Investment Trust Income Portfolio for our Retirement

[OhNoNotimAgain]

I am slightly envious of your 5.7% yield. Mine is approximately 3%. Similar to Forrado, my top 5 account for 50 % of the portfolio. ( Foreign and Colonial, Scottish American, Personal Assets, Rothschild and Standard Life Equity) . They currently provide 30 % of the income and in the last 5 years or so have produced approximately 70 % of the capital gains.

Looking at that combination though, you've taken a slightly different approach, haven't you? Personal Assets and Rothschild at least aren't about generating an income per se (or at least a high yield), but more aimed at capital preservation. I hold PNL as part of my core holding primarily for the diversification it provides and the defensiveness of its holdings - a bit of insurance if you like. It's not exactly been setting the world alight in terms of performance, but then that's not the intention! (But there again I hold 26 ITs as my portfolio, so might be regarded by some here as too diworsified).

Can I also add my voice to the appreciation of this thread? I have spent the past 18 months or so gradually changing from a portfolio of predominantly ndividual equities to one now focused almost entirely on ITs. At present it's more growth orientated than generally being discussed here (or, more TR orientated perhaps?) but I'm gradually moving it towards providing retirement income. Like the OP, I've relied mainly on info in Money Observer and John Baron column, plus what I've gleaned here, so all this discussion has been really interesting.

The only way to preserve capital is to grow it in real terms.

Try adding Monevator to your reading list.

[CryptoPlankton]

As others have said, the OP is trading a great income today for a substantial risk that income may not grow as fast as inflation (or cost of living, which can be higher). Fine if you're nearing end of life, risky otherwise. I'd swap out the infrastructure assets particularly and some other very high yielders for ITs that pay less but grow dividends faster.

Have you worked out how long it takes to compensate for such tactics? It could be 20 years before there is any advantage.

TJH

This warning that high yield today is storing up trouble in the face of the ravages of future inflation is flagged up very frequently. As someone who has been building a high yield IT portfolio myself, I would love to explore this further and, if there is good evidence for it I may modify my strategy a little to compensate. I have seen how TJH's assertion that it takes years for lower (but faster growing) income to catch up is arrived at, but I haven't seen any figures to support the idea that high yield now is unacceptably risky.

I haven't had the chance to look into this too deeply yet, but perhaps people would like to comment on the following:

The AIC site provides annualised 5-year dividend growth rates and I looked up these for mickeypops' portfolio:

BRNA 15.3%
HFEL 4.9%
EAT 4.7%
TFIF 3.9%
MYI 3.5%
DIG 2.6%
HICL 2.5%
RECI 2.3%
MRCH 1.6%
SHRS 1.6%
TRIG 1.5%
PEY 1.1%
SLI 1.0%
NCYF 1.0%
MCT 0.4%
And 5 x 0% (have assumed 0% for N/A, but there may be one or two negatives)

So the average annualised dividend growth rate is 2.4%. The actual growth rate of the total dividend payout isn't so straightforward, but there does seem to be some built in protection against "normal" inflation rates. It does suggest to me that it helps enormously to have one or two ITs with fast growing dividends, perhaps as slightly larger holdings (to still generate the average individual dividend payout), but not that it would be catastrophic to mainly aim for high yield.

Another way in which I intend to protect myself is through drawing only 80% of dividends and reinvesting the rest. My ITs yield about 5%, so I will, on average grow the payout by 1% each year.

Even with a modest 1% dividend growth rate from the ITs to add to the 1% from reinvestment, I calculate that I could increase my income withdrawal by 3% a year and not have to draw on capital for 18 years. Without any other capital growth, the reinvestments would mean that there would still be plenty to continue increasing at 3% for as long as I will possibly need (assuming I haven't adapted my strategy by then anyway).

Just some basic thoughts - provoked by this thread. I'd be more than happy to have them ripped to shreds by some more thorough analysis!

