retain it since I believe, perhaps naively, that Stephen Hester will turn it round. The 3-for-8 issue at 55p has been priced sufficiently realistically that the rights have a value of around 31p each in the market, so what I propose to do is “tail swallow” — sell enough of the rights in the market to be able to take up my remaining entitlement.

My existing holding entitles me to 2,099 rights; if I sell 1,342 of them for £416 I am left with 757 shares, which will cost me a few pence over £416. This will bring my existing holding up to 6,355 at no extra cost, and so reduces my average purchase price from 125p to 110p a share — though this is still well above the price the shares are likely to command after the rights issue. This also entails some dilution of my holding, but as it was one of my biggest investments I am not going to worry about that.

Dividend growth is still satisfactory for rising income portfolio

My overall dividend forecasts for the rising income portfolio for the current year are lower than they would otherwise have been because in order to compensate for last year’s lack of dividend growth following cuts or suspensions at RSA and FirstGroup, I decided to “borrow” some money in advance from the Vodafone payout.

rising income portfolio
RIRP dividend growth

If it were not for that, projected dividend growth this year would already be over 6%: as it is, it is only currently showing a small projected growth for the year, even though since January six of the shares have already announced higher dividends than last year.

I am paying the price this year not only of the absence of dividends from RSA, but also of Standard Life’s special dividend last year, which will not be repeated and which contributed several hundred extra pounds last year.

I have every reason to believe that dividend increases across the rising income portfolio will accelerate in the year ahead, barring fresh disasters amongst my choices. The 2-point reduction in corporation tax to 21%, which comes into effect this year, had been pre-announced in last year’s Budget, like so much else these days, and so got no publicity this year. It means that even a company with unchanged pre-tax profits will see its after-tax earnings — and hence its dividend-paying potential — rise by more than the projected 2% increase in the CPI for the year ahead.

 rising income portfolio
The Rising Income Retirement Portfolio constituents and performance

When it comes to how to reinvest the Verizon cash, the Editor has suggested that I should consider including a collective investment in overseas markets, since the portfolio is so UK based. I have three problems with this:

  1. At least six of my shares have huge non-UK income and all but BP present their accounts in sterling;
  2. BP shows the problems with non-sterling dividends when sterling is strong: their latest quarterly dividend is unchanged in dollars, but the sterling payout is nearly 2% lower; and Reckitt Benckiser is paying out 1p less in final dividends than their previous record might have led us to expect.

But most importantly of all (3) with over £99,000 previously invested and a £2,000+ windfall from Verizon which appears to cost me nothing, I think we deserve now to include what most investors have somewhere in their portfolio, a silly “fun” investment that we could afford to lose, but which we secretly believe we are clever enough to identify as a potential winner that the market has overlooked.

An off-piste stock

Nearly everyone who follows the markets from time to time comes across such a company which just feels undervalued, but which is so far off the wall that they do not stand up to rational inclusion. I had toyed with adding shares in bombed-out annuity specialist Partnership, since for all the post-Budget froth annuities will remain the right solution for many pensioners.

I have bought some myself, but because there is a question over how profitable annuities will be in future for the providers, instead I am buying for the rising income portfolio two £1,000 units in an AIM-listed Guernsey-based provider of loans to small and medium sized businesses in the US and UK.

GLI Finance, formerly Greenwich Loan Income Fund, has had a chequered history, but since passing the dividend in 2008 has restored it from 3p in 2009 to the previous 5p, when the shares were trading around 100p.

At the end of last year it embraced a new investing policy, designed to transform it into a leading alternative provider of finance to SMEs in the UK and US through non-banking platforms, but with the centre of the business remaining firmly in the UK, “reflecting the sterling investor base, share price and dividend policy.”

The stated aim is to “to produce a stable and predictable dividend yield, with long-term preservation of net asset value”, currently 50p. Admittedly the 1.25p quarterly dividend currently has skimpy cover, which is probably the main reason the shares yield nearly 8.5% at the current 59p.

But the dividend was raised last year, which encourages me to believe it is safe, and with an xd date later this month, we will start getting an income from June. I am also using under £300 to top up the remaining Vodafone share stake to a round number of £1,000 book price purchase units following their consolidation after the capital refunds.

