Getting Minted

Here is an update on my portfolio for the month of June.

Investment changes

In early June I sold small slices of my holdings in UK and Asia Pacific equity income investment trusts and added to my holdings in UK and Asia Pacific smaller companies’ investment trusts as part of my re-positioning from income to growth. This has marginally reduced portfolio income. In the three months since mid-March, I have built up a position of about 3% in smaller companies trusts that target growth. This has increased my total growth holdings to 10.79%.

June

The FTSE All Share Total Return index, my chosen benchmark, is up by 0.2% in the month, and is up by 11.1% for the year to date. My investment return for the month was a fall of -0.80%, and a rise of 9.38% for the year to date. This underperformance arises mostly from lower returns on my global and Asia Pacific holdings. My individual holdings recorded share price movements for the year so far ranging from a loss of -0.77% to a gain of 23.55% with an unweighted average result of a gain of 8.64%.

Capital

Starting from an index value of 100.00 at 31 December 2013, my capital is now 136.87. This is a slight reduction from last month’s peak. It is up by 7.74% since the end of the 2020 year. Investment returns, growth and income, were 9.31%, and draw down expenditure deducted -1.57% for the year to date.

Income

Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach 6.65% at this month end. This measure is reduced slightly at the end of June because of the investment changes mentioned above.

Portfolio income has increased by 2.82% in the year to date. Increases in income arise from the re-investment of dividend income in more shares, from dividend increases announced, and from portfolio changes. Going forward any increase is likely to be small because increases arising from re-investment are likely to be matched by decreases from portfolio changes as I reduce higher income holdings and increase growth holdings. Dividend increases are less prevalent at present although dividends are being maintained at the level of the previous year.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by the income and growth characteristics of each holding. I am aiming to gradually increase my investment in growth holdings.

	Yield %	Capital %	Income %
High Income	6.86	35.26	49.81
Income	4.52	38.77	36.02
Income & Growth	3.70	13.60	10.35
Growth	1.69	10.79	3.75
Cash	0.24	1.57	0.08
	4.86	100.00	100.00

Cash

My annual drawdown spending is now around 3.26% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are sufficient to cover about six months of spending. In addition to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments every few months in order to cover spending and to keep a small cash reserve.

Expenditure

Draw down expenditure was only 61.16% of my portfolio income for the last twelve months. This compares to draw down spending being 69.42% of my portfolio income in the previous twelve months. Portfolio income has risen by 13.75% whilst expenditure has increased by 0.21%. The increase in income includes inheriting extra capital in April last year, and the continued effect of dividend reinvestment, dividend increases, and portfolio changes. The impact of lockdown restrictions on expenditure is no longer evident now that both years include periods of lockdown.

Conclusion

Portfolio income has been stable for the last four months whilst I have added to my growth holdings and reduced my income holdings. This will likely continue so long as my drawdown spending is less than my portfolio income. This will accelerate if dividends increase, or decelerate or even reverse if dividends are cut. The stock market growth this year has maybe stalled as we await what the removal of lockdown restrictions brings.

My investment approach of seeking income and growth is sometimes seen as being a poor alternative to seeking total return. I was reminded again of this by a comment (#13) on last weekend’s post on Monevator. I was inspired to pen a response.

The original commenter said that “never selling, and being ok with it, is the only way, I think, I can truly be FI [Financially Independent] and contemplate RE [Retire Early]. This obviously means I am not using my resources optimally.” They added that “my strategy is to build my investments in the form of income bearing investment trusts, in all sectors and geographies” and “currently this portfolio has a natural yield around 3%. I will be FI when I have £50k in passive income. This gives me a target of £1.67M.”

My comment (#36) in response was to say that “I think your approach can work for you. A 3% yield is actually a compromise between an all-out growth approach that would yield between 0% and 2% and my own income growth approach that is currently yielding 4.8%. I have followed this approach for fifteen years and have averaged a 4.3% yield and 4.3% capital growth each year. The total of 8.6% beats the UK market but not the World market.”

I would like to expand on that, based on my own experience and my own views. Having invested for twenty years with a combination of different approaches I decided to make changes in 2006. I had previously invested in unit trusts and investment trusts invested in UK income, UK and international growth, UK and international indexes, and technology, as well as individual UK shares. I decided to switch to a mix of UK and global equity income investment trusts. Consequently, my portfolio income yield increased from 2.59% in 2005 to 3.47% in 2006. That 34% increase became a 65% increase in actual portfolio income because of capital growth and additional savings invested during the year. Portfolio income received in 2006 represented 46% of my spending that year. That was an encouraging sign that living on portfolio income was within reach.