[mickeypops]

Thanks for the research CryptoP, that’s really useful.

Like you, I don’t need all the income but will reinvest the surplus outside the portfolios, as they are SIPPs in drawdown and I can use the cash to fund our ISAs.

Good luck!

MP

[mickeypops]

Hi Gadge

If you read the OP, you’ll see that UK equities account for just 23% of what is a well diversified income focused portfolio.

Regards

MP

[Alaric]

The actual growth rate of the total dividend payout isn't so straightforward, but there does seem to be some built in protection against "normal" inflation rates.

The UK taxation rules on Investment Trusts require them to pay out at least 85% of their dividend income. But they can retain the 15% and use it as a smoothing fund so that the payout to IT shareholders is maintained or even increased even where there's a cut in the dividends they receive from the companies the IT invests in. Hence a built in protection against inflation. The rules now allow them to distribute realised capital gains as well.

[CryptoPlankton]

The actual growth rate of the total dividend payout isn't so straightforward, but there does seem to be some built in protection against "normal" inflation rates.

The UK taxation rules on Investment Trusts require them to pay out at least 85% of their dividend income. But they can retain the 15% and use it as a smoothing fund so that the payout to IT shareholders is maintained or even increased even where there's a cut in the dividends they receive from the companies the IT invests in. Hence a built in protection against inflation. The rules now allow them to distribute realised capital gains as well.

Forgive me for being a little obtuse, but I'm not quite sure what point you are making in the context of a reply to my post?

[ADrunkenMarcus]

I have looked carefully at previous performance of seven Investment Trusts over a 20 year period, comparing them to various indices. The trusts are Law Debenture,Finsbury Growth and Income, Lowland, Edinburgh, City of London, Temple Bar and Foreign and Colonial.

Temple Bar isn't bad but it hasn't really shot the lights out for either income or total return. On my notes for my holding: From 13 December 2001 to a recent peak in January 2018, the share price increased 117.3% for a CAGR of 4.7%. The dividend per share grew 3.4% CAGR from 2001 to 2017 - likely 0.5-1% CAGR above inflation.

Best wishes

Mark.

[Hariseldon58]

ADrunkenMarcus

Temple Bar was not the best but it’s style has been out of favour in recent years and thus it may well do better in the future.

The list of shares I picked for my comparison was based on what I had held for typically 20+ years and it forms a good basis for a comparison of different investments and I found it quite informative and interesting.

[ADrunkenMarcus]

I agree entirely, Hariseldon58. It's a very useful exercise. Using my rear view mirror, I wish I'd had Finsbury Growth & Income! However, it could equally be argued that Temple Bar may have a better decade or so ahead of it than Finsbury. These things tend to move in cycles.

Best wishes

Mark.

[richfool]

Re Temple Bar: on page 7 of the Report & Accounts for year ending 31 December 2017, the Manager, Alastair Mundy gives a good account of his positioning, outlook and the context of the recent lack of performance.
Note he is a value investor, as opposed to a growth investor.

I accessed that through HL's website:

https://www.hl.co.uk/shares/shares-sear ... -25p-share

[Longtermyieldman]

As others have said, the OP is trading a great income today for a substantial risk that income may not grow as fast as inflation (or cost of living, which can be higher). Fine if you're nearing end of life, risky otherwise. I'd swap out the infrastructure assets particularly and some other very high yielders for ITs that pay less but grow dividends faster.

Have you worked out how long it takes to compensate for such tactics? It could be 20 years before there is any advantage.

TJH

You might be surprised. I have some investment trusts that started out with yields of perhaps 2-2.5% but which grow payouts at about 20% a year. These now pay me more cash each year than ones that started at 4% yield but increase their dividends in line with inflation, or a little more. Compounding is a wonderful thing!

[OZYU]

As others have said, the OP is trading a great income today for a substantial risk that income may not grow as fast as inflation (or cost of living, which can be higher). Fine if you're nearing end of life, risky otherwise. I'd swap out the infrastructure assets particularly and some other very high yielders for ITs that pay less but grow dividends faster.