There is probably little prospect of significant dividend growth from GLI, and in that respect its inclusion in the RIRP is a sort of challenge to the basic philosophy: it is the only share in the RIRP which I have bought with the intention of selling if it generates useful medium-term capital profits.

If peer-to-peer lending — soon to be eligible for inclusion in New ISAs — takes off as the board hopes, I think this is the sort of share which might well attract more widespread attention.

Respectable institutional shareholders already own over 60% of the company; one of my reservations is the relatively low direct director shareholding at under 2%, worth only around £1m between three of them.

Like all other shares in the rising income portfolio, I already have a small personal stake in this company among my own shares, acquired in the past few months.

I should however add a note of caution for newer subscribers: the last share I had this sort of gut undervalued feeling about, one which similarly seemed poised to exploit a gap in the financial marketplace, was Cattles, which became my first casualty when it went spectacularly and fraudulently bust.

I shall reserve until next time further discussion of the apparent threats to my utility and life assurance holdings posed by politicians and the Competition Commission.

First published in The IRS Report on 5th April 2014.

Vodafone special dividend saves RIRP

Vodafone special dividend saves RIRP’s bacon

Vodafone special dividend saves RIRP’s bacon. Since the last article in October, twelve of the shares in the Rising Income Retirement Portfolio have paid another dividend, or will have done so by the end of the RIRP accounting year in February.

Ten of them, whose current year income is shown in blue in the main table, will have paid out more than this time last year. That includes a restoration of dividend growth at BP, and a surprise special dividend of 4p a share from Direct Line following the sale of its closed life assurance business.

I normally rail against these erratic special payouts because they wreak havoc on my efforts to achieve smooth dividend growth. But I cannot ignore the fact that the extra income from DL and Standard Life earlier this year has significantly mitigated the effect on the RIRP of the two failures in this, my first annus horribilis.

The big one was the total loss of income from FirstGroup following its rights issue earlier this year, at which point it was ejected from the portfolio with a big capital loss. The second was the recent cut in dividend at RSA following news of a black hole at their Irish subsidiary  — see Peter Shearlock’s update here.

And now it looks as though my income from RSA will be further reduced in the year ahead. But so long as they do not resort to a rights issue and suspension of dividends, I can weather that with equanimity, largely because of the impending massive return of cash from the Vodafone special dividend to its shareholders in March.

My immediate problem is my current year income. The impact of FirstGroup and RSA means that despite the sturdy rise in dividends from most of the portfolio shown in Table 2 — averaging more than three times the rate of RPI inflation this year — there is still a hole of several hundred pounds between my actual dividend income for the current year and what I need to beat inflation for the year.

I am in some ways setting my income bar for the year artificially high, ignoring the fact that the cumulative rise in return on capital since the fund was started actually amounts to more than twice the rate of inflation.

As always I choose the higher of the RPI and CPI to calculate inflation: I have beaten the CPI rise nearly threefold. I am also choosing to ignore the possibility that some of the Vodafone payout may in practice be encashable right at the end of February, within my current accounting year.

I am doing so partly as a result of having had to face the “problem” earlier this year of what to do with shares whose capital value has raced ahead of my average purchase price, as many of them have.

Theoretically, capital gains or losses do not interest me, but I was forced to address them to help restore the scars of the FirstGroup capital losses, which I reduced by cashing in one fifth of my holdings in Bankers Investment Trust and Pearson, both of which had almost doubled in value.

Vodafone special dividend
The RIRP summary to date

And it is this which has enabled me to sleep easily for the rest of the year despite its disappointments: for if it was right to do that, then the rabbit I am about to extract from my hat to compensate for this year’s income shortfall must be just as defensible.

Earlier in the year I was staring at the prospect of a £600 income deficit, but dividend growth elsewhere and further falls in inflation have reduced the gap to under £250. I propose to fund this by cashing in some of the RIRP’s Lloyds shares.

I had hoped they would be providing some income well before now, but their failure to do so means I suffer no immediate income loss by selling some of them. By cashing in just 1,592 of my existing 5,840 shareholding at 78p, I get cash of £1,242 representing:-

  • a capital gain of £494 — 66% — which I can add to my “income”
  • return of £748 original investment, applied to defray the cost of this month’s new purchases.

This also eliminates the previous untidy fractional Lloyds holding, now reduced to 2 units from 2.75.

