Getting Minted

The headline after the stock market closed on Christmas eve read “‘Santa rally’ sees FTSE 100 hit 22-month high on Omicron optimism.” The article then stated that “data suggesting the variant is not as severe as feared pushes index close to pre-pandemic levels.”

A week later on reviewing my portfolio for the month of December I concluded that the Santa rally had delivered for me. Half of my (unrealised) capital gains for the year were made in December. The month was the best of the year since we had similar gains in March and April. In my portfolio 94% of my total gain for the year was made in those three months.

December

The FTSE All Share Total Return index, my chosen benchmark, was up by +4.68% in the month, and is up by +18.32% for the year to date. My investment return for the month was a gain of +3.95%, and I have a gain of +13.94% for the year to date. My individual holdings recorded share price movements for the year ranging from a loss of -9.65% to a gain of +45.17% with an unweighted average result of a gain of +12.43%.

My best performers were in commercial property with average share price gains of 29.50%. My UK holdings made share price gains between 4.80% and 25.06% with an unweighted average of 13.44%. That is just below the capital gain of 14.60% from the FTSE All Share index. My international and bond holdings detracted from my overall results. The share price of my bond holding rose by 7.31%. My Asia Pacific and global holdings recorded share price movements between a loss of -9.65% and a gain of 28.05% with an unweighted average of 6.41%.

My UK dividend income return will have exceeded the 3.72% income return on the FTSE All Share index and allowing for the fees payable on a UK index tracker fund then I believe that total returns on my UK holdings have near enough matched the total return on the UK index. If we include my property and bonds then the 57% of my portfolio I have invested in the UK, and in property and bonds has beaten the UK index, but the 42% invested in Asia Pacific and global holdings has not.

Capital

Starting from an index value of 100.00 at 31 December 2013, my capital is now 140.19, as shown in the graph above. This is a new peak. It is up by +10.35% for the 2021 year. Investment returns, growth (+8.33%) and income (+5.38%), added +13.71%, and draw down expenditure deducted -3.36% during the 2021 year.

Income

Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach 6.74% at this month end, as shown in the graph above. This is a tiny fall from last month’s peak, and arises from the investment changes mentioned below, but is still a doubling of the starting income eight years ago. Portfolio income has increased by 4.14% in the year to date.

Investment changes

Some of last month’s dividends were re-invested early in the month. Also, in early December I sold part of an “income” holding in order to add to a “growth” holding. This is part of my gradual switch towards growth.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by the sector of each holding.

I have also analysed by the income or growth category of each holding.

This allocation has changed, again, since last month as some holdings have moved from the higher income to the income category because their share price rose. My holdings in the growth category have grown from 8.06% to 12.54% of my portfolio over the last twelve months.

Cash

My annual drawdown spending is now around 3.36% 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 five months of spending. In addition, dividends being paid out in cash each year from my dealing account are sufficient to cover about four months of spending. Most of my dividends are being reinvested in my tax-sheltered accounts. I last sold shares from my dealing account to raise cash in early September. I will need to do that again in the next few months.

Expenditure

Draw down spending was 63.67% of my portfolio income in the year to 31 December 2021 which was an increase from 62.54% for the previous year. Portfolio income rose by 6.66% and expenditure rose by 8.60%. This increased spending represents exceptional items and spending choices and fewer restrictions but not yet higher inflation.

Our energy costs have not risen significantly yet as our energy company transfer away from our failed provider has still not completed. Our grocery costs are slightly lower than the previous year. I expect both to rise along with Council Tax.

Conclusion

I’m pleased with the progress of my investment portfolio this year. Total returns were in double figures even after deducting draw down spending. I achieved a balance of an increase in portfolio income and a slight shift towards owning more holdings seeking growth. It would have been nice to have beaten the UK index too but it’s not essential for me to do that every year.

Current portfolio

I have over 80% of my investment portfolio in equities (company shares) and only around 2% in cash and I hold the balance in bonds and property. I’m now going to explain how I arrived at that position and how that is working for me.