Have you worked out how long it takes to compensate for such tactics? It could be 20 years before there is any advantage.

TJH

It depends on how you model that effect.

If you just model the income, you are right, but you need to add the likely capital effect to that modelling too, which can then feed back into income as required. The very same thing for a shares portfolios rather than ITs too, in fact, even more marked as individual share sp responds even more sharply than ITs to good divi growth. So, in practice, the positive effect on income will occur way quicker than your 20 years.


So on the whole, being more modest with one's overall yield will be well paid back, after all you should know, as you hold quite a few lower payers but good divi growers yourself in you version of HYP, which we re balance on similar lines to recycle excess capital into income(you do it on too low a yield or too high a weight, but in practice recycling excess capital is what it amounts to), although I just call mine HY rather than hyp because I hold across the UK market cap and not just the UK stock market.


Ozyu


PS OP(mickeypops), an intetesting post and thread, please keep up with updates if you have time. More exposure to ITs on the boards can only be a good thing imho.

[kempiejon]

...investment trusts that started out with yields of perhaps 2-2.5% but which grow payouts at about 20% a year. These now pay me more cash each year than ones that started at 4% yield but increase their dividends in line with inflation, or a little more. Compounding is a wonderful thing!

I actively hunt income growth rate and 20% a year would be just the thing, I only have a few investment trusts so would be interest to hear these for more investigation. TIA

[BusyBumbleBee]

A very interesting thread, mickypops - thank-you; and thanks also for the interesting comments from others.

I too have a portfolio like this with aims (not too dissimilar to yours) which are:

>> A high and, where possible, a rising income at least covering inflation as measured by the RPI
>> Capital protection so that as much as possible can be left to the next generations
>> Easy maintenance (wife can manage it if I pop it)
>> a spread of Asset Classes (at the moment they are: a few retail bonds, some venture capital selected from VCTs and APAX, some specialist REITS, some green infrastructure funds and a tiny bit of ‘yeast’). I used to have some preference shares in the mix as well, but the yield on these dropped and there were better prospects elsewhere.

Asset Classes

Retail Bonds : WAS1 :yields over 6.50% on purchase price

VCTs : currently CRWN and CYS but have been through the Ventus, British Smaller Companies and the Northern Funds with admirable results in terms of income and capital growth. Recent changes in the law make these less attractive and so only the ALBION VCTs and CYS are of interest to me. I include APAX here as it is a high yield fund run by managers with a great reputation over the years.

Green Infrastructure funds Currently FSFL, JLEN and NESF but do swap between these and BSIF, TRIG and UKW, as all of these share prices go walkabout every year with little correlation between them – more dependent on where they each are in the fund-raising cycle. Trading between these often gives a 2-3 % uplift and the possibility of an extra quarterly dividend. As these are all registered in the Channel Isles there is no stamp duty on trades

REITS : currently : AEWU, IHR (invested in care homes), NRR but keeping an eye on RDI, RGL and SRE

Other : RMDL – yields 6.50% on purchase price

YEAST : currently REDT energy but has been LLOY, UU and Greene King over the past two to three years. These can leaven the portfolio with a capital gain but must be very carefully selected

Cash and Ex-Divs : about 1% of the portfolio but there is at least one dividend paid every month with the exception of October.

Measurement & Monitoring:

The portfolio is unitised so every payment out or in either reduces or increases the number of units. Currently the portfolio is showing a 34% increase in unit value over the past two years.

