Watching the dividends

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 %
UK	5.40	38.78	35.36
Asia Pacific	5.69	24.00	23.05
Global	4.90	19.57	16.18
Bonds	9.25	7.84	12.25
Property	11.62	6.64	13.03
Cash	0.24	3.18	0.13
	5.92	100.00	100.00

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.