Dividend cut

Source: Pixabay

After six months of the financial crisis situation brought about by the pandemic my investment portfolio has suffered a first dividend cut. After over twenty dividend announcements that increased or maintained the dividends in payment over the last six months I have now had one that reduced it.

In a recent discussion with my brothers we considered whether we were out of lock down yet. At that time, we had all enjoyed the freedom to go out for a drink or a meal or a holiday but those of us working were still working from home and our children were still awaiting a return to school. This week the children have finally and successfully (so far) gone back to school but we now have the prospect of other things being restricted for months ahead. Contrary times in which to live, and contrary times in which to invest too. Those invested in growth companies in the dominant USA technology sector seem to be prospering this year, whilst those of us invested in higher dividend and value companies in the unloved UK FTSE 100 companies have seen a significant fall. In bearing with these declines in my capital assets this year I had been able to comfort myself with the belief and hope that my investment trust dividends would be maintained so it is a blow to have heard the news of my first dividend cut during the past month.

I’m expecting to receive 57 dividend payments in the 2020 calendar year. In the year so far 38 payments have been received. A further 9 payments have been declared including two from the dividend cutter (each dividend from a REIT being paid in two payments). Of the remaining 10 dividend payments yet to be declared and paid in 2020 one from the dividend cutter is now expected to be a further cut but I’m still hopeful that will be the only one cut.

It was unsurprisingly the one UK commercial property real estate investment trust I hold that reduced the dividend. Despite talking up recent rent receipts during a time of lock down, furlough, and working from home, and despite favourable comments on that in the press, the Directors decided to be cautious and reduced the quarterly dividend by 21.05%. Their guidance on future dividends suggests a 22.42% reduction in the annual dividend this year.

I have tracked the annual level of my dividends received since January 2014 as shown in the income graph. This property trust was a significant contributor to my dividend income in providing 13.25% of the total. This has now been reduced to 10.55% of the lower total. My diversification across other sectors means that this 22.42% reduction amounted to a 2.97% reduction on the annual level of dividends I recorded at the end of July. Fortunately, the reinvestment of dividends received in August has meant that by 2 September the annual level is only 1.88% below that of 31 July. That is not too much of a blow considering the wider picture of the economy and of FTSE 100 companies dividend cuts.

The next test for my portfolio income will be whether my high yield bond fund maintains the dividend in payment. I won’t know about that until October. I’m more confident that my other holdings in investment trusts invested in UK, Asia Pacific and global equities will maintain or increase their dividends. A recent report indicated that “just two investment trusts out of 182 investing in equities have cut their dividends”.

This income graph shows the annual dividend income as a percentage of the opening portfolio value. My income had increased from 3.37% to 6.58% by 31 July but has now fallen to 6.42% by 31 August and 6.46% as at 2 September. Income from funds inherited this year contributed 0.69% of this, so without that my current income would be 5.77% of my capital as at 31 December 2013. A 71.46% increase in portfolio income over six years, eight months and two days.

This capital graph shows the portfolio value at each month end since 31 December 2013. Starting at an index of 100.00 this has varied between a high of 122.69 on 31 December 2019 and a low of 87.43 at 31 March 2020. Including mid-month dates the low was 71.46 on 19 March 2020. The current value is 110.98. Funds inherited this year contributed 16.10 towards this, so without that the value would be 94.88. A 5.12% capital loss over six years and eight months.

 Yield %Capital %Income %
UK5.5537.9336.42
Asia Pacific5.6024.4123.63
Global5.0719.1016.75
Bonds9.167.9212.54
Property8.377.2910.55
Cash0.203.350.11
5.78100.00100.00

This table shows how the percentage yield on my property trust has fallen to 8.37% from 12.44% last month. This arises because the expected income has fallen by 22.42% at the same time as the capital value has risen by 15.38%. Presumably other investors were more pessimistic than me in July and had already assumed a dividend cut and maybe a higher cut.

