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 %|
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.
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.