The first dividend cut is the deepest

Source: Pixabay

The UK situation at present is somewhat confused. There is a worsening in the covid-19 statistics and there are pressures to enact more restrictions or even another lockdown. Different restrictions have been applied to different parts of the UK. There is a debate about what these statistics show us, whether more restrictions are needed or proportionate and about their costs and benefits. There is also a suggestion that only the vulnerable should be shielded and most of us be allowed to return to near normality. There is not a clear path ahead. This does not bode well for business, employment or the economy, and is another incentive to invest globally rather than in the UK.

The confusion was brought home to us, literally, a couple of weeks ago, when one month after returning to school our children were sent home from school. A few children at their school have tested positive for covid-19 so now a number of the year group bubbles have been sent home and are now working from home getting their lessons online via Microsoft Teams. Hopefully this will be a temporary phase for the school.

I consider myself to be financially independent and I am not in paid employment, nor am I looking to resume such employment nearly seven years after quitting it. I am dependent on living off my savings and investments. I look to spend less than the dividends paid on my investments, although I will draw the required cash to spend by a combination of dividends received, investments sold, and cash deposits reduced. Maintaining dividends received, and receivable in the future, at a higher level than our spending now, and in the future, is critical to the success of this approach. The prospect of dividend cuts is a threat to this.

I now expect to receive 54 dividends in 2020 and nearly all have been higher per share than those paid in 2019. There are three dividend declarations I am still waiting for, whilst there have been some reductions. After suffering my first dividend cut in late August, the second one came in late September. Fortunately, this second one has left a smaller impact. My high yield bond fund maintained its dividend at the same level as last year.

That first dividend cut, on my only UK commercial property REIT, reduced my portfolio income by 2.97%. I decided to keep that holding because it was still one of my highest yielders and alternatives that could match the reduced yield of 8.37% were in short supply. After the cut 7.29% of my portfolio capital and 10.55% of my portfolio income were tied up in that holding and I didn’t relish making a big switch. I’m hopeful that the dividend will be increased again next year given that they are claiming to be collecting over 90% of the rent due at present.

The second dividend cut, on one of my UK equity income investment trusts, only reduced my portfolio income by a further 0.44%. This holding had been described as a dividend hero for increasing its dividend every year for over twenty years but the Directors of this investment trust decided to sacrifice that badge. They appointed new managers and prioritised a preference for value investing. This almost casual dismissal of their dividend reputation made it easy to sell. This had been my worst performing holding this year and I had previously reduced my holding and I had intended to sell the remainder for cash. Instead, I decided to sell that holding and buy a holding paying a lower dividend. This switch of 1.46% of my portfolio marks a beginning of a shift to prioritising capital growth in my investment approach. It was an addition to an existing UK equity income investment trust holding that is more focused on growth and that has produced the best results for me this year. This is now my second biggest holding and represents 9.15% of my portfolio. I won’t be selling this one to raise cash anytime soon.

Extra income from re-invested dividends elsewhere meant that I could mostly absorb that second cut and the investment switch quite easily. Portfolio income was reduced by only 0.52% in September. It has now fallen by 3.02% since its’ month end peak in July. I am hopeful that any further cuts will be less deep and can ideally be covered by increased income from re-invested dividends. Where and when possible, I will be shifting my portfolio in the direction of international and smaller company investment trusts that aim for higher growth.

 Yield %Capital %Income %
UK5.5538.0135.46
Asia Pacific5.6725.0923.95
Global5.0919.6516.84
Bonds9.538.0912.97
Property9.776.4910.66
Cash0.242.670.11
5.94100.00100.00

This table shows the composition of my portfolio at the end of September.

My cash holdings at the end of September were 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 spending. My other dividends received are being immediately re-invested in more shares. This cash position means I will need to sell some investments in the next nine to twelve months in order to cover spending. I have only made one sale to raise cash in 2020 so far. When I do decide to sell, I intend to reduce one of my UK equity income investment trusts.

After nine months of the year the capital value of my investment portfolio is down by 12.46%. There was a capital decline of 25.42% but income receipts have added back 3.86%. This gives an investment portfolio decline of 21.56%. I received some inherited funds in early April that added 11.37%. I have incurred draw down expenditure of 2.27%.

With dividends received for the first nine months of the year my portfolio income has grown by 20.38% compared to the same point last year. I am now expecting income growth of 21.42% for the twelve months, with 9.64% of that from funds inherited during the year. This assumes there are no more dividend cuts from the few dividends yet to be declared.