My cash reserve would currently fund eleven months of spending, and dividends being paid out to me would fund four months of spending each year. My other dividends are being re-invested so as to further grow my income. I therefore need to make investment sales to cover eight months of spending each year, or else run down that cash reserve. I retain a small holding in my worst performing trust after selling most of it earlier in the year. If I sell that I can raise enough cash to cover five months of spending. I am considering when to action that.

After eight months of the year the capital value of my investment portfolio is down by 9.54%. There was a capital decline of 22.68% but income receipts have added back 3.74%. This gives an investment portfolio decline of 18.94%. I received some inherited funds in early April that added 11.37%. I have incurred draw down expenditure of 1.97%

With dividends received for the first eight months of the year my portfolio income has grown by 24.04% compared to the same point last year. With the known dividend cuts on my property trusts I am now expecting income growth of 21.37% for the twelve months, with 9.64% of that from funds inherited during the year. That assumes there are no more cuts – so it may change.

Expenditure in the first eight months of the year is 10.69% down on the same period last year. We have had fewer opportunities to spend this year because of lock down restrictions.

Increasing income and reducing expenditure could mean that expenditure will be below 62% of income this year. This will mean that more income is re-invested. I am now aiming to maintain rather than increase my current level of portfolio income so I should soon start to reinvest that income in new ideas. I will look to reinvest in international and smaller company investment trusts that aim for higher growth and produce lower income.

Holding my own

Source: Pixabay

After six years and seven months on the road marked financially independent draw down I am holding my own in the most challenging year so far.

I maintain and update these graphs at each month end to help review longer term progress.

This income graph shows the annual dividend income as a percentage of the portfolio value at 31 December 2013. My income has almost doubled from 3.37% to 6.58%. An increase of 3.21%. Income from funds inherited this year contributed 0.69% of this, so without that the increase would be 2.52%.

This capital graph shows the portfolio value at each month end since 31 December 2013. Starting at an index of 100.00 this has varied between a high of 122.69 on 31 December and a low of 87.43 at 31 March 2020. Including mid-month dates the low was 71.46 on 19 March 2020. The current value is 107.14. Funds inherited this year contributed 15.47 towards this, so without that the value would be 91.67.

According to one definition holding your own means to maintain your position despite difficulties. I think that sums up my current view. I’m essentially maintaining my position in terms of my portfolio holdings and my investment approach for now. I’m certainly open to adapting them to changing personal circumstances and the evolving world situation but that will happen over the medium to long term. No knee jerk reactions or short term moves for me.

My portfolio remains in investment trusts in the UK equity income, global equity income, Asia Pacific income, Debt loans and bonds, and UK commercial property sectors. My approach is to pursue a high and growing income. I aim to remain essentially fully invested and to minimise portfolio turnover. I hold only a small cash reserve.

 Yield %Capital %Income %
UK5.6538.3235.26
Asia Pacific5.7524.5322.95
Global5.1519.3216.19
Bonds9.278.1012.22
Property12.446.5513.25
Cash0.233.190.12
6.15100.00100.00

I aim to stay fully invested so as to maximise portfolio income in the current near zero interest rate situation. I am 96.81% invested now. I aim to sell only to raise cash to spend or else to reallocate or switch between holdings. Clearly if you sold at the right time in say February and bought back in at the right time in mid-March then you could have made substantial gains. I don’t pretend that I can achieve that sort of timing.

I am reasonably comfortable with my cash position and available cash flow. Cash holdings currently would fund ten months of spending. At present dividends being paid out would fund four months of spending each year. My other dividends are being re-invested so as to further grow my income. I therefore need to make investment sales to cover eight months of spending each year, or else run down my cash reserve. My practice has been to sell shares every three months. Each sale would be for just under 1% of the portfolio. This year I have made only one such sale. I did raise extra cash last December just ahead of the election. Some of my inherited funds were received in cash.

In choosing in April to re-allocate my inherited funds to lower yielding international holdings I am beginning to nudge the portfolio away from all-out income growth and to reduce my home country bias. Going forward I will aim to maintain my current level of portfolio income whilst re-allocating in favour of both international and smaller company investment trusts. If dividends are not reduced then I can move more quickly on this.