My journey

When I first invested in equities in 1986, I kept a large proportion of my assets in cash because that cash was my rainy-day fund – my three, six or twelve months of spending held in reserve. On average I kept 30% in cash and on average that was about half of my net salary. As I built up my equity savings, including PEP’s when they started, the proportion of my money in cash fell. As I moved home twice in the ten years after 1986 and changed jobs twice including a redundancy it was useful to have surplus cash. Also, interest rates were more generous (and exceeded dividend yields).

By the late 1990’s I began to consider my asset allocation and by coincidence I read a book, The Fortune in Your Future by David C Veeneman, that considered some model portfolios. The book explored eleven model portfolios along a so-called efficient frontier. My preference was for the “partly cloudy” portfolio that had 79% in equities, 1% in bonds, and 20% in stable values. This was described as “a portfolio for investors who want a good return and can tolerate occasional setbacks”. I chose to interpret the portfolio allocations as 80% in equities and 20% in cash.

My portfolio roughly kept to that for the next ten years with on average 22% in cash. This will have mitigated my losses in the dot come boom and bust era. When interest rates were massively reduced in 2008, I felt it was time to reduce my cash which now represented over twice my net salary. I bought more shares and then my shares rose in price so my cash position fell from about 22% in 2007 to around 12% in 2009. I held that position for the next five years.

On ending my last job at the end of 2013, I again considered my portfolio allocation. I had only 9% in cash but I took the view that I still had too much cash given the poor returns from the low interest rates in early 2014. Cash has become trash in offering no meaningful return. Its value was in providing liquidity and stable values so long as inflation remained very low. As I began to focus more on the amount of income generated by my portfolio, I decided to put more cash into equities to drive up my income. Having invested through the stock market falls of 1987, 2001-2002, and 2008 I felt that my ability to handle equity risk was sufficient to be able to hold more equities. I then moved to have over 95% in equities and less than 5% in cash during 2014.

My next move was in early 2017 when I decided to diversify for the first time into high-yield bonds and commercial property REIT’s. This was a tactic to increase again my portfolio income but also to diversify away from the pure equities of company shares. This also reflected the idea of reducing such equity exposure as you get older. Over the next three years, I built up a position of nearly 18% in these assets. About half of that was in an investment trust that held over one hundred high-yield bonds. Its objective then was “to provide investors with a high dividend yield and the potential for capital growth by investing mainly in high yielding fixed interest securities”. The accounts of the trust at that time indicated that it had 132 holdings with the biggest one being only 3.2% of the portfolio. This gave me less risk than holding an individual corporate bond or retail bond. The other half was in a commercial property REIT investment trust that held over one hundred properties. Its factsheet then said that it had a “highly diversified regional UK office and industrial portfolio” of 128 properties, comprising 974 units, and with 719 tenants. This gave me less risk than holding an individual property with an individual tenant, and didn’t require as much of a financial commitment.

I have kept those holdings since then, both in tax sheltered accounts, with their dividends being reinvested in more shares. The only change in early 2021 was to sell half of the commercial property REIT in order to buy into a rival commercial property REIT. As I’ve previously reported that new holding has since been re-rated and is now my top performer of 2021.

Selected years

My recent results

I have reviewed the total return on these non-equity holdings for the nearly five years I have been invested in them. I have allowed for the time invested, the gain or loss in the share price, and the dividends received. I calculated an internal rate of return (XIRR using an excel spreadsheet). This gave an overall result of 6.19% per annum. There has been some decline in capital values of -1.65% per annum but the income return has been 7.72% per annum. In simpler terms the amount invested has grown in total by 25.46%, comprising 32.46% from dividends received less -7.01% from share price falls.

That 6.19% total return for these assets is close to my rough calculation of 6.10% compound growth for my total portfolio from February 2017 to November 2021. So, I have matched my equity returns and exceeded the returns available on cash. There has been significant volatility so these assets have more risk than cash and maybe more risk than equities. Certainly, the bond trust and the property trust fell significantly in March 2020. I believe they have given me more diversity whilst they have increased my portfolio yield. The current yield is 7.70%.

