Tag Archives: rsa dividend

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.

Dividend cut from RSA

Dividend cut from RSA for RIRP

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

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

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

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

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

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

Dividend cut from RSA
Legal and General’s accelerating dividends

Avoiding losses – for now

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

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

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

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

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

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

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

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

Dividend cut from RSA
RIRP purchases and dividends to date

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

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

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

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

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

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

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