Pot Yield is 7.03%

The withdrawal rate is 5.6% of the pot leaving 1.43% behind for investment

At least 31% of the pot is subject to RPI increases in yield each year

Bid Offer prices are updated daily and NAV and XDs etc updated as and when there is a relevant RNS

Buying and Selling - Trading
If I become aware of a share suitable for inclusion, then it is extensively researched before being added to the list
A share is selected for sale that is trading at or near the top of its trading range and then simple calculations against would be candidates for inclusion showing what the effect on income of the portfolio would be if the trade was made. If the increase in income is worthwhile and there will be no interruption in the dividend flow, then the trade is made but if there is some spare cash (not needed for withdrawal) that is added to the amount purchased to cut dealing costs. The size of trades here is of the order £15-20K with the switch between stocks being made in two or more back to back transactions.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
This is the table that I use to decide whether to 'trade' in the Green Infrastructure funds.

Code: Select all

Stock Bid             Offer      DIVI Yld BID    Yld/offer   NAV   Premium
BSIF    118.00     119.00     7.43    6.30%   6.24%    112.81    5.49%
Jlen    106.00     107.00     6.51    6.14%   6.08%    99.60    7.43%
TRIG    111.20     111.40     6.50    5.85%   5.83%    105.20    5.89%
FSFL    109.50     110.50     6.58    6.01%   5.95%    105.20    5.04%
UKW    126.80     127.00     6.76    5.33%   5.32%    114.10    11.31%
NESF    108.50     109.50     6.65    6.13%   6.07%    104.50    4.78%

[mickeypops]

Hi BusyBumbleBee

Thanks for your post, your strategy is very interesting and I'm keen to see periodic updates to compare with my PF. I don't intend to trade unless there's a compelling reason to do so, e.g. change of dividend strategy, corporate event etc. Your more active approach may well be better but I don't think I have the necessary expertise to confidently do the same. How frequently on average do you switch in/out of investments?

MP.

[formoverfunction]

A very interesting thread, mickypops - thank-you; and thanks also for the interesting comments from others.

I too have a portfolio like this with aims (not too dissimilar to yours) which are:

>> A high and, where possible, a rising income at least covering inflation as measured by the RPI
>> Capital protection so that as much as possible can be left to the next generations
>> Easy maintenance (wife can manage it if I pop it)
>> a spread of Asset Classes (at the moment they are: a few retail bonds, some venture capital selected from VCTs and APAX, some specialist REITS, some green infrastructure funds and a tiny bit of ‘yeast’). I used to have some preference shares in the mix as well, but the yield on these dropped and there were better prospects elsewhere.

Asset Classes

Retail Bonds : WAS1 :yields over 6.50% on purchase price

VCTs : currently CRWN and CYS but have been through the Ventus, British Smaller Companies and the Northern Funds with admirable results in terms of income and capital growth. Recent changes in the law make these less attractive and so only the ALBION VCTs and CYS are of interest to me. I include APAX here as it is a high yield fund run by managers with a great reputation over the years.

Green Infrastructure funds Currently FSFL, JLEN and NESF but do swap between these and BSIF, TRIG and UKW, as all of these share prices go walkabout every year with little correlation between them – more dependent on where they each are in the fund-raising cycle. Trading between these often gives a 2-3 % uplift and the possibility of an extra quarterly dividend. As these are all registered in the Channel Isles there is no stamp duty on trades

REITS : currently : AEWU, IHR (invested in care homes), NRR but keeping an eye on RDI, RGL and SRE

Other : RMDL – yields 6.50% on purchase price

YEAST : currently REDT energy but has been LLOY, UU and Greene King over the past two to three years. These can leaven the portfolio with a capital gain but must be very carefully selected

Cash and Ex-Divs : about 1% of the portfolio but there is at least one dividend paid every month with the exception of October.

Measurement & Monitoring:

The portfolio is unitised so every payment out or in either reduces or increases the number of units. Currently the portfolio is showing a 34% increase in unit value over the past two years.