Vodafone special dividend from Verizon sale foots the bill

But for all the logic, I find it difficult to resist a sense of Puritan guilt at this solution, so I propose to exorcise it thus.

Our 2014 accounting year starting in March will kick off with the Vodafone special dividend, it’s unprecendented return of cash to shareholders resulting from their realisation of the embedded value of their joint venture with Verizon.

The RIRP will receive a payout of an estimated 30p a share, and twice as much value in Verizon shares. The £1,000 plus cash payout alone would provide the RIRP with dividend growth of 17% for the year, assuming all the other shares deliver no growth at all. Of course I shall be left with fewer Vodafone shares after their consolidation and as yet the dividend prospects there are unclear.

So to salve my conscience I shall refund £494 of the payout to the capital account so that essentially I shall just have lent myself the cash for this year’s inflation-beating “income” — consuming some of tomorrow’s jam today.

In February the RIRP will be 6 years old and I propose to round off this year by making it fully invested. So I will buy further units in those companies in which I am underweight: two in BP, and one each in Direct Line and Reckitt Benckiser.

Because nothing I buy now comes anywhere near matching my current effective average yield of over 6% on my originally invested capital, this reduces the projected yield for the year ahead slightly, and so has the further effect of raising the bar a little higher for next year’s dividend growth requirement.

At the moment, if I assume the additional income from Verizon will offset any fall in income from Vodafone, and assume zero income from RSA and bring in only half the special cash from the Vodafone special dividend, the portfolio shows broadly unchanged income from the current year, assuming there is no income growth from other holdings.

Income and capital way ahead of inflation

I do not expect an entirely easy ride between now and the 2015 election, but I have reasonable confidence that in practice the RIRP income will continue to outperform inflation, without needing to consume any more capital gains.

It is true that the RIRP is overweight in the two sectors which are likely to be political footballs as targets of “cost of living crisis” electioneering between now and 2015: energy and transport. But frankly all the shares in the portfolio could come under headline-grabbing attack if the fight gets really nasty, with the possible exceptions of Balfour Beatty, Interserve and Pearson.

On balance I doubt if the boards of any of the RIRP holdings will punish their shareholders unless forced to by their regulators — who currently lack the power to do so — or by persuasion by government, public opinion and the press. Apart from RSA the prospects for dividend growth from the rest of the portfolio look as sound as ever and — who knows — Lloyds might yet restore the dividend in 2014!

And to end on an upbeat note: I started investing with a yield target of 4% net. My actual dividend income for the current year before the Lloyds fudge represents 5.8% of the funds invested. That is the equivalent of a pre-tax interest rate of 7.25% for a basic rate taxpayer. There has also been cumulative income growth of 45% from the initial target against a rise in inflation of under 21%.

Vodafone special dividend
RIRP dividend growth

And just for the record, despite the 25% current book loss on RSA, the £100,000 invested to date could be sold for just under £146,000, a percentage capital gain which is uncannily close to the cumulative dividend growth. Even a new investor in the RIRP at today’s prices would get an underlying yield of at least 3.7% net, equivalent to 4.6% gross at a bank, assuming nothing from RSA and no further dividend growth elsewhere in the year ahead.
So I keep my fingers crossed for a prosperous and healthy 2014, and wish you all the same.

First published in The IRS Report on 11th January 2014.

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.

FirstGroup disaster in RIRP

Dealing with the RIRP’s FirstGroup disaster

FirstGroup disaster in RIRP. I had frankly been dreading writing this latest update to the Rising Income Retirement Portfolio, ever since FirstGroup ruined my cornflakes at the end of May with the announcement not only of their widely anticipated rights issue, but also suspension of their dividends, effectively for a year and half. But at least it makes a change from my usual complacent boasting about how my dividends continue to outstrip inflation.

I could have coped with the rights issue — and had planned to; but the dividend holiday means FirstGroup cannot have any place in a portfolio designed to produce a rising income with as little management as possible.

My immediate problem is the gaping £600 hole in my projected income for the year ahead — representing over 0.6% of the value of the total funds invested. I explained in the web updates and in last issue’s brief update that as I cannot afford to wait for the company to resume its dividends, the portfolio would sell half the holding the Thursday before the shares went ex-rights on June 10th, and the remainder the week afterwards, together with the rights if they had any value.

