Watching the dividends

Source: Pixabay

We’re nearing the end of the school year and we’re expecting our home school duties to finish next Friday. Hooray for the holidays! This has been quite a draining and distracting time with all four of us at home for nearly all of the time. I have certainly found that the sources of any stress in my life are primarily around these non-financial aspects of being in an enforced lockdown and in attempting to ensure that lessons sent by the children’s school are completed. There has been less time for considering our financial position. As mentioned last time I think our position is reasonably good. We have cash in the bank to cover our expenditure for the next few months, and we have an equity portfolio paying out regular dividends.

When I do spend time on financial matters, I am now watching these dividends quite closely. All my portfolio holdings are investment trusts and all except one pay four dividends each year. The one exception pays out only twice each year. Company announcements can be found online (e.g. at Investegate ), and these will include dividend declarations, such as this one: “The board has declared a first interim dividend of (amount) pence per share, payable on (date) August 2020 to holders on the register at the close of business on (date) July 2020. This dividend is in line with the fourth interim dividend paid last year, and represents an increase of 1.5% on the first dividend paid last year.” I am counting on these boards of Directors wanting to maintain the dividend and to maintain their record of annual rises. They may increase the annual dividend by only 1% in order to keep that record of increases.

I have mentioned before about those trusts declared to be dividend heroes and next generation dividend heroes by the AIC (Association of Investment Companies). They have over twenty years, or over ten years, of history of annually increased dividends. The leading dividend hero is the City of London Investment Trust with a record of fifty-three years of increased dividends. In the year ended 30 June 1966 the dividend was 0.209 pence (Source: Citywire 2016), whilst if the fourth and final dividend of the year ended 30 June 2020 at least matches that of last year (Source: AIC) then the dividend for the year will be 19.000 pence. That is a compound annual growth rate of 8.71%.

Encouragingly on 2 April 2020 the Chairman of this trust said: “In our Interim Report in February, I said that the Board was confident that it would be able to increase the dividend for a 54th consecutive year. Since then, a number of companies in which we are invested have cancelled their dividends. We continue to recognise the importance of dividend income to our shareholders. Over the last 10 years, we have set aside over £30 million into revenue reserves to underpin future dividends in circumstances such as we face now. Those reserves stood at £58.3 million at 30 June 2019, our last financial year end. If in July we need to draw on those reserves to maintain our unique record of annual dividend growth, then it is our intention to do so.”

Most of the trusts I hold have similar but less good and less lengthy records. In fact, 80% of my expected dividend income for 2020 is from dividend hero or next generation dividend hero trusts. Those that aren’t classed as “heroes” include trusts that were launched less than ten years ago and some that held or reduced their dividends around 2010.

One that was launched less than ten years ago is my commercial property trust. Analysts have suggested that the dividend will be reduced by about 30%. While awaiting the next dividend declaration I read their latest announcement that said: “Q1 rent collection has continued to increase to 96.7%” and “an encouraging 78.5% of the rent due had already been collected for Q2 or a payment plan has been agreed and is in place. Furthermore, at this point we are in discussion with an additional 12.6% of occupiers by income, and an update will be provided in due course. Therefore, it is expected that the rental collection amount will rise.” I’m continuing to hold this one despite a 37.28% fall in the share price in the first six months of the year. That makes it my second worst performing trust.

Since last month I have sold most of my holding in my worst performing trust, which is in the UK equity income sector. It’s share price fell 47.80% in the first six months of this year. I chose to switch into other trusts that I already hold in the UK, international and Asia Pacific equity income sectors. I have accepted a slightly lower dividend yield as a result. The remaining balance in the trust will be sold the next time I need to raise cash.

Markets have continued to be relatively stable since mid-April. My portfolio has reduced by 22.66% in the year to date. This reduction includes only 1.54% of draw down expenditure over six months, which implies an annual withdrawal rate of around 3%. That leaves a negative return of -21.12% which is below the negative return of -17.50% for the FTSE All Share total return index. After allowing for the receipt of some inherited funds I am actually only 9.76% down since the start of the year.