Annual	Cap%	Inc%	Getting Minted	FTSE AS TR	MSCI World
31-Dec-06	22.29	3.47	25.76	16.75	20.65
31-Dec-07	-5.19	3.38	-1.81	5.32	9.57
31-Dec-08	-26.65	3.66	-23.00	-29.93	-40.33
31-Dec-09	20.79	6.37	27.16	30.12	30.79
31-Dec-10	11.59	4.90	16.49	14.51	12.34
31-Dec-11	3.27	4.18	7.46	-3.46	-5.02
31-Dec-12	7.89	4.23	12.13	12.30	16.54
31-Dec-13	19.69	4.28	23.96	20.81	27.37
31-Dec-14	-0.44	3.58	3.14	1.18	5.50
31-Dec-15	-4.70	3.87	-0.83	0.98	-0.32
31-Dec-16	11.43	4.17	15.60	16.75	8.15
31-Dec-17	9.25	4.42	13.66	13.10	23.07
31-Dec-18	-10.69	4.24	-6.45	-9.50	-8.20
31-Dec-19	15.06	5.18	20.24	19.17	28.40
31-Dec-20	-9.46	5.02	-4.44	-9.82	16.50
Average	4.28	4.33	8.60	6.55	9.67
Std Dev	13.77	0.79	14.10	15.31	18.26

[Total Return for Getting Minted = Cap% + Inc%]

Reviewing the data fifteen years later it is interesting that half of my returns were from income and half from capital growth. The total return beat the FTSE All Share Total Return Index performance in ten of the fifteen years. The total return has lagged that of the MSCI World Index in nine of the fifteen years. My cumulative return from that 2005 starting point remained ahead of the UK index at every year end, and only fell behind the World Index last year. Other starting points are less favourable!

Cumulative	Getting Minted	FTSE AS TR	MSCI World
31-Dec-05	100.00	100.00	100.00
31-Dec-06	125.76	116.75	120.65
31-Dec-07	123.48	122.96	132.20
31-Dec-08	95.08	86.16	78.88
31-Dec-09	120.90	112.11	103.17
31-Dec-10	140.84	128.38	115.90
31-Dec-11	151.35	123.94	110.08
31-Dec-12	169.70	139.18	128.29
31-Dec-13	210.37	168.14	163.40
31-Dec-14	216.97	170.13	172.39
31-Dec-15	215.16	171.79	171.84
31-Dec-16	248.74	200.57	185.84
31-Dec-17	282.72	226.84	228.72
31-Dec-18	264.50	205.29	209.96
31-Dec-19	318.02	244.65	269.59
31-Dec-20	303.90	220.62	314.07
Compound Average	7.69	5.42	7.93

I think shifting to a lower yield requirement than 4.8% will generate better total returns so that is what I am doing now, albeit in a very slow manner. If I switched out of my high yielding property REIT’s and bond investment trusts then my total yield would fall to 4.4%. If my UK, global and Asia Pacific equity income investment trusts better reflected the sector averages then the yield would fall further to 3.9%. I therefore think that a 4% yield target, also in line with the 4% “safe withdrawal rate” estimate, could be reasonable. A portfolio target of £1,250,000 might therefore be sufficient to achieve a £50,000 income target. This assumes that no tax is payable, i.e., the portfolio is in an ISA or covered by income tax allowances.

Making optimal use of your resources is a challenge. My tilt towards income and towards the UK has generated lower total returns for me in the last four years than would have been the case if I had just tracked the World Index. We do not know what will happen in the next four or more years so it may be that my allocations will perform more successfully, or not. Certainly seeking dividend income can limit your investment choices.

Maintaining my allocations to property and bonds (yielding over 6%) may hinder growth but it does enable me to allocate more towards growth holdings (yielding less than 3%) in the future whilst maintaining my overall income (yielding over 4%). Allocating some resources to income and some to growth may be optimal for some portfolios, depending on your overall objectives. If you can get 4.8% yield on half your portfolio, aiming for income, then you could invest the other half in a global tracker yielding 1.3% (Comment #31, Monevator), aiming for growth, and achieve an overall yield of 3.05%. Alternatively, it could be optimal to invest for growth whilst accumulating (before FI), when there is no requirement to sell to cover expenditure, and to invest for income whilst decumulating (post FI).

One advantage that I see in my approach is that my income return has been very steady around an average of 4.33%, with a standard deviation of 0.79%. Eleven of the fifteen years have an income return within the range of 3.54% and 5.11%. All fifteen were within the range of 3.38% and 6.37%. This is perhaps better illustrated in the graph above. This gives me some confidence that about half of my return is consistent year on year.