Although there was in fact little difference in the overall pre-cum and post-ex rights values, the weak stockmarket ahead of the second sale served to increase my overall losses to £5,036.03 from the original cost of £7,999.15.

With nearly two thirds of original investment gone to money heaven, and since this was also the highest potential yielder of my selections, it is sadly clear there is no realistic way any reinvestment can hope to make up the lost ground in the short term.

Of course I could claim I don’t really need to, because over the portfolio’s life the average projected dividend yield on the sums invested is 50% higher than my original target of 4%, which is more than double the rise in inflation for the period.

But I won’t. Instead I will use the crisis as a challenge to address one of the problems of success somewhat earlier than I had anticipated: unrealised capital profits. I have stressed many times that the capital performance of the shares is of almost no interest to me. I should have qualified that: unless they stop paying rising dividends and I have to crystallise a loss.

Which way to plug the FirstGroup hole?

My average mouth-watering 6% yield on my original investment means almost anything I do now is bound to further reduce the average yield on the fund in the short term. My first inclination was to mitigate the impact by going for a replacement share with a relatively high yield, but still with prospects of dividend increases at least matching future inflation.

But the Editor has pointed out that — given the inevitable short-term reduction in overall yields — now might be the time to crystallise some of my fortuitous capital gains and buy a lower yielding share with higher dividend growth prospects.

It is indeed true that four of my shares have doubled in value, and so now “really” yield less — on their market value — than my minimum yield criterion, which inflation has increased from its initial 4% to nearly 4.8%.

My first response was to remind him of the length of time it takes for a low yielding share to catch up with a higher-yielder. But on consideration, as always he has a point. So just as I included Bankers Investment Trust at his suggestion as a useful control to ensure I was not reinventing the wheel, I now propose to reinvest into both a higher yielding share, and into a “growth” share whose initial yield falls below my normal yield criteria.

Two sales to boost yield

So I am adding to my distress FirstGroup sale proceeds with the sale of one fifth of my holdings of Bankers Investment Trust, currently yielding well under 3% on its market value, and Pearson, now yielding under 3.7% to new investors.

For my higher-yield purchase, I am buying three £1,000 units of Direct Line, a company I would not otherwise have included, largely because together with my holding in RSA it leaves me uncomfortably overweight in the insurance sector. Direct Line are on a historic yield of 5.2% with a commitment to “increase the dividend annually in real terms”.

 

FirstGroup disaster in RIRP
Will Reckitt pay for dinner?

For the lower yielder I first considered Unilever, makers of many of the brand names you see on the supermarket shelves. But ever since they adopted the euro as their base accounting currency some years ago, sterling holders have been exposed to fluctuations in the exchange rate: so last year’s 8% rise in the euro dividend was pared to a rise of under 2% in the sterling payout.

So I am going instead for their main competitor in the household products sector, Reckitt Benckiser, whose brand names include most letters of the alphabet, including the best known brand of contraceptives. This combination has driven dividend growth of 67% over the past 5 years, bettering my own average, though the annual growth rate has slackened in recent years.

Another BP top-up

Elsewhere I am also topping up the BP holding with a further £1,000 purchase. Sadly their most recent payment suffered from the Unilever currency effect: a maintained dividend in US$ terms, the accounting currency which befits this largely US company, produced a slight reduction in the sterling payout received in June.

Reduced dividends are shown in italics in the table, somewhat unfairly putting BP in the company of recent dividend slashers RSA.

The FirstGroup failure disguises the underlying strength of the rest of the portfolio. Increased payouts and forecasts from nearly all the other holdings would have almost made good the £600 black hole by year end.

But the net reinvestment effect of my changes leaves my projected return on capital for the year currently showing a fall, partly because my capital profits do not fully offset the FirstGroup losses, and partly because we have already missed the bigger dividends paid earlier this year by the two new purchases.

FirstGroup disaster in RIRP
The Rising Income Retirement Portfolio to date

Although we are only one third of the way through the accounting year, dividends received to date are much more than one third of what I will need to restore my overall return on capital to the 6.3% which will probably be needed to beat inflation by my year-end. But the uneven pattern of dividend payouts means it is unlikely, but not entirely impossible, that dividend rises yet to be announced for the rest of the year will meet the fund’s yield target.

