Reaching new peaks, August 2021

Source: Pixabay

This is an update on my portfolio for the month of August. This was another quiet month, with no changes, but with several dividends reinvested or received as cash in accordance with my standing instructions. I’m looking to make some small changes in early September.

August

I have prepared this month end based on the starting position at 29 July, just ahead of going on holiday on 30 July. The FTSE All Share Total Return index, my chosen benchmark, is up by 2.07% in the month, and is up by 14.66% for the year to date. My investment return for the month was a gain of 1.59%, and a gain of 11.38% for the year to date. My individual holdings recorded share price movements for the year so far ranging from a loss of -7.66% to a gain of 35.14% with an unweighted average result of a gain of 10.96%. The underperformance arises mostly from lower returns on my global, Asia Pacific, and bond holdings. These have risen below that average, whereas my UK holdings have mostly been above that and above the index return. My worst result is from an Asia Pacific income holding with high exposure to China. My best result is from a UK commercial property REIT holding that has been upgraded by the market. The share price now matches the net asset value of each share, whereas my other property holding is priced at 10% below its asset value.

Capital

Starting from an index value of 100.00 at 31 December 2013, my capital is now 138.67, as shown in the graph above. This is a new peak. It is up by 9.16% since the end of the 2020 year. Investment returns, growth and income, were 11.26%, and draw down expenditure deducted -2.10% for the eight 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 6.71% at this month end, as shown in the graph above. Portfolio income has increased by 3.66% in the year to date. This is a new peak, but it is likely to fall next month because of investment changes I am currently considering. I may reduce a “high income” holding in order to add to a “growth” holding. I may also reduce an “income & growth” holding in order to raise cash levels. I am prepared to reduce my income a little in order to do this.

Dividend increases are now scarce or minimal in size. Portfolio income has risen recently almost entirely as a result of the re-investment of dividends received. About 80% of dividends received are being immediately re-invested in more of the same shares in order to grow my income. Where this raises income to more than I currently want then I can consider switching a small part of the portfolio to lower dividend holdings with better growth prospects.

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.

 Yield %Capital %Income %
UK4.0641.4234.76
Asia Pacific4.9622.7423.30
Global4.3818.5516.81
Bonds8.177.7413.08
Property7.307.9511.99
Cash0.171.610.06
4.84100.00100.00

I have also analysed by the income or growth category of each holding. I am looking to increase my growth holdings to be more than 11.05% of the portfolio over the next several months as and when there is the opportunity.

 Yield %Sectors
High Incomeabove 5%UK, Property, Bonds, Asia Pacific
Income4% to 5%UK, Global, Asia Pacific
Income & Growth3% to 4%Asia Pacific, Global
Growthbelow 3%UK, Asia Pacific
 Yield %Capital %Income %
High Income6.8435.3249.98
Income4.5038.6235.98
Income & Growth3.7113.3910.27
Growth1.6311.053.72
Cash0.171.610.06
4.84100.00100.00

Cash

My annual drawdown spending is now around 3.28% 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 to this, about 20% of my dividends are being paid out in cash each year and that is sufficient to cover about four months of spending. This cash position means I will need to sell some investments in the next few months in order to cover spending and to keep a small cash reserve. The dividends being paid out are from, non-tax sheltered, dealing accounts. The sale of shares to raise cash to spend is also taken from these accounts. I have not yet sold holdings or drawn income or cash from any accounts that are tax sheltered.

Expenditure

Draw down expenditure was only 62.40% of my portfolio income for the last twelve months. This compares to draw down spending being 63.73% of my portfolio income in the previous twelve months. Portfolio income has risen by 9.38% whilst expenditure has increased by 7.09%. The increase in income partly results from inheriting extra capital in April last year. Continued dividend reinvestment is also significant. Expenditure is higher this year partly because of the reduced impact of lockdown restrictions such that we had two holiday breaks this summer and only one last summer.

There is much talk of higher inflation and the retail price index (RPI) has increased from an annual rate of 1.62% at July 2020 to 3.84% at July 2021. This hasn’t yet shown up in our expenditure where variations are more down to choices made. One area where prices are increasing rapidly is electricity and gas. On 30 August I got an email advising that “your tariff is changing”. Looking at the detail this amounted to a 46% increase in our monthly payment. We have only been with this provider since April when they had the best variable rate but, by October, they would have the worst. I did a comparison using the Cheap Energy Club, from Money Saving Expert, and actioned a switch within ninety minutes. If that goes as planned, we will be on a twelve-month fixed rate that is 26% more than we currently pay (rather than 46% more).