This year

After seven months of this exceptional year the capital value of my investment portfolio is down by 12.68%. I have incurred draw down expenditure of 1.73%. My investment portfolio has declined by 22.32%, but I received some inherited funds in early April that have served to shore up my position.

With dividends received or declared for the first eight months of the year my portfolio income has grown by 24.04% compared to the same point last year. This included 7.54% from the inherited funds but 16.50% from the existing portfolio. As yet no dividends have been reduced! If that continues to hold true then my expectation is for income growth of 22.65% for the twelve months, with 9.64% from the inherited funds and 13.01% from the existing portfolio. This prospective income growth compensates somewhat for the currently disappointing capital returns.

Expenditure in the first seven months of the year is 8.25% down on the same period last year. This is because we have had fewer opportunities to spend since lockdown. In 2019 expenditure was only 78.10% of income. Increasing income and reducing expenditure could mean that expenditure will only be 62.15% of income this year.

My commercial property holding has been reporting reasonable news but I still await news on the next quarterly dividend. The share price of this holding has given an exciting ride. A near 60% fall from best to worst prices earlier in the year has been followed by a volatile recovery. Save for reinvesting the last quarterly dividend I have thus far resisted selling out or buying more. Having 6.55% of my portfolio in this holding is enough and hopefully not too much.

More robust and less fragile?

In a comment on my previous post it was suggested to me that my position was “pretty fragile” given that “equities may fall 50%” and “dividends may be cut 50%” and that my “margin of safety seems quite small”. This is useful feedback that helps me to test my own thinking.

I have experienced equities falling 50% around 2002 and again around 2008 so I stand ready for that variability. Interestingly we haven’t had a 50% fall this time. At least not yet! In 2002 and 2008 I wasn’t in draw down but although company dividends would have fallen investment trust dividends were mostly maintained or increased. Having a revenue reserve of around one year’ s dividends enables them to be sustained for a time. That is part of my margin of safety, so I’m watching the dividends. As we are spending significantly less than our current dividend income that provides a further margin of safety. Spending could also be reduced further if that were needed. We also have a small cash reserve. I’m hopeful that these factors prove to be robust rather than fragile. Time will tell (stay tuned).

We could raise more capital by moving house to a smaller property or a cheaper area but we wouldn’t want to do that. I’m not looking to go back to work and I’m not sure what my prospects would be nearly seven years on and with higher unemployment. We are debt free but would like to keep it that way. So, none of these options are up for consideration, and only the first offers some margin of safety.

Income investing has not given me good capital returns this year, and my UK home bias has not helped either. It has, however, allowed me to build up a good level of portfolio income that will hopefully be robust. Going forward I’m looking to gradually move my portfolio towards more exposure to international markets and to smaller companies that are growing, whilst ideally sustaining my current level of portfolio income.

Watching the dividends

Source: Pixabay

We’re nearing the end of the school year and we’re expecting our home school duties to finish next Friday. Hooray for the holidays! This has been quite a draining and distracting time with all four of us at home for nearly all of the time. I have certainly found that the sources of any stress in my life are primarily around these non-financial aspects of being in an enforced lockdown and in attempting to ensure that lessons sent by the children’s school are completed. There has been less time for considering our financial position. As mentioned last time I think our position is reasonably good. We have cash in the bank to cover our expenditure for the next few months, and we have an equity portfolio paying out regular dividends.

When I do spend time on financial matters, I am now watching these dividends quite closely. All my portfolio holdings are investment trusts and all except one pay four dividends each year. The one exception pays out only twice each year. Company announcements can be found online (e.g. at Investegate ), and these will include dividend declarations, such as this one: “The board has declared a first interim dividend of (amount) pence per share, payable on (date) August 2020 to holders on the register at the close of business on (date) July 2020. This dividend is in line with the fourth interim dividend paid last year, and represents an increase of 1.5% on the first dividend paid last year.” I am counting on these boards of Directors wanting to maintain the dividend and to maintain their record of annual rises. They may increase the annual dividend by only 1% in order to keep that record of increases.

