Tag Archives: Rising retirement income

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 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

Double digit dividend growth

Double digit dividend growth

Double digit dividend growth. Since my last article two months ago, exactly half the companies in the Rising Income Retirement Portfolio (RIRP) have announced dividend increases averaging over 7%, more than twice the latest year-on-year inflation rate, my only measure of success; but my prediction for my full year’s income before this month’s purchases was down by £68.

The culprit is something I railed against recently (Issue 330) — so-called “special” dividends. I dislike them for precisely the same reasons I concentrate on dividends rather than possible capital profit (or loss): relative certainty.

Two companies in my list paid them this year: GlaxoSmithKline and Vodafone, and it now seems pretty certain that Vodafone will not pay one in my current accounting year, which runs to the end of February.

Vodafone’s 4p a share special dividend last February was the result of their receipt of a maiden dividend from their minority holding in Verizon Wireless: Verizon has said that will not be repeated this year.

The result is that the projected Vodafone dividend for the RIRP’s current accounting year falls from 13.52p a share to 9.52p. On our holding of 3,624 shares this costs us over £145 and is not what a portfolio designed to deliver rising income should be seeing.

Two options for top-up

The fact that all my other holdings have been declaring healthy increases means the overall return on capital this year will only fall from 12% to 10%. Few salaried people will see rises of over 10% in their income for this year, which maybe just shows what high standards the RIRP has set itself. But it still leaves me pondering the best way to make up the “lost” ground.

There are in fact only two of my existing stocks, FirstGroup and RSA, in which I can now invest new money at a higher yield than my projected yield of just over 6% for the year ahead. That is because most of the RIRP’s shares, which as the table shows produce mouthwatering yields on the original capital invested, have been rewarded with comparable rises in their share prices — which I neither show in the table nor particularly care about.

My investing equivalent of “taking care of the pennies” is my belief that if you take care of the dividend growth, the capital value takes care of itself.

So now I have to decide whether I trust my rules sufficiently to make FirstGroup my biggest single holding with yet another purchase yielding a prospective 9.6% on new money at the current price, or whether I should heed the market hint that the bigger the yield, the greater the risk.

My rules stipulate that if the fundamentals have not changed, if a share falls below my average purchase price to date, I should top up to the maximum automatically. My current maximum is seven £1,000 units, so I have a get-out if I want one.

Double digit dividend growth
FirstGroup should help RIRP towards double digit dividend growth

Keeping an eye on director share sales

And I could argue the fundamentals have changed too. Since my last purchase, FirstGroup has wrested the West Coast Mainline contract from arch showman Richard Branson’s Virgin, but at more than twice the price he bid. He in turn has thrown a hissy fit, declaring FirstGroup’s bid will bankrupt them; FirstGroup have responded that Sir Beardie is just peeved because he can no longer go on “cashing cheques on Necker Island like there was no tomorrow”.

I have no more idea how to run a railway than Mussolini, and have already been stung once as a shareholder in National Express who famously overbid for the East Coast franchise which they eventually surrendered to avoid incurring ongoing losses. But I judge FirstGroup’s railway and general management expertise to be somewhat ahead of National Express, and their perception of what is a fair shareholders’ return may be more modest than Sir Richard’s — though in his case no one really knows what he was making from his rail interests because of his arcane corporate ownership structures.

The one thing that worries me about FirstGroup is the relatively small size of director shareholdings — only two directors have share stakes in the company worth more than £250,000. Although director dealings are frequently unreliable guides, I shall be looking carefully for any evidence of early cashing in of FirstGroup options in future.

So I am trusting my rules to the extent of establishing a new maximum holding of 8 units with a further £1,000 purchase of FirstGroup in the hope of double digit dividend growth. I am not increasing my holding of RSA, partly because we are too late for the November dividend, and partly because it has only been raised by 2%. Instead I am buying another unit of Interserve in time for the 6.6% rise in its interim dividend next month. These purchases have the effect of restoring my projected rate of increase in yield for the year ahead to over 11%.

First published in The IRS Report on 1st September 2012.

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.