Conclusion

Markets still seem unsure about the future for covid, for inflation, and for money printing. My portfolio has been moving in a narrow range since April and has this month exceeded the previous peak in May. As usual I am trying not to pay too much attention to the market as I very gradually reposition my portfolio for higher growth in the future.

Busy doing nothing, July 2021

Source: Pixabay

This is an update on my portfolio for the month of July. This was a quiet month. I made no investment changes in the month. Two dividends were reinvested and one was received as cash in accordance with my standing instructions.

July

I have prepared this month end based on the position at 29 July, just ahead of going on holiday on 30 July. The FTSE All Share Total Return index, my chosen benchmark, is up by 1.13% in the month, and is up by 12.34% for the year to date. My investment return for the month was a gain of 0.21%, and a gain of 9.63% for the year to date. This underperformance arises mostly from lower returns on my global and Asia Pacific holdings. Share prices for my holdings in those sectors increased by an unweighted average of 3.40%, whereas my other holdings averaged gains of 13.07%. Overall, my individual holdings recorded share price movements for the year so far ranging from a loss of -4.90% to a gain of 30.24% with an unweighted average result of a gain of 9.44%.

Capital

Starting from an index value of 100.00 at 31 December 2013, my capital is now 136.83. This is a slight reduction from a peak at the May month end. It is up by 7.70% since the end of the 2020 year. Investment returns, growth and income, were 9.54%, and draw down expenditure deducted -1.84% for the seven 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 6.66% at this month end. This measure is reduced slightly since the end of May because of the investment changes made in early June.

Portfolio income has increased by 2.98% in the year to date. I am now aiming to hold my income at this level.

This year the investment trusts I hold are mostly maintaining their dividends at the level of the previous year. There have been some small increases to meet previously stated objectives or to maintain dividend hero status. They are mostly having to use their revenue reserves to support these dividend payments. They will need the companies they hold to increase or restore their dividends within the next couple of years or else their dividends and my income will fall.

My portfolio can still increase it’s income by the reinvestment of dividends given that my expenditure is lower than my portfolio income. When that happens, I can sell some shares to raise my cash position, or I can sell some higher income holdings and buy some more growth holdings. This will leave portfolio income back where it was but should enable more portfolio growth in future.

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 am mostly content with this distribution with over 80% in equities and about half of that in the UK. The bonds and property provide some diversification and enhance the overall dividend yield of the portfolio.

 Yield %Capital %Income %
UK4.1341.0634.82
Asia Pacific4.9422.8723.18
Global4.3818.6716.79
Bonds7.998.0213.17
Property7.367.9311.98
Cash0.221.460.07
4.87100.00100.00

Cash

My annual drawdown spending is now around 3.28% 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 to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments every few months in order to cover spending and to keep a small cash reserve.

Expenditure

Draw down expenditure was only 63.31% of my portfolio income for the last twelve months. This compares to draw down spending being 67.41% of my portfolio income in the previous twelve months. Portfolio income has risen by 9.99% whilst expenditure has increased by 3.31%. The increase in income includes inheriting extra capital in April last year, and the continued effect of dividend reinvestment, dividend increases, and portfolio changes. The impact of lockdown restrictions on expenditure is no longer evident now that both years include several months of lockdown restrictions.

Conclusion

This was a quiet month after some repositioning in earlier months. I feel able to be less active partly because I am relying on the portfolio managers of the investment trusts I hold to manage my stake in the markets and to manage the income flowing from that stake. I also feel that being more active can impair results if the changes made are mistimed.

Half a year, June 2021

Source: Pixabay

Here is an update on my portfolio for the month of June.

Investment changes

In early June I sold small slices of my holdings in UK and Asia Pacific equity income investment trusts and added to my holdings in UK and Asia Pacific smaller companies’ investment trusts as part of my re-positioning from income to growth. This has marginally reduced portfolio income. In the three months since mid-March, I have built up a position of about 3% in smaller companies trusts that target growth. This has increased my total growth holdings to 10.79%.