I have mentioned before about those trusts declared to be dividend heroes and next generation dividend heroes by the AIC (Association of Investment Companies). They have over twenty years, or over ten years, of history of annually increased dividends. The leading dividend hero is the City of London Investment Trust with a record of fifty-three years of increased dividends. In the year ended 30 June 1966 the dividend was 0.209 pence (Source: Citywire 2016), whilst if the fourth and final dividend of the year ended 30 June 2020 at least matches that of last year (Source: AIC) then the dividend for the year will be 19.000 pence. That is a compound annual growth rate of 8.71%.

Encouragingly on 2 April 2020 the Chairman of this trust said: “In our Interim Report in February, I said that the Board was confident that it would be able to increase the dividend for a 54th consecutive year. Since then, a number of companies in which we are invested have cancelled their dividends. We continue to recognise the importance of dividend income to our shareholders. Over the last 10 years, we have set aside over £30 million into revenue reserves to underpin future dividends in circumstances such as we face now. Those reserves stood at £58.3 million at 30 June 2019, our last financial year end. If in July we need to draw on those reserves to maintain our unique record of annual dividend growth, then it is our intention to do so.”

Most of the trusts I hold have similar but less good and less lengthy records. In fact, 80% of my expected dividend income for 2020 is from dividend hero or next generation dividend hero trusts. Those that aren’t classed as “heroes” include trusts that were launched less than ten years ago and some that held or reduced their dividends around 2010.

One that was launched less than ten years ago is my commercial property trust. Analysts have suggested that the dividend will be reduced by about 30%. While awaiting the next dividend declaration I read their latest announcement that said: “Q1 rent collection has continued to increase to 96.7%” and “an encouraging 78.5% of the rent due had already been collected for Q2 or a payment plan has been agreed and is in place. Furthermore, at this point we are in discussion with an additional 12.6% of occupiers by income, and an update will be provided in due course. Therefore, it is expected that the rental collection amount will rise.” I’m continuing to hold this one despite a 37.28% fall in the share price in the first six months of the year. That makes it my second worst performing trust.

Since last month I have sold most of my holding in my worst performing trust, which is in the UK equity income sector. It’s share price fell 47.80% in the first six months of this year. I chose to switch into other trusts that I already hold in the UK, international and Asia Pacific equity income sectors. I have accepted a slightly lower dividend yield as a result. The remaining balance in the trust will be sold the next time I need to raise cash.

Markets have continued to be relatively stable since mid-April. My portfolio has reduced by 22.66% in the year to date. This reduction includes only 1.54% of draw down expenditure over six months, which implies an annual withdrawal rate of around 3%. That leaves a negative return of -21.12% which is below the negative return of -17.50% for the FTSE All Share total return index. After allowing for the receipt of some inherited funds I am actually only 9.76% down since the start of the year.

 Yield %Capital %Income %
UK5.4038.7835.36
Asia Pacific5.6924.0023.05
Global4.9019.5716.18
Bonds9.257.8412.25
Property11.626.6413.03
Cash0.243.180.13
5.92100.00100.00

My portfolio has continued to shift towards non-UK equities partly driven by better returns on them recently and partly by the switch mentioned above. I will also be looking to shift towards more of a total return approach in future. This will be done gradually as I would like to maintain my current dividend income. With that in mind I will keep watching the dividend declarations, especially on my commercial property real estate investment trust.

Returning to normal?

Source: Pixabay

Tomorrow there are changes being made to the lockdown as the UK tries to return to normal life in the wake of the coronavirus having peaked. Personally, I’m generally in favour of steps being taken by government to relax the lockdown but I also favour being cautious in the steps we as a family take. Some schools and school years are returning to their school buildings but our current expectation is that our children will remain in our home school until September, so that’s a step we don’t get to consider yet. In the meantime, our focus will continue to be on supporting home school and surviving as a family in this ongoing health crisis situation. This leaves less time to consider how best to maintain financial independence in the face of an emerging financial crisis. I like to think we have things in reasonable order financially. We have no debts, we have sufficient cash in the bank to cover our expenditure for the next few months, and we have an equity portfolio paying out regular dividends.