The other half of my returns is very inconsistent year on year. Capital returns were more volatile with an average of 4.28%, a standard deviation of 13.77%, and a high of 22.29% and a low of -26.65%.

With a total return strategy, the returns are similarly volatile with highs of around +30% and lows of around -30% and -40%. I’m not sure I’d want to sell 4% of my investments to cover my spending after the market had fallen by 30% or 40%. With a steady income of around 4% I feel better able to withdraw that and spend it, and to be more detached and hands-off about the volatile movements of my capital. My view may be a minority view and the opinions of others may vary somewhat!

Five years on from that vote and many things have happened – or not happened – and many of those things have no connection to that vote. We’ve had an economy in lockdown for fifteen months, together with additional government spending and continuing low interest rates. We may be about to emerge from lockdown and markets have, I think, anticipated much of that.

I chose five years ago to ignore the noise that emerged after that vote and continued with my existing income growth approach with high UK exposure and some Asia Pacific and global exposure too. During the five years I did build up investments in UK high yield bond trusts, and UK high yield commercial property REIT’s, in order to increase my portfolio income. Later on, I increased my Asia Pacific and global equity holdings and reduced my UK equity holdings. I managed to also ignore the noise around the lockdown of the economy last year and stay invested and on my chosen path. Now I am very slowly switching from equity income holdings to small company growth holdings whilst keeping my income at around the current level.

I thought it would be an interesting time period to review. My key performance indicators in this five-year review are capital, investment income versus household expenditure, and total return. My key comparisons are with a UK equity index, a UK tracker fund, and a UK inflation index,

Capital

My capital has increased by 44.62% as shown in this table and graph.

	Capital	Inherited	Capital Growth	Investment Income	Expenditure
31-May-16	100.00
31-Dec-16	111.66	0.00	11.92	2.14	-2.40
31-Dec-17	122.56	0.00	10.14	4.84	-4.07
31-Dec-18	110.63	0.00	-12.88	5.11	-4.17
31-Dec-19	128.19	0.00	16.33	5.62	-4.39
31-Dec-20	132.74	14.57	-12.62	6.70	-4.10
31-May-21	144.62	0.00	9.98	3.55	-1.65
		14.57	22.88	27.96	-20.79

[as % of May 2016 assets]

This increase is 30.05%, if the inheritance is deducted. That is higher than the 17.10% increase in the FTSE UK All Share capital return index, and higher than the 15.19% increase in RPI inflation.

Income versus Expenditure

Expenditure as a percentage of investment income, as taken from the above table, gives these results.

	Spend %
31-Dec-16	-112.39
31-Dec-17	-84.14
31-Dec-18	-81.54
31-Dec-19	-78.10
31-Dec-20	-61.24
31-May-21	-46.55
5 years	-74.35

Overall spending was 74.35% of investment income over the five years. 2016 and 2021 are part years, seven months and five months respectively, so they produce unusual spend percentages because my income and expenditure don’t fall evenly across the year. The overall trend is for the spend percentage to fall from over 85% to about 60%, mainly because of increasing income and stable spending.

Total return

My total return measure starts at 100.00 on 31 December 2013 and uses a chain of annual or part year calculated total return percentages. Total returns between that start date and 31 May 2016 were a disappointing 3.60%.

[Total Return = (ending balance – ½ contributions + ½ withdrawals) divided by (beginning balance + ½ contribution – ½ withdrawals) minus 1 ]

	Total Return	Index	Tracker	RPI
31-May-16	103.60	5,580.19	106.48	262.1
31-Dec-16	118.24	6,424.25	121.55	267.1
31-Dec-17	134.39	7,265.66	137.11	278.1
31-Dec-18	125.72	6,577.39	124.84	285.6
31-Dec-19	151.17	7,837.96	147.65	291.9
31-Dec-20	144.46	7,068.59	133.01	295.4
31-May-21	159.28	7,840.17	147.16	301.9

For comparison purposes my chosen equity index is the FTSE All Share total return index. After five years the FTSE UK All Share total return index has increased by 40.50%. A typical unit trust tracker fund (M&G Index Tracker Fund Sterling A Acc) attempting to track the index had a total return of 38.20%. This is lower because of fees and tracking errors. My chosen inflation index is the retail price index. Between May 2016 and May 2021, the RPI index has increased by 15.19%.

