Nowadays, around 40% of my income portfolio consists of collective-investments, with only 60% now being represented by single-share holdings, and when high-ball bids come in for any of my single-share income-holdings now, I relish the chance to rotate that single-share capital into an often slightly lower-yielding collective income-investment, and this post is meant to put down my thoughts on why I think it's advantageous for me to do so....
If we take today's Greene King (GNK) £8.50 per share bid as an example, this represents around a 49.5% up-take on this morning's opening price of around £5.68.
For a notional investment of £25,000, and a previous 12-month dividend of 33.2p (Interim 8.8p + Final 24.4p), we can state for this example that at last night's close, GNK represented the following income slot in my portfolio -
Last night - £25,000 notional capital against a 12-month running yield of 5.8% (33.2 / £5.68) equals a 12-month running income from dividends of around £25000 x 0.058 yield = £1,450
Following today's £8.50 per share bid, that notional £25,000 GNK capital is now worth around £25,000 x 1.495 = £37,375 (notional)
There are many collective investment-trusts that yield around the 4% mark, and sometimes a little higher.
As it happens, I posted earlier today that I was actually beginning to look at some income-IT's following the recent market weakness - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=19097&p=245426#p245426
If we look at the list of income Investment-Trusts on that link, as an example we can see that Murray Income Trust is currently yielding around 4.09% and has a NAV discount of around 5% (Trustnet - https://tinyurl.com/yyyc42cp).
Also, if we look at the above Trustnet site for Murray Income, we can see the following Top 10 Holdings for 30th June 2019 -
- Diageo 3.70%
- BHP 3.50%
- Prudential 3.30%
- BP 3.20%
- Royal Dutch Shell 'B' 3.20%
- Unilever 3.20%
- RELX 2.90%
- Aveva 2.80%
- GlaxoSmithKline 2.70%
- AstraZeneca 2.60 %
If we now look to see what income we'd get by rotating the current Greene King capital (following today's £8.50 bid) into a collective investment such as Murray Income Trust (MUT), we can see the following -
Tomorrow - Notional capital of £37,375 into Murray Income Trust yielding 4.09% equals a 12-month dividend of £37,375 x 0.0409 = £1528
The above is a hypothetical example, but we can see that we might notionally move from a position last night of receiving £1,450 per year of single-share Greene King dividends, to a position tomorrow of receiving £1,528 per year of much more widely-diversified Murray Income Trust dividends.
That's actually also an income up-lift of around 5.4% (£1,528 / £1,450 = 1.0538), which is always nice but isn't actually the main idea behind this mainly-diversification process....
In the round I would see such an income-transition proposal as being beneficial for a number of reasons -
- More diverse income - coming from a wide 'internal-spread' of IT holdings
- Often taking advantage of a market-discount to underlying IT holdings (NAV) at today's price
- Taking advantage of the revenue-reserve of an income-IT (around 0.8x in this example, which is nearly a full-years worth of revenue reserve..)
- Diversifying away not only investment-holdings, but also some 'portfolio-management processes' too, which I see as an advantage as it's then not 'just me' looking after my investments...
- Sometimes actually increases dividend-income at the same time as taking advantage of the above additional elements...
If I were to stick with rotating high-bid capital like this back into single-share HYP holdings, I would worry that I'd not looked after such a capital increase as well as I could have, and nowadays, by finding a suitable income-IT as a home for this type of very short-term capital increase, I find that I personally gain a lot of satisfaction that my income-portfolio end-result, both in terms of capital allocation and income-diversity, sits much more comfortably with me than it might otherwise have done. It certainly helps with the 'sleep at night' side of things, in my personal experience...
The use of Murray Income Trust above is just a notional example of the type of capital-rotation I like to process in these nice circumstances, and of course income IT's offer much more than just rotating back into the same UK markets that we'd normally fish in...
Looking at the table I posted earlier from the AIC website (first link above), we can see that many international markets and other specific market-segments offer similar yields to the Murray Income Trust example I've used here, so in additional to gaining advantage of more diverse income from similar markets, we can also start to look outside the UK markets for similar income yields, to gain even more global exposure for our dividend income.
I've not yet decided where my Greene King capital is actually likely to land, but I hope the above is an interesting example of the type of process I like to carry out when surprise high-bids like today's GNK example pops up.
Bids like this don't come along too often - let's make sure we don't waste them when they do......
Cheers,
Itsallaguess