A quick look at our spending in the first two months of lockdown compared to the same month’s last year suggests a 10% reduction. We have spent less on things we can’t have or don’t need right now such as holidays, dining, drinks, entertainment, petrol, travel, more clothes, and more furniture. We haven’t spent any actual cash coins and notes. We have spent a little bit more on groceries and books. Fortunately, we only had one holiday booked and paid for and that has been postponed by twelve months. We can’t contemplate booking other holidays or spending on the house at this time.

During the past five months, as the portfolio fell by 41.76%, I managed to stay calm and not sell any of my equity shares. I was trying to keep my head as others lost theirs, but also, I hadn’t been clever enough to sell anything before the market fell significantly. Eventually in late April I did sell shares to the value of about 1% of my portfolio. In not selling at the lowest point I got 32.87% more cash for my shares, albeit I got 23.55% less than I would have at the end of last year.

My share sale should cover about three month’s spending. This sale was made to increase my available cash and followed the partial recovery in stock markets. At the moment I have cash to cover eleven month’s spending. That gives me some comfort. I have more time in which to choose when to raise more cash. I am currently taking the dividend payments on my non-ISA investments and these should now cover about five month’s spending each year. I would previously sell about 1% of the portfolio every three months but I can probably delay that for up to sixteen months if I choose to.

Markets have been relatively stable since mid-April. My portfolio has reduced by 23.52% in the year to date. I would need an increase of 30.76% to restore the year end position. This reduction includes only 1.24% of draw down expenditure over five months, which implies an annual withdrawal rate of around 3%.

After allowing for the receipt of some inherited funds I am actually only 11.07% down since the start of the year.

There has been quite a variation of share price movements in the year to date from my investment trust funds from a best of -7.78% to a worst of -49.32% and a simple average of -25.07%. That worst performing trust, which is in the UK equity income sector, may be sold and a replacement bought. I could choose another UK trust or switch to the international or Asia Pacific sectors. I could choose to seek a similar dividend yield which restricts my options, or I could accept a lower yield. I’m considering my options for now.

My commercial property trust has fallen by 31.80%. That may also be sold because analysts are suggesting that it will reduce it’s dividend by about 30%. That would reduce total portfolio income by about 4%. I could switch some or all of my holding into my high yield bond fund and accept about a 13% reduction rather than that 30%. Alternatively, I could switch to equities and accept a 40% reduction rather than the 30%. I’m considering my options on that too. For now, none of my holdings have declared a reduced dividend. I’m maybe too keen on dividends but may have to opt for a lower portfolio income before one is imposed on me by dividend cuts. It’s difficult to consider switching to avoid one dividend cut and maybe receive a different dividend cut from what you buy.

After switching to a more international portfolio (“going global”) last year I currently have around 40% in UK equities and about 40% in global and Asia Pacific equities, with property, bonds and cash making up less than 20%. The international holdings, the bonds and the higher quality UK holdings have performed best this year. The property, and the more value orientated UK holdings have performed less well.

 Yield %Capital %Income %
UK5.5239.4636.40
Asia Pacific6.0522.2322.47
Global4.9219.3415.89
Bonds9.397.6812.04
Property10.697.3313.07
Cash0.193.970.13
5.99100.00100.00

I can now see me moving away from a high yield income growth investment approach towards more of a total return approach although this will likely take some months and years to evolve. As mentioned, I may switch to lower yielding trusts to avoid further poor performance and possible dividend cuts. My current portfolio income exceeds my requirements. I am reluctant to see that income fall but I don’t need it to rise necessarily. As dividends are increased (hopefully) I can switch more into lower yielders. Where my re-invested income exceeds my share sale proceeds, I can use that to switch to lower yielders. Holding such lower yielding investments will hopefully enable me to benefit from better share price growth.