Draw down expenditure so far this year was only 58.81% of portfolio income receipts. This indicates to me that expenditure will be below 62% of income at the year end, and that a high proportion of income has been re-invested in more shares. This reinvestment accounts for much of the income growth this year and will hopefully enable more income growth next year and counter any more dividend cuts.

My Covid dashboard

Source: Pixabay

After six months of the pandemic things seem to be worsening again. In trying to understand for myself what is going on I have prepared my own set of indicators on my own Covid dashboard.

The scientists suggested last Monday that cases might double every week and reach 50,000 per day in October and that deaths could then be 200 per day. They said it wasn’t a prediction but they suggested no other scenarios. This grim presentation without any politicians present and without any questions allowed was followed by the Prime Minister’s statement a day later. As it turned out the reality of the changes that were announced appeared to me to be fairly minor, however, the direction of travel was made clear. We seem to be moving backwards now with recent relaxations of the lockdown being tightened up again. One month ago, those working from home were urged to return to the office, and now they are being urged to work from home again, if they are able.

The suggestion that cases were doubling every week would be worrying but many commentators weren’t buying that. Nor was I. The government data can be found online. I decided to prepare my own analysis of that government data. I took the data as at 24 September and prepared my own analysis and graphs. (I may update this data in future.)

Tested positive

DateTested positive, 7 day averageTested positive, 7 day growth %
24-Aug-201,1235.64
31-Aug-201,37922.80
07-Sep-202,886109.19
14-Sep-203,1017.45
21-Sep-204,40842.17

My first graph shows the 7-day growth in the moving average of daily cases starting from 12 August. As I understand it, this is using the number of those testing positive and the date of the test. I am using a moving average to smooth out any daily bumps in the statistics. I am using 7-days so as to avoid any weekend timing issues. Growth in cases measured this way did hit 109% on 7 September, i.e. an average of 2,886 compared to 1,379 for the previous week. From that peak the growth rate has since been lower and was 42.17% on 21 September.

Hospital cases

DateHospital Cases
12-Aug-20936
11-Sep-20723
14-Sep-20922
21-Sep-201,475

My second graph shows the number of Covid patients in hospital. This had been fairly stable and below 1,000 from 12 August until 14 September. It then increased 59.98% in the week to 21 September from 922 to 1,475. This compares to a peak of 19,872 on 12 April and a low of 723 on 11 September.

Deaths

DateDeaths, 7 day averageDeaths, 7 day growth %
19-Aug-208.29-20.55
04-Sep-206.71-29.85
10-Sep-2010.4348.98
17-Sep-2018.8680.82
21-Sep-2023.0069.47

My third graph shows the 7-day growth in the moving average of daily deaths starting from 12 August. As I understand it, this is using the date of the death and not the day it was reported. I’m starting from 12 August because that was when the death statistics were re-stated. The average daily deaths were 10 or less from 12 August to 10 September. This grew to be 19 on 17 September and is now showing a growth rate of over 60% from a low base. This compares to a peak of 973 on 12 April and a low of 7 on 4 September and 7 or lower up to 13 March. Prior to the lockdown in March there was a 7-day growth rate of between 461% and 1,250% whereas it has not exceeded 81% in September so far.

Conclusions

I conclude that from my own analysis of the available government data that positive tests, hospital cases and deaths have all risen but not on the scale that the government scientists suggested. It may be that they are using other data that supports their scenario, or that it was a worst-case scenario intended to encourage us to comply with current and future restrictions. If this is indicative of government thinking then it suggests we are headed for more restrictions than were announced last Tuesday.

As I see it there is a risk to me and my family and friends and the wider community from Coronavirus. On that basis I understand the need to maintain social distancing outside of the home, to wash our hands more often, to wear masks in shops and when not sitting down in hospitality venues. I do not agree, however, with any new full lockdown, nor with closing schools. I can agree with only minimal additional restrictions, and prefer that they be local rather than national. I believe we can’t afford further damage to our economy or our children’s education. Those most at risk, with specific conditions, or in care homes, should be advised of the risks to them and could be shielded. Those not at high risk should be free to decide what additional precautions they wish to take and to get on with their lives as they wish. I also think parliament should properly debate and scrutinise any future changes, including the health and economic trade-offs that may arise. I’m sure others will agree or disagree with me on this.

More restrictions do not bode well for the UK economy and will serve to encourage investors to invest in other countries instead. This is another incentive for me to adjust my portfolio towards international markets.

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.