As stock market returns disappoint me, it is good to have portfolio income that is growing. It is also useful to have a margin of safety between income and expenditure when prices are rising.
February
One review of the month stated that “resilient economic data in February led to a move higher in bond yields and a decline in equity markets” and added that “developed market equities were 2.4% lower.” This reflected market falls in the US of -2.4% but results in other markets were mixed. Asia excluding Japan fell -6.8% whereas the UK, Europe and Japan rose by 1.5%, 1.3% and 0.9% respectively.
My benchmark, the FTSE All Share Total Return index rose by +1.52% in the month, and by +6.09% for the year to date. My investment return for the month was a loss of -0.39%, and a reduced gain of +2.41% for the year to date. I’m trailing the UK index again, at least partly because of my international exposure.
My individual holdings recorded an unweighted average share price movement of a gain of +1.58% for the year so far. They ranged from a loss of -4.15% on a high yield bond trust to a gain of +6.77% on a UK Equity Income trust. Overall, my UK holdings did better than my international holdings reflecting the markets they are invested in.
Capital
Starting from an index value of 100.00 on 31 December 2013, my capital is now 137.12, as shown in the graph above. This is -2.76% down from its all-time peak in March 2022. Investment return for the year to date of a capital gain of +1.33% and dividend income of +1.08%, results in a gain of +2.41%. Draw down expenditure deducted -0.49% for the year to date. Therefore, capital was up +1.92% 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 another new peak of 7.09% at this month end, as shown in the graph above. My current portfolio dividend income yield is 5.17%, i.e., 7.09 divided by 1.3712.
Investment changes
Portfolio income rose again in the month to reach another new high. The announcement of increased dividends to be paid, and the re-investment of dividends received, both contributed to this. During the month dividends received in my tax-sheltered accounts were re-invested and dividends received in my trading account were paid out. No other trades were done. This is a low turnover portfolio. I’m not a trader.
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. Cash holdings cover about four months of spending. Dividends being paid out in cash each year from my dealing account are sufficient to cover about three months of spending each year. I expect to raise more cash again in the next few weeks. I need to review my capital gains tax position before the tax year end. I will sell sufficient from my dealing account to fund next year’s ISA. Depending on the tax position this sale could be in the old or new tax year. Alongside this I may sell a further slice of my dealing account to raise cash for spending.
Expenditure
Draw down spending was 64.41% of my portfolio income in the last twelve months which is more than the figure of 61.78% for the previous twelve months. Portfolio income rose by 2.00% as more dividend income was received. Expenditure rose by 6.35%.
This table compares the last two years to the end of February.
| Year | Prior 12 mths | Last 12 mths | Change % |
|---|---|---|---|
| Income | 100.00 | 102.00 | 2.00 |
| Essential | 24.17 | 27.00 | 11.71 |
| Luxury | 16.04 | 18.02 | 12.38 |
| Discretionary | 21.57 | 20.67 | -4.15 |
| Expenditure | 61.78 | 65.70 | 6.35 |
| Income – Expenditure | 38.22 | 36.30 | -5.02 |
as % of Prior year Income
Essential spending is now 11.71% higher mainly because the higher energy and grocery costs have now hit us. Year against year grocery costs are only up 11% so far but energy costs are up 79%. We have probably seen the worst of the energy price rises, but I expect the additional spend on groceries to continue. A large Council Tax rise is also expected.
Luxury spending is 12.38% higher mainly because we spent more on holidays.
Discretionary spending was 4.15% lower. This reflects choices we made on home improvements from year to year. This is expected to rise later this year.
Overall, our margin of safety, our surplus income, was reduced by -5.02%. That is not a crisis for us, but it is something to keep an eye on as we consider our future spending choices.
Conclusion
As I write developments in March look to have knocked about 4% off the capital value of my portfolio. This sort of turbulence is to be expected so I see no reason to change my plans at the moment. I have no direct holdings of bank shares and I am relying on the managers of the investment trusts I hold to manage any exposure they have to banks.
The continuing rise in portfolio income is some consolation for total returns being below the benchmark in recent months. The cumulative increase in portfolio income built up over the last nine years has ensured that we have a good surplus over our expenditure, leaving us reasonably placed in the face of rising prices.