It is still my assumption that I will not face significant dividend cuts because of the revenue reserves held by my dividend hero investment trusts.

Short term thinking

Source: Pixabay

It is now one month after the recent stock market low point on 19 March. I am still more concerned about health matters than financial matters. Tomorrow I will again be concerned and distracted by our children’s home school. I’m still taking stock of the situation we are in and my financial thinking is concerned with surviving this, hopefully, short term crisis. This post records my current thinking.

Based on values at the close on Thursday 19 March my portfolio had fallen by 41.76% this year of which only 0.86% was draw down spending. One month on and based on values at the close on Friday 17 April my portfolio had fallen by 24.51% this year of which only 1.00% was draw down spending.

I have also now received some inherited funds following a recent bereavement. Allowing for the uplift from that I am down by 12.31% since the turn of the year.

When I was 41.76% down, I would have needed an increase of 71.70% to recover. This reflects that if there is a 50% fall then you need a 100% increase to recover. Since that low point the increase has been 29.62%. A further increase from current values of 32.46% would complete the recovery. I worry, however, that we may see more of a decrease before we see such a further increase. The flow of news and the market reactions to come are unpredictable.

At a trust level some of the volatility has been extreme with falls of up to 63% from a twelve-month high being followed by rises of up to 105% as at Friday, when looking at daily prices over the last four months. If you are reasonably confident of your investment approach it is probably best not to look too closely at such daily movements. I look most days, which is more often than I should, but I don’t feel compelled to re-act. Rightly or wrongly, I have remained mostly passive in the markets since 10 December 2019 when I last sold shares and withdrew cash just before the election. I’m still considering reducing my high yield bond and commercial property exposure by switching to equities in my ISA. I am watching to see what will happen on dividend payments.

My current liquid cash position, my cash bucket, is enough cash to cover eight months of spending at current levels or twelve months if I reduce spending. The spending reductions would include some of the things we can’t do at present such as holidays and meals out. They also include cutbacks on discretionary spending on the house and on clothes which can be postponed. Investing in the children’s Junior ISA’s, which I record as spending, could also be reduced or stopped temporarily. I think some of these reductions will happen because of the lockdown and others I will need to decide to implement. I don’t propose to reduce other discretionary spending or charitable donations.

My non-ISA held shares are now paying out all their dividends to me. If these dividends are maintained at current levels then one year’s dividends from them will cover four months spending at current levels or seven months if I reduce spending. I reckon I can therefore avoid selling any shares or taking any dividends from my ISA for over twelve months, and maybe for nineteen months.

I may, however, choose to raise more cash now at current prices so I can increase my cash bucket to cover another three or four months of spending. This would mean selling about 1% of my portfolio. Being 97.36% invested in equities, high yield bonds, and commercial property is maybe a bit aggressive in the currently volatile markets. I should maybe raise some cash now that share prices have recovered some ground.

Dividend payments are endangered in the current situation which threatens my commitment to a natural yield approach to a safe withdrawal rate. It may be that the dividend hero investment trusts, both actual and aspiring, that I am invested in will hold firm and use their revenue reserves to make up for dividends being cancelled or reduced by the companies they hold. This seems likely if the dividend downturn lasts for only one year. Studies have shown, however, that a second year of falling company dividends would be challenging even for some of the dividend heroes. Since 2013 my spending has been below the dividends I have received. It may be that in 2020 or 2021 my dividends will fall below my spending. In the short term I can cover any shortfall by spending cash from my cash bucket.

I still believe in stocks for the long run and on that basis, I will stay near enough fully invested and mostly in equity income investment trusts invested in the UK, Asia Pacific, and global sectors. I will continue to roll with the punches as thrown by the markets. As a short-term measure, I am likely to raise cash to top up my cash bucket by selling some investments from my non-ISA holdings. What happens on dividend payments may lead me to reduce or sell off the commercial property and high yield bond trusts in my ISA. This is my short-term thinking.