June

The FTSE All Share Total Return index, my chosen benchmark, is up by 0.2% in the month, and is up by 11.1% for the year to date. My investment return for the month was a fall of -0.80%, and a rise of 9.38% for the year to date. This underperformance arises mostly from lower returns on my global and Asia Pacific holdings. My individual holdings recorded share price movements for the year so far ranging from a loss of -0.77% to a gain of 23.55% with an unweighted average result of a gain of 8.64%.

Capital

Starting from an index value of 100.00 at 31 December 2013, my capital is now 136.87. This is a slight reduction from last month’s peak. It is up by 7.74% since the end of the 2020 year. Investment returns, growth and income, were 9.31%, and draw down expenditure deducted -1.57% 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 6.65% at this month end. This measure is reduced slightly at the end of June because of the investment changes mentioned above.

Portfolio income has increased by 2.82% in the year to date. Increases in income arise from the re-investment of dividend income in more shares, from dividend increases announced, and from portfolio changes. Going forward any increase is likely to be small because increases arising from re-investment are likely to be matched by decreases from portfolio changes as I reduce higher income holdings and increase growth holdings. Dividend increases are less prevalent at present although dividends are being maintained at the level of the previous year.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by the income and growth characteristics of each holding. I am aiming to gradually increase my investment in growth holdings.

 Yield %Capital %Income %
High Income6.8635.2649.81
Income4.5238.7736.02
Income & Growth3.7013.6010.35
Growth1.6910.793.75
Cash0.241.570.08
4.86100.00100.00

Cash

My annual drawdown spending is now around 3.26% 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 to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments every few months in order to cover spending and to keep a small cash reserve.

Expenditure

Draw down expenditure was only 61.16% of my portfolio income for the last twelve months. This compares to draw down spending being 69.42% of my portfolio income in the previous twelve months. Portfolio income has risen by 13.75% whilst expenditure has increased by 0.21%. The increase in income includes inheriting extra capital in April last year, and the continued effect of dividend reinvestment, dividend increases, and portfolio changes. The impact of lockdown restrictions on expenditure is no longer evident now that both years include periods of lockdown.

Conclusion

Portfolio income has been stable for the last four months whilst I have added to my growth holdings and reduced my income holdings. This will likely continue so long as my drawdown spending is less than my portfolio income. This will accelerate if dividends increase, or decelerate or even reverse if dividends are cut. The stock market growth this year has maybe stalled as we await what the removal of lockdown restrictions brings.

Fifteen years of income and growth

Source: Pixabay

My investment approach of seeking income and growth is sometimes seen as being a poor alternative to seeking total return. I was reminded again of this by a comment (#13) on last weekend’s post on Monevator. I was inspired to pen a response.

The original commenter said that “never selling, and being ok with it, is the only way, I think, I can truly be FI [Financially Independent] and contemplate RE [Retire Early]. This obviously means I am not using my resources optimally.” They added that “my strategy is to build my investments in the form of income bearing investment trusts, in all sectors and geographies” and “currently this portfolio has a natural yield around 3%. I will be FI when I have £50k in passive income. This gives me a target of £1.67M.”

My comment (#36) in response was to say that “I think your approach can work for you. A 3% yield is actually a compromise between an all-out growth approach that would yield between 0% and 2% and my own income growth approach that is currently yielding 4.8%. I have followed this approach for fifteen years and have averaged a 4.3% yield and 4.3% capital growth each year. The total of 8.6% beats the UK market but not the World market.”

I would like to expand on that, based on my own experience and my own views. Having invested for twenty years with a combination of different approaches I decided to make changes in 2006. I had previously invested in unit trusts and investment trusts invested in UK income, UK and international growth, UK and international indexes, and technology, as well as individual UK shares. I decided to switch to a mix of UK and global equity income investment trusts. Consequently, my portfolio income yield increased from 2.59% in 2005 to 3.47% in 2006. That 34% increase became a 65% increase in actual portfolio income because of capital growth and additional savings invested during the year. Portfolio income received in 2006 represented 46% of my spending that year. That was an encouraging sign that living on portfolio income was within reach.

