The first dividend cut is the deepest

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The UK situation at present is somewhat confused. There is a worsening in the covid-19 statistics and there are pressures to enact more restrictions or even another lockdown. Different restrictions have been applied to different parts of the UK. There is a debate about what these statistics show us, whether more restrictions are needed or proportionate and about their costs and benefits. There is also a suggestion that only the vulnerable should be shielded and most of us be allowed to return to near normality. There is not a clear path ahead. This does not bode well for business, employment or the economy, and is another incentive to invest globally rather than in the UK.

The confusion was brought home to us, literally, a couple of weeks ago, when one month after returning to school our children were sent home from school. A few children at their school have tested positive for covid-19 so now a number of the year group bubbles have been sent home and are now working from home getting their lessons online via Microsoft Teams. Hopefully this will be a temporary phase for the school.

I consider myself to be financially independent and I am not in paid employment, nor am I looking to resume such employment nearly seven years after quitting it. I am dependent on living off my savings and investments. I look to spend less than the dividends paid on my investments, although I will draw the required cash to spend by a combination of dividends received, investments sold, and cash deposits reduced. Maintaining dividends received, and receivable in the future, at a higher level than our spending now, and in the future, is critical to the success of this approach. The prospect of dividend cuts is a threat to this.

I now expect to receive 54 dividends in 2020 and nearly all have been higher per share than those paid in 2019. There are three dividend declarations I am still waiting for, whilst there have been some reductions. After suffering my first dividend cut in late August, the second one came in late September. Fortunately, this second one has left a smaller impact. My high yield bond fund maintained its dividend at the same level as last year.

That first dividend cut, on my only UK commercial property REIT, reduced my portfolio income by 2.97%. I decided to keep that holding because it was still one of my highest yielders and alternatives that could match the reduced yield of 8.37% were in short supply. After the cut 7.29% of my portfolio capital and 10.55% of my portfolio income were tied up in that holding and I didn’t relish making a big switch. I’m hopeful that the dividend will be increased again next year given that they are claiming to be collecting over 90% of the rent due at present.

The second dividend cut, on one of my UK equity income investment trusts, only reduced my portfolio income by a further 0.44%. This holding had been described as a dividend hero for increasing its dividend every year for over twenty years but the Directors of this investment trust decided to sacrifice that badge. They appointed new managers and prioritised a preference for value investing. This almost casual dismissal of their dividend reputation made it easy to sell. This had been my worst performing holding this year and I had previously reduced my holding and I had intended to sell the remainder for cash. Instead, I decided to sell that holding and buy a holding paying a lower dividend. This switch of 1.46% of my portfolio marks a beginning of a shift to prioritising capital growth in my investment approach. It was an addition to an existing UK equity income investment trust holding that is more focused on growth and that has produced the best results for me this year. This is now my second biggest holding and represents 9.15% of my portfolio. I won’t be selling this one to raise cash anytime soon.

Extra income from re-invested dividends elsewhere meant that I could mostly absorb that second cut and the investment switch quite easily. Portfolio income was reduced by only 0.52% in September. It has now fallen by 3.02% since its’ month end peak in July. I am hopeful that any further cuts will be less deep and can ideally be covered by increased income from re-invested dividends. Where and when possible, I will be shifting my portfolio in the direction of international and smaller company investment trusts that aim for higher growth.

Yield %Capital %Income %
Asia Pacific5.6725.0923.95

This table shows the composition of my portfolio at the end of September.

My cash holdings at the end of September were sufficient to cover about nine months of spending. In addition to this, dividends being paid out each year are sufficient to cover about four months spending. My other dividends received are being immediately re-invested in more shares. This cash position means I will need to sell some investments in the next nine to twelve months in order to cover spending. I have only made one sale to raise cash in 2020 so far. When I do decide to sell, I intend to reduce one of my UK equity income investment trusts.

After nine months of the year the capital value of my investment portfolio is down by 12.46%. There was a capital decline of 25.42% but income receipts have added back 3.86%. This gives an investment portfolio decline of 21.56%. I received some inherited funds in early April that added 11.37%. I have incurred draw down expenditure of 2.27%.

With dividends received for the first nine months of the year my portfolio income has grown by 20.38% compared to the same point last year. I am now expecting income growth of 21.42% for the twelve months, with 9.64% of that from funds inherited during the year. This assumes there are no more dividend cuts from the few dividends yet to be declared.

Draw down expenditure so far this year was only 58.81% of portfolio income receipts. This indicates to me that expenditure will be below 62% of income at the year end, and that a high proportion of income has been re-invested in more shares. This reinvestment accounts for much of the income growth this year and will hopefully enable more income growth next year and counter any more dividend cuts.

2 Replies to “The first dividend cut is the deepest”

  1. Thanks for sharing the detailed workings of your portfolio. The position your in – being able to reinvest a large part of your investment income – must be reassuring when receiving news of dividend cuts.

    I’m in the early stages of investing in dividend paying funds, so your insights are very helpful.

  2. Thanks for your comment. I’m pleased that you find it helpful. I think that you will find that investing in dividend paying investments is rewarding.

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