In which case, now that I have been forced to crystallise some of my fortuitous capital gains, I have set a precedent I may have to revisit next January.

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

RIRP investment updates

RIRP Investment Updates

Investment Update – 1st June 2013

First Group – Events have moved swiftly since I posted my first reaction to FirstGroup’s rights issue and dividend suspension a week ago. By the end of the week the market was valuing the shares with the rights entitlement at less than the theoretical ex-rights price.
Now that the full details are available, it is clear the restored dividend in over a year’s time will only be producing a yield of under 5% at the rights price, and while the group may later enjoy the revitalisation they hope for, I don’t think I can afford to wait for them to prove it. As I think I can do something better with the cash, certainly in the meantime, I now propose to sell all the RIRP holding.
he shares go ex-rights at close of business on June 7th, the Friday after this issue of The IRS Report is published, and just in case the market changes its assessment after the rights, in the July RIRP article I shall treat the sale proceeds as if half the holding had been sold cum-rights on June 6th, and the remaining half ex-rights the following Thursday, June 13th. If the rights have any value in the market the RIRP will notionally sell them too.
Sadly as FirstGroup is our biggest single holding, its sale will create a £600 black hole in the dividend income for the current year, equal to over 0.6% of the total invested capital. But I will still have over half the RIRP’s accounting year to make up some of the lost ground.

 

Investment Update – 1st December 2012

RIRP dividend growth tops 11%

Now the Rising Income Retirement Portfolio is nearing maturity, with over 90% of capital invested, reporting on it should become increasingly routine, and for this reason we are in future only going to publish full updates every third month.

This after all was the key behind the original concept — to create a portfolio, for those like me who are in or approaching full retirement, which would require only care and maintenance rather than day-to-day active management. Two main reasons for my adopting this approach were to minimise dealing costs and to protect against the day when I may not feel or be able to take sensible investment decisions.

Ideally, now that only a small amount remains to be invested, I should just be recording a continuing catalogue of dividend increases outstripping inflation from the RIRP. I wish… but of course in reality the sailing will never be entirely so plain. Since the last full report, it is true, the dividends have continued to roll in: the average rate of increase in dividends this year will be comfortably over 11% as three more companies have announced increases.

But we have also had a warning shot from FirstGroup, which has not raised its interim dividend, adding to market speculation about the possibility of a rights issue: this would require some active engagement of the grey cells. If necessary, I will confront this issue in the next full report in the January issue.

 

Investment Update – 3rd November 2012

FirstGroup (FGP): the shares were not selected for the RIRP on the basis that they would win the West Coast rail franchise. So the company’s failure to win it will not result in any action. The rules of the RIRP require a review and usually a sale if the dividend is cut.

 

Investment Update – 5th February 2011

Cattles – Sum invested for RIRP: £4,000. Average price per share: 165p. Suspended 23.4.09.
Value of offer under proposed Scheme of Arrangement £24.23.
The shareholder meeting held on January 31st overwhelmingly accepted the 1p per share offer so as to enable the company to be reconstructed, largely to the benefit of the banks who are owed over £1 billion.
But as a result of the huge number of proxies gathered on behalf of the shareholders association, the board was forced to allow major concessions recognising the rights of many of the shareholders who have lost money — which will include those who bought at the time the RIRP was buying — to gradually get some more back in addition to the 1p per share.

 

Investment Update – 3rd April 2010

In line with our policy of topping up whenever companies maintain or increase their dividends and the yield remains above 4%, we are adding to three companies in the RIRP.

Interserve’s annual results show revenues, pre-tax profits and earnings per share all up healthily, and the final dividend goes up, to make a rise of nearly 3% for the whole year. The prospective yield is almost double the portfolio target. The portfolio adds a further £1,000 worth at 220p.

Balfour Beatty’s full-year revenues were up more than 9% and profits up 7% at £267m. The recent rights issue means earnings per share were unchanged, but adjusted for that, the 12p total dividends for the year are up 8%. We add £1,000 worth at 295p.

Standard Life’s full-year figures show broadly maintained pre-tax profits and earnings per share of 29.1p, allowing a 5% rise in the final dividend to make a well covered 12.24p for the year. The portfolio adds a fifth £1,000 at 205p.