The future

At present these holdings of bonds and property are useful as a means of raising the level of income in the portfolio in that they provide one-quarter of the income from only one-sixth of the capital. This assists me in moving some of the equity holdings from income trusts to small company growth trusts. Going forward I am likely to maintain these investments but I can envisage in the longer term reducing their position sizes, or switching them to lower yielding alternatives, as I increasingly prioritise growth over income. I don’t plan to raise my cash levels significantly unless interest rates rise significantly so that there are some returns from cash.

This is an update on my portfolio for the month of November. Despite the news of the latest pronouncements on the pandemic stock markets only dipped slightly last month, whilst my portfolio was buoyed by record dividend receipts.

November

The FTSE All Share Total Return index, my chosen benchmark, was down by -2.24% in the month, but is up by +13.04% for the year to date. My investment return for the month was a loss of only -0.09%, but I have a gain of +9.66% for the year to date. My individual holdings recorded share price movements for the year so far ranging from a loss of -11.03% to a gain of +42.08% with an unweighted average result of a gain of +8.04%.

The underperformance arises mostly from lower returns on my non-UK holdings in the Asia Pacific and global equity income sectors where the unweighted average gain was +2.17%. Returns from my UK holdings have, however, been mixed with only half of them ahead of the index. My UK holdings had share price movements ranging from +0.91% to +20.13% with an unweighted average of 9.23%. Adding dividend income to these capital returns suggests that my UK returns are slightly ahead of the index. My best individual return is from the commercial property real estate investment trust that I switched into in February 2021.

Capital

Starting from an index value of 100.00 at 31 December 2013, my capital is now 135.20, as shown in the graph above. This is below August’s peak of 138.67. It is up by +6.42% since the end of the 2020 year. Investment returns, growth (+4.13%) and income (+5.38%), added +9.51%, and draw down expenditure deducted -3.09% during the eleven months of 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 6.75% at this month end, as shown in the graph above. This is a new peak and is a doubling of the starting income nearly eight years ago. The increase in the month mostly arose from dividends received being reinvested in more shares. There were three small dividend increases announced and one dividend was reduced. The reduction was made to a special dividend paid by one of my new small company growth trusts. This is a small holding so the income impact was minor. Portfolio income has increased by 4.27% in the year to date. The value of dividends received in the month was also a new high and was over 1% of the portfolio value. My dividends are mostly paid every quarter and 75% are paid in the four months of February, May, August and November. All dividends have now been declared for 2021 for my holdings so I know that there will be no dividends paid in December.

Investment changes

Dividends were re-invested in the month but no other trades were made. In early December I sold part of an “income” holding in order to add to a “growth” holding. This is part of my gradual switch towards growth.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by the sector of each holding.

I have also analysed by the income or growth category of each holding.

This allocation has changed since last month as some holdings have slipped into the higher income categories because their share price fell.

Cash

My annual drawdown spending is now around 3.34% 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, dividends being paid out in cash each year from my dealing account are sufficient to cover about four months of spending. Most of my dividends are being reinvested in my tax-sheltered accounts. I last sold shares from my dealing account to raise cash in early September. I will need to do that again in the next few months.

Expenditure

Draw down spending was 65.74% of my portfolio income in the year to 30 November 2021 which was an increase from 59.02% for the year to 30 November 2020. Portfolio income rose by 5.28% and expenditure rose by 17.27%. Expenditure in the month of November was less than 1% higher than last November which gives some limited reassurance that the apparently upward trend is not inexorable.

Higher unavoidable spending on energy costs, council taxes, and groceries look to me to be certain, probable, and possible respectively. Other higher spending may be avoidable or at least a discretionary choice. We have certainly made some discretionary choices to spend more in the last year on things for the home. We have also had some exceptional costs for car repairs and Capital Gains Tax.

The inflation indices are continuing to rise with the retail price index (RPI) now at an annual rate of 7.1% and the consumer price inflation index (CPI) now at an annual rate of 5.1%. This gives me concern for our future expenditure but also for the future of markets and our investments.

Conclusion

The latest pronouncements on the pandemic look to have only caused a small dip in the UK stock market at the end of November which was then mostly reversed. Perhaps more importantly for my portfolio the pace of dividends being paid and re-invested continued unabated. I’m now considering when next to continue my switch to growth and when next to raise more cash. I will aim to take these steps whilst sustaining my dividend income at the levels achieved in 2021.