I calculate that my portfolio total return has been 53.74%. That is a compound annual growth rate of 8.98%. This exceeds the returns from both the FTSE All Share total return index and from the M&G Index Tracker Fund Sterling A Acc, and exceeds RPI inflation.

	Total Return %	Index %	Tracker %	RPI %
31-May-16
31-Dec-16	14.13	15.13	14.15	1.91	7 months
31-Dec-17	13.66	13.10	12.80	4.12
31-Dec-18	-6.45	-9.47	-8.95	2.70
31-Dec-19	20.24	19.17	18.27	2.21
31-Dec-20	-4.44	-9.82	-9.92	1.20
31-May-21	10.26	10.92	10.64	2.20	5 months
5 years	53.74	40.50	38.20	15.19

Nevertheless, the UK stock market has lagged the rest of the world, according to new research by Interactive Investor. Between 23 June 2016 and 11 June 2021, the MSCI Europe ex UK index had total returns of 85%, which was bettered by the MSCI World index returned (104%) and the US’s S&P 500 index (132%). The UK indices had total returns of 40% (FTSE All Share), 37% (FTSE 100) and 49% (FTSE 250). With that hindsight going global would have been the way to maximise total returns if that was your main objective. Being focused on income growth, and thinking that the US was too expensive, it was never an option for me.

Conclusion

I am content with the returns I have made that have beaten my chosen benchmarks. I know I have underperformed against international indices and against portfolios heavy in US and technology holdings. I was not, however, aiming for all out growth. I was mainly seeking income growth, with capital growth as a secondary objective. As my strategy evolves and as my portfolio becomes more focused on small company growth holdings and perhaps more international exposure, I may need to consider a different or additional benchmark in future.

Here is a late update on my portfolio for the previous month of May.

Investment changes

I made no changes in May. Dividends received were paid out or re-invested as usual. In early June I sold further small slices of my holdings in UK and Asia Pacific equity income investment trusts and added to my holdings in UK and Asia Pacific smaller companies’ investment trusts as part of my re-positioning from income to growth. In the three months since mid-March, I have built up a position of about 3% in smaller companies trusts that target growth.

May

The FTSE All Share Total Return index, my chosen benchmark, went up by 1.1% in the month, and it was up by 10.9% for the year to date. My investment return for the year to date was a rise of 10.26%, including 1.86% in the month. Ahead of the index for the month but behind the index for the year so far. My individual holdings recorded share price movements for the year so far ranging from a loss of -1.09% to a gain of 21.88% with an unweighted average result of a gain of 9.32%.

Capital

I have tracked my portfolio value at each month end since 31 December 2013, taking an index value of 100.00 as the starting point. This capital measure 138.41. At this month end, the capital value of my investment portfolio is at a new peak and is up by 8.95% since the end of the 2020 year. Investment returns, growth and income, were 10.20%, and draw down expenditure deducted -1.25% for the year to date.

Income

I have tracked the annual level of my dividends received since 31 December 2013. The annual dividend income as a percentage of the opening portfolio value has increased from 3.37% on 31 December 2013 to reach a new peak of 6.68% at this month end. This measure will be reduced slightly at the end of June because of the investment changes mentioned above.

Portfolio income has increased by 3.20% in the year to date. That is a 98.36% rise since draw down started on 31 December 2013. Increases in income arise from the re-investment of dividend income in more shares, from dividend increases announced, and from portfolio changes. Going forward any increase is likely to be small because increases arising from re-investment and increased payments are likely to be matched by decreases from portfolio changes as I reduce higher income holdings and increase growth holdings.

Cash

My annual drawdown spending is now around 3.26% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are sufficient to cover about nine months of spending. In addition to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments every few months in order to cover spending and to keep a small cash reserve.

Expenditure

Draw down expenditure was only 59.44% of my portfolio income for the last twelve months. This compares to draw down spending being 70.77% of my portfolio income in the previous twelve months. Portfolio income has risen by 17.96% whilst expenditure has fallen by -0.94%. The increase in income includes inheriting extra capital in April last year, and the continued effect of dividend reinvestment, dividend increases, and portfolio changes. The impact of lockdown restrictions on expenditure is no longer evident now that both years include periods of lockdown.

Conclusion
In the last three months I have added to my growth holdings. Going forward I aim to use further increases in portfolio income as an opportunity to continue this switch by reducing my higher income and income holdings and increasing my growth holdings.