Pot Yield is 7.03%

The withdrawal rate is 5.6% of the pot leaving 1.43% behind for investment

At least 31% of the pot is subject to RPI increases in yield each year

Bid Offer prices are updated daily and NAV and XDs etc updated as and when there is a relevant RNS

Buying and Selling - Trading
If I become aware of a share suitable for inclusion, then it is extensively researched before being added to the list
A share is selected for sale that is trading at or near the top of its trading range and then simple calculations against would be candidates for inclusion showing what the effect on income of the portfolio would be if the trade was made. If the increase in income is worthwhile and there will be no interruption in the dividend flow, then the trade is made but if there is some spare cash (not needed for withdrawal) that is added to the amount purchased to cut dealing costs. The size of trades here is of the order £15-20K with the switch between stocks being made in two or more back to back transactions.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
This is the table that I use to decide whether to 'trade' in the Green Infrastructure funds.

Code: Select all

Stock Bid             Offer      DIVI Yld BID    Yld/offer   NAV   Premium
BSIF    118.00     119.00     7.43    6.30%   6.24%    112.81    5.49%
Jlen    106.00     107.00     6.51    6.14%   6.08%    99.60    7.43%
TRIG    111.20     111.40     6.50    5.85%   5.83%    105.20    5.89%
FSFL    109.50     110.50     6.58    6.01%   5.95%    105.20    5.04%
UKW    126.80     127.00     6.76    5.33%   5.32%    114.10    11.31%
NESF    108.50     109.50     6.65    6.13%   6.07%    104.50    4.78%

"Other : RMDL – yields 6.50% on purchase price"

I'd be interested on your present view of RMDL. It's been on my watch list for a little time, I'm think it's a really well run outfit and they should be able to increase the payout over the short term.

I haven't been tempted at this point as I've been adding parcels of NRR & RGL . I'm just about where I want to be with RGL, but would like to add more NRR. That's suggest I might think RGL is about the best value it's going to be in the short term. But, who really knows.

Interestingly I bought SREI when it was looking distressed a few years ago, I'm up over 40% since then, maybe more when I include div's. I would just need to do the calculation, but I'm confident at over 40%. You did mean SREI didn't you?

Have you ever looked at VSL? It's yeilding nearly 9% at the moment. I've been buying in tranches for a few years. I have the position I want in terms of commited capital, but if it reaches lower 70's I'll add more, although I have bought around this price before. Probably a months div. income.

[BusyBumbleBee]

I too like RMDL. Seems that it has an inexhaustible supply of asset backed companies that want to borrow money at high rates and as interest rates go up generally these rates should rise which gives a chance for the dividend to rise as well - but we shall see. In the meanwhile it yields over 6%. My mistake - if it was one - was to buy on launch which meant that the dividend in year one was below my target.

I did not mean SREI. I meant SRE, Sirius Real Estate Limited. However, this pays its dividends in Euros and I don't want to complicate the portfolio with currency risk as well so am mulling it over.

You ask how often I trade. Well barely a month goes by without one back to back trade and there have been as many as ten trades in one month (once! when I was doing a major re balancing act and had some Special Divis to invest). The rule for doing a trade is that it must be income enhancing.

I will have a look at VSL and will try to keep you updated on progress. Kind regards - BBB

[formoverfunction]

I too like RMDL. Seems that it has an inexhaustible supply of asset backed companies that want to borrow money at high rates and as interest rates go up generally these rates should rise which gives a chance for the dividend to rise as well - but we shall see. In the meanwhile it yields over 6%. My mistake - if it was one - was to buy on launch which meant that the dividend in year one was below my target.

I did not mean SREI. I meant SRE, Sirius Real Estate Limited. However, this pays its dividends in Euros and I don't want to complicate the portfolio with currency risk as well so am mulling it over.

You ask how often I trade. Well barely a month goes by without one back to back trade and there have been as many as ten trades in one month (once! when I was doing a major re balancing act and had some Special Divis to invest). The rule for doing a trade is that it must be income enhancing.

I will have a look at VSL and will try to keep you updated on progress. Kind regards - BBB

Please do, yes I know