 Yield %Capital %Income %
UK5.4038.7835.36
Asia Pacific5.6924.0023.05
Global4.9019.5716.18
Bonds9.257.8412.25
Property11.626.6413.03
Cash0.243.180.13
5.92100.00100.00

My portfolio has continued to shift towards non-UK equities partly driven by better returns on them recently and partly by the switch mentioned above. I will also be looking to shift towards more of a total return approach in future. This will be done gradually as I would like to maintain my current dividend income. With that in mind I will keep watching the dividend declarations, especially on my commercial property real estate investment trust.

10 Replies to “Watching the dividends”

  1. Hi GM, does the yield you show in the table include asset growth as well as dividend payouts? If it’s dividends only, the yields you’re achieving are fantastic!

    Building a dividend portfolio is something I would also like to do in time. I would opt for the fund route like yourself as I know I lack the time, knowledge, and skill to follow and pick individual companies. Does it take much time to manage your portfolio?

  2. Thanks for commenting. The yield percentage is the current dividend divided by the current price. Dividends on my holdings have been maintained so far this year whilst share prices have fallen so that has increased the yield. Using managed funds such as investment trusts needn’t take much time once your portfolio is in place. I leave worrying about individual companies to the fund managers!

    • In that case, your yield is fantastic! Even when markets recover, I imagine you’ll still have a decent yield.

      I have an income investor mindset, and seeing the potential returns on offer from dividends makes me want to get on with building a dividend portfolio. Currently, I invest in Vanguard index funds (that reinvest income) but I’m going to look into redirecting my standing order into dividend funds.

      If you don’t mind me asking, what brokerage firm do you use to buy your funds?

      • Thanks for commenting again. I expect that a market recovery would reduce my portfolio yield back to around the 4.5% of last December. The brokerage firm you use is less important than your fund selections. I select from investment trusts in the UK equity income, Asia Pacific income, Global equity income, Property UK Commercial, and Debt Loans and Bonds sectors.
        https://www.theaic.co.uk/

  3. Such a great post. I love passive income investment because it has got more advantages compared to disadvantages. Dividends are cool. But as my friend says, dividends are good as long as they are paid.

  4. “As mentioned last time I think our position is reasonably good. We have cash in the bank to cover our expenditure for the next few months, and we have an equity portfolio paying out regular dividends.”

    I have to admit that reading those words above, I think your position is pretty fragile unless you have some significant back up plans. It is entirely unclear what is going to happen (as it always is), equities may fall 50% (or rise), dividends may be cut 50% for several years (or rise) but the variability in the short term seems particularly striking and in the long term (as ever who knows). The point I am making is your margin of safety seems quite small – unless you have options such as (a) back to work (b) substantial flex in your budget (c) assets you are not disclosing. The other option is just to borrow money to cover expenses, which is the same affect as investment trusts ‘paying dividends out of reserves’ – it just sounds ever so sophisticated that way – but mathematically it’s the same.

    The problem with income investing is that it concentrates you into a few sectors, which unfortunately have been particularly impacted by the pandemic – commercial property, natural resources etc. That’s not to say that in a few years time, income investing might not become a successful strategy given it’s incomplete correlation to value investing. If something is paying 4.5% with risk free rates at 0% there is a reason for it.

    I haven’t a clue what will happen over the medium term but given virtually zero nominal yields there is no way I would be using a four % SWR. Why because it’s based on small historical data set – circa 130 (I forget precisely) years therefore just four unrelated time periods of 30 years and a set of historical events that bear no relation to today – btw the next 130 years may be better (I’m not an undue bear – just recognise nothing can be predicted).

    That’s not to say I disagree with much of your blog, saving, investing etc etc. All of which make you more robust and less fragile to the modern world.

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