I’ve had my second jab today, with no side effects so far, and I am feeling more optimistic for the future. It’s interesting that nearly 24 million people in this country are older, less healthy, or otherwise more entitled to a second vaccination than me. I’ve enjoyed a couple of indoor pub drinks with friends and a family meal in a restaurant in the last ten days. That’s nearly normal apart from the wearing of masks when you are not sat down. Britain’s economic prospects are being talked up by some pundits, stock markets are holding up, and as of yesterday my portfolio is inching nearly back to pre-pandemic levels, and is about 1% ahead in the month to date.

Here is a late update on my portfolio for the previous month of April.

Investment changes

In early April, in the old tax year, I sold investments in my dealing account and then, in the new tax year, I re-invested that cash in my ISA. I sold one UK equity income trust and bought another one with a slightly higher dividend yield. In late April I sold a slice of one of my Asia Pacific income investment trusts and bought shares in an Asia Pacific smaller companies investment trust that will target growth rather than income. That represents 0.76% of the portfolio and is a second small step in re-positioning away from high income towards growth.

April

The FTSE All Share Total Return index, my chosen benchmark, went up by 4.3% in the month, and it was up by 9.7% for the year to date.

My investment return for the year to date was a rise of 8.25%, including 3.96% in the month. Lagging the index slightly. My individual holdings recorded share price movements ranging from a loss of -0.15% to a gain of 18.92% with an unweighted average result of a gain of 7.79%.

Capital

This capital graph shows the portfolio value at each month end since 31 December 2013, taking an index value of 100.00 as the starting point. This capital measure on the graph is now at 136.2. At this month end, the capital value of my investment portfolio is at a new peak and is up by 7.21% since the end of the 2020 year. Investment returns, growth and income, were 8.21%, and draw down expenditure deducted -1.00% for the year to date.

Income

I have tracked the annual level of my dividends received since 31 December 2013 as shown in the income graph. This income graph shows the annual dividend income as a percentage of the opening portfolio value. My income has increased from 3.37% on 31 December 2013 to reach a new peak of 6.67% at this month end.

Portfolio income has increased by 3.02% in the year to date. The income measure on the graph rose to 6.67%. That is a 98.02% rise since draw down started on 31 December 2013. Increases in income arise from the re-investment of dividend income in more shares, from dividend increases announced, and from portfolio changes. Going forward any increase is likely to be small because increases arising from re-investment and increased payments are likely to be matched by decreases from portfolio changes as I reduce higher income holdings and increase growth holdings. The two small switches made so far have sacrificed income growth of about 1.25%.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by sector, that is by geography for equities, or by type for non-equities.

	Yield %	Capital %	Income %
UK	4.30	40.00	35.14
Asia Pacific	4.78	23.81	23.24
Global	4.20	19.33	16.60
Bonds	8.26	7.66	12.92
Property	8.13	7.23	12.01
Cash	0.22	1.98	0.09
	4.89	100.00	100.00

I have also analysed based on the income and growth characteristics of each holding. I have classed my holdings as high income (dividend yields greater than 5%), as income (yields between 4% and 5%), as growth and income (yields between 3% and 4%), and as growth (yielding less than 3%). I am aiming to gradually reduce my investment in high income and income holdings and increase my investment in growth holdings. The latter have risen from 7.81% of capital in February to 9.49% of capital now, as a result of the two small steps taken so far.

	Yield %	Capital %	Income %
High Income	7.00	34.99	50.07
Income	4.49	39.38	36.15
Income & Growth	3.57	14.16	10.33
Growth	1.73	9.49	3.36
Cash	0.22	1.98	0.09
	4.89	100.00	100.00

Cash

My annual draw down spending is now around 3.26% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are sufficient to cover about eight months of spending. In addition to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments every few months in order to cover spending.

Expenditure

Draw down expenditure was only 60.12% of my portfolio income for the last twelve months. This compares to draw down spending being 73.88% of my portfolio income in the previous twelve months. Portfolio income has risen by 16.43% whilst expenditure has fallen by -5.24%. The increase in income includes inheriting extra capital in April last year, and the continued effect of dividend reinvestment, dividend increases, and portfolio changes. The expenditure comparison is mostly one of pre-lockdown and lockdown. The fall in spending is mostly a result of lockdown restricting spending opportunities. Spending this April was higher than last April leading to a slight worsening of the position since the previous month. Spending increased as lockdown was eased this April compared to last April, but also a new washer dryer was purchased in the month.

Conclusion

In the last two months I have added to my growth holdings which are now 9.49% of my portfolio. Going forward I aim to use further increases in portfolio income as an opportunity to continue this switch by reducing my higher income and income holdings and increasing my growth holdings. This will be stalled by any dividend cuts, but I am hopeful that this will not happen.