 

Investment Update – 7th November 2009

Lloyds Banking Group – In theory I should spurn Lloyds’ proposed rights issue and sell the shares, since there is no hope of a dividend for the foreseeable future. But while it is true that unrealised capital profits or losses are almost immaterial to the portfolio’s dividend paying potential, a certain return on the original capital is required and retirees cannot replace lost capital from earnings. So as I am only 50% invested I do not want to crystallise any significant capital losses unless I have to.
Our losses on Lloyds would be much bigger if we had not taken up the last rights issue at tiny cost. The terms of the proposed £13.5bn issue will (unusually) not be announced till later this month, but on my reckoning they will involve less than £600 for our holding, and the price can only reduce our average purchase cost still further. So I shall take them up and hope they will come right one day.
I toyed with taking the profits on Kingfisher which would more than wipe out the losses on selling Lloyds, but am frankly gambling that the group will recover to the point where the government can get out at a profit, and we can decide whether to join them or stay in if they resume dividend payments.

 

Investment Update – 1st August 2009

National Express – Takeovers are usually bad news for a rising income portfolio since, regardless of price, the subsequent income stream usually falls. National Express, which is now clearly “in play”, may be the exception, since the board are convinced the company is worth significantly more than our average purchase price. The rumoured cash bid would enable us to reinvest at similar yields to what we were getting on the shares. For this sort of portfolio the strategy is to hold the shares until we are bought out.

 

Investment Update – 6th June 2009

Tate & Lyle – The RIRP has so far made only one investment in Tate & Lyle, because I wanted to see their considered assessment of the adverse International Trade Commission judgment against their claim for patent infringements of their key sucralose product. There is good news and bad: they claim not to be worried by the judgment, and report that a breakthrough in sucralose yields enables them to mothball their US plant and concentrate production in Singapore.

This produces a one-off charge of £97m which cuts profits from £182m to £113m. The final dividend is only maintained at 16.1p, after a small increase in the interim, and is technically not covered by earnings. But the full-year payment of 22.9p is covered 1.5 times by free cash flow and 1.7 times by adjusted earnings from continuing activities.

The outlook is cautious and debt has risen, but the company says its “inherent ability to generate strong cash flows, assisted by the ending of our major capital expenditure programme, will help drive a stronger balance sheet in the year ahead.”
Adding another £1,000 to the portfolio at 312.5p a share to bring the average purchase price down to 349p, giving a highly satisfactory yield of nearly 6.6% on the £2,000 invested to date.

United Utilities – Water supplier United Utilities has produced an optimistic commentary on its full-year figures – underlying pre-tax profit up 12% to £531m, a final dividend of 22.03p payable in August as promised under the capital reconstruction scheme, and the commitment to a 5% increase in the year ahead. The company is in discussion with Ofwat about pricing for the coming 5-year period; its earnings from activities not subject to government price controls increased by 9% to £68m.

The company says its “robust financing position” gives it headroom to cover its projected financing needs through to mid-2011. The only danger I foresee is that utilities might become a political football in the forthcoming election, and that a new “caring-feely” regime might ignore the consensus to date, hitherto preserved under New Labour, that utility companies are not charities and need to earn a proper return on capital to finance their huge capital investment programmes.

The RIRP makes its fifth £1,000 investment at 535.5p, bringing the average purchase price to date down to 651p, giving a yield of just over 5% on the sums invested to date.

Kingfisher – The first quarter update from DIY group Kingfisher shows how a well-managed company can buck recession: first quarter trading profits are up 40% at £128m, despite a slump in sales in China and 25% rise in losses there to £14m. In retrospect I should have bought more Kingfisher earlier, but the price has soared since my first purchases to the point where the yield on any new investment falls way short of my 4% target. So while my sentiment remains very positive, the portfolio has to sit on its hands and look for another buying opportunity later.

 

Investment Update – 7th March 2009

Pearson, publishers of the FT, owners of Penguin and much more, released their results after the copy deadline for my main article. They are everything I could want. Pre-tax profits are up 25% to £585m, earnings per share are up nearly the same at over 57p, and the dividend goes up 7%.

