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 % | |
|---|---|---|---|
| UK | 5.55 | 37.93 | 36.42 |
| Asia Pacific | 5.60 | 24.41 | 23.63 |
| Global | 5.07 | 19.10 | 16.75 |
| Bonds | 9.16 | 7.92 | 12.54 |
| Property | 8.37 | 7.29 | 10.55 |
| Cash | 0.20 | 3.35 | 0.11 |
| 5.78 | 100.00 | 100.00 |
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.
I was interested to find mention of my blog in the comments on 26 August (thanks Al Cam) on Ermine’s blog. https://simplelivingsomerset.wordpress.com/2020/08/20/winter-is-coming/
Interesting update – still all looks “rather risky” to my eyes. Next few years could turn out to be crucial I guess.
A couple of other peoples recently revised approaches (that eschew bonds totally) that might interest you are described at:
http://mdonfire.com/2020/08/08/portfolio-ptoday/
and
see naeclue’s comments from #102 at:
https://monevator.com/weekend-reading-get-ready-for-the-drop/
As usual, each to their own, but whilst these guys take radically different approaches they both hold substantially larger cash buffers than yourself.
Thanks for your comment. My “rather risky” approach is certainly being tested at the moment. You suggest some interesting alternatives. mdonfire requires daily and sometimes intra-day monitoring for the aggregation of marginal gains. That’s not for me. naeclue has 50 years spending in equities and 5 years in cash so his draw down is 1.82% each year. That’s about half my current level of 3.60%. I have 26.86 years spending in equities and 0.93 years in cash. If I increased my cash to 2.5 years and reduced equities to 25.29 years that would approximate his allocation albeit with about half his assets measured against our respective spending. A 2.5 year buffer would certainly be of comfort at the moment. I derive comfort from the idea that my spending could be only 62% of my income this year.
Everybody will, of course, form their own view – and only with the benefit of hindsight will we know who was “correct”.
Having said that, the what-if that bothers me is if your dividends collapsed to 50% of their current level or even dried up totally. In the latter case your cash buffer would last about a year at which point you become a forced seller. In the former case (divis down 50%) – and assuming you used all dividends for consumption – you could eek out the cash buffer such that you could hold off being a forced seller for probably three to four years.
FWIW, IMO four years is the minimum required to ride out big a UK Bear.
Thanks for your comment. I think in over 34 years of being invested, 6 years is the longest time period for me to break even from a bear market (worst case so far). When you could get 5% interest on deposit, I did hold 20% in cash which would have nearly covered that. Currently if the dividend down-turn is longer than 1 to 2 years then I think my IT’s would cease to be dividend heroes but I think they would still pay 50% of their current level, unless dividends fall further. I only need 62% of current dividends so my enforced selling might be 0.7% of capital each year, or else I spend less. Time will tell.
Interesting update Getting Minted. Given we know dividends being paid by companies are being reduced substantially, if investment trusts are maintaining / increasing their dividends then the only way this can be achieved is either by borrowing money or reducing cash on balance. Therefore if it is important to you that regular income keeps being paid, you can manufacture the same result through borrowing money or reducing cash reserves. If that is not acceptable then it is cognitive dissonance (which btw is completely understandable) as the net effect is the same.
I’m obviously in Al CAM’s camp as you know. The key is that you, I, Al CAM or anyone else is unlikely to know whether one’s strategy is going be successful or not until decades into the future.
I’m not so sure on cash reserves being a panacea. For sure if I was following this approach, then yes I’d want 4 – 5 years of cash reserves. But there’s no reason why a bear market can’t out run those levels and any more could be a major drag on real returns.
The best strategy, which it appears you might be following is to reduce expenditure such that your withdrawal rate is substantially lower.
Thanks for your comment. I’m happy to let the IT’s manage the funding of paying out dividends not fully supported by dividends received. I don’t hold much cash because of the low returns available. I would prefer to have over 2 years spending in cash but I’m not currently ready to take the income reduction that would result from that. I could reduce my spending a bit more if necessary, which could allow me to live on reduced dividends, i.e. a 50% reduction.