AnnualCap%Inc%Getting MintedFTSE AS TRMSCI World
31-Dec-0622.293.4725.7616.7520.65
31-Dec-07-5.193.38-1.815.329.57
31-Dec-08-26.653.66-23.00-29.93-40.33
31-Dec-0920.796.3727.1630.1230.79
31-Dec-1011.594.9016.4914.5112.34
31-Dec-113.274.187.46-3.46-5.02
31-Dec-127.894.2312.1312.3016.54
31-Dec-1319.694.2823.9620.8127.37
31-Dec-14-0.443.583.141.185.50
31-Dec-15-4.703.87-0.830.98-0.32
31-Dec-1611.434.1715.6016.758.15
31-Dec-179.254.4213.6613.1023.07
31-Dec-18-10.694.24-6.45-9.50-8.20
31-Dec-1915.065.1820.2419.1728.40
31-Dec-20-9.465.02-4.44-9.8216.50
Average4.284.338.606.559.67
Std Dev13.770.7914.1015.3118.26

[Total Return for Getting Minted = Cap% + Inc%]

Reviewing the data fifteen years later it is interesting that half of my returns were from income and half from capital growth. The total return beat the FTSE All Share Total Return Index performance in ten of the fifteen years. The total return has lagged that of the MSCI World Index in nine of the fifteen years. My cumulative return from that 2005 starting point remained ahead of the UK index at every year end, and only fell behind the World Index last year. Other starting points are less favourable!

CumulativeGetting MintedFTSE AS TRMSCI World
31-Dec-05100.00100.00100.00
31-Dec-06125.76116.75120.65
31-Dec-07123.48122.96132.20
31-Dec-0895.0886.1678.88
31-Dec-09120.90112.11103.17
31-Dec-10140.84128.38115.90
31-Dec-11151.35123.94110.08
31-Dec-12169.70139.18128.29
31-Dec-13210.37168.14163.40
31-Dec-14216.97170.13172.39
31-Dec-15215.16171.79171.84
31-Dec-16248.74200.57185.84
31-Dec-17282.72226.84228.72
31-Dec-18264.50205.29209.96
31-Dec-19318.02244.65269.59
31-Dec-20303.90220.62314.07
Compound Average7.695.427.93

I think shifting to a lower yield requirement than 4.8% will generate better total returns so that is what I am doing now, albeit in a very slow manner. If I switched out of my high yielding property REIT’s and bond investment trusts then my total yield would fall to 4.4%. If my UK, global and Asia Pacific equity income investment trusts better reflected the sector averages then the yield would fall further to 3.9%. I therefore think that a 4% yield target, also in line with the 4% “safe withdrawal rate” estimate, could be reasonable. A portfolio target of £1,250,000 might therefore be sufficient to achieve a £50,000 income target. This assumes that no tax is payable, i.e., the portfolio is in an ISA or covered by income tax allowances.

Making optimal use of your resources is a challenge. My tilt towards income and towards the UK has generated lower total returns for me in the last four years than would have been the case if I had just tracked the World Index. We do not know what will happen in the next four or more years so it may be that my allocations will perform more successfully, or not. Certainly seeking dividend income can limit your investment choices.

Maintaining my allocations to property and bonds (yielding over 6%) may hinder growth but it does enable me to allocate more towards growth holdings (yielding less than 3%) in the future whilst maintaining my overall income (yielding over 4%). Allocating some resources to income and some to growth may be optimal for some portfolios, depending on your overall objectives. If you can get 4.8% yield on half your portfolio, aiming for income, then you could invest the other half in a global tracker yielding 1.3% (Comment #31, Monevator), aiming for growth, and achieve an overall yield of 3.05%. Alternatively, it could be optimal to invest for growth whilst accumulating (before FI), when there is no requirement to sell to cover expenditure, and to invest for income whilst decumulating (post FI).

One advantage that I see in my approach is that my income return has been very steady around an average of 4.33%, with a standard deviation of 0.79%. Eleven of the fifteen years have an income return within the range of 3.54% and 5.11%. All fifteen were within the range of 3.38% and 6.37%. This is perhaps better illustrated in the graph above. This gives me some confidence that about half of my return is consistent year on year.

The other half of my returns is very inconsistent year on year. Capital returns were more volatile with an average of 4.28%, a standard deviation of 13.77%, and a high of 22.29% and a low of -26.65%.

With a total return strategy, the returns are similarly volatile with highs of around +30% and lows of around -30% and -40%. I’m not sure I’d want to sell 4% of my investments to cover my spending after the market had fallen by 30% or 40%. With a steady income of around 4% I feel better able to withdraw that and spend it, and to be more detached and hands-off about the volatile movements of my capital. My view may be a minority view and the opinions of others may vary somewhat!