So long as the dividend goes up by more than inflation (and this is the 17th successive year of above-inflation payouts) I don’t mind them improving their cover, currently 1.7, even though their headline free cash flow was up 55% at over 70p a share. CEO Dame Marjorie Scandino says she expects the company to remain “hardy and aggressive” in difficult times. If the current US exchange rate prevails this year it will add around 7p to earnings per share.

Even though markets were testing new lows as these figures were announced, Pearson are actually showing a gain on my purchase price. The shares do not go xd until April 8th, and ideally I should like the price to come back closer to where I originally bought, but I shall monitor them throughout March and if they start showing renewed strength I will book a further £1,000 purchase if they rise above 660p, when they will still be yielding over 5%.
Comment: Very Positive.

 

Investment Update – 6th December 2008

If the recession is going to be as severe as as severe as the markets and almost everyone except MR Darling seem to believe, then we are indeed entering unknown territory.  When companies cut dividends even though profits are better than expected (as Mitchells and Butlers – not in my portfolio – have done) then the entire rules of the game are changing. The portfolio’s income expectations have been downgraded by Barclays and Lloyds passing their dividends, and my aim is now to preserve the target 4% net yield for the year to form a base on which to produce inflation-linked rises in future years – I am still not yet protecting against real long term deflation. After the markets tested new lows recently, I believe the best policy for the portfolio for the rest of this year is masterly inactivity: I will review the New Year strategy in the January issue.

 

Investment Update – 6th September 2008

Cattles – I can see nothing in the Cattles interim figures to explain the market’s continued distrust of the shares. Profits for the half year are up a sixth to £70.2m, earnings per share are up over 7% and the interim dividend goes up 5%. The loan loss ratio is unchanged, the cost to income ratio is down, the return on equity is up – and the shares are below the recent rights issue price. As I said in the last issue, if there were no nasty surprises in this statement the Rising Income Retirement Portfolio would top up its holding on the announcement by £1,500 making a total investment to date of £4,000, so I am booking the purchase of a further 1,282 shares at the price they were the day of the announcement reducing the average purchase price per share to 163p.

 

Investment Update – 5th July 2008

Cattles – The market continues to ignore everything unsecured lenders Cattles tell it. The company again confirms that trading so far this year is in line with its expectations, which were the basis for the recent rights issue at 128p putting the shares on a prospective yield of over 12.8%. It is applying even tighter credit criteria to protect the quality of its loans and continues to express confidence on its funding situation: gearing is under 3.5 times against a covenant limit of 6. Half time results will be announced on August 28th. The price has since fallen below the rights price; if your nerves can stand it, buy.

 

Investment Update – 7th June 2008

Full-year profits to end March 2008 from Scottish and Southern (Issue 283) are up nearly 14% to £1.23m, with a slightly higher percentage rise in earnings per share, and a 6% rise in the final dividend to make the full year 10% up on last year.

My recommendation was based on the board’s commitment to real dividend growth of 4%, which this clearly comfortably exceeds. Again the board takes the opportunity to state that its “first responsibility to shareholders is to deliver sustainable real growth in dividends”.
The price has moved up some 4.6% since my recommendation and at 1453 still offers a 4.1% historic yield. But if you buy before the shares go xd on August 20th, the raised final dividend alone on September 26th gives you over 2.9% net on your money at the current price, which I make an annualised time-adjusted return of something over 9%.

In my next article I shall be booking another purchase at this date and price.

Similarly United Utilities (Issue 283) have reported a 17% rise in profits from continuing activities to £475m, and confirm payment of the 31.47p final dividend on 8th August with an xd date of June 25th. This alone gives a net return of 4.1% at 765p in just two months’ time, so I shall also be booking another purchase of this stock at this price and date.

Shares in Cattles (Issues 280, 283) took a hammering ahead of the rights call on June 3rd. but by comparison with RBS and Bradford and Bingley the fall is a relative vote of confidence. The company has appointed two more experienced clearing bankers to the board to strengthen their application for a retail banking licence, one of the purposes of the rights issue. Even if the prospective yield of over 9% shows no growth, they still look a bargain for new investors at 173p.

 

Investment Update – 3rd May 2008

Cattles – The company says that it has made a strong start to 2008, and is achieving higher margins on its new lending volumes. The fall in the share price since my initial recommendation seems to have been largely due to a trickle of institutional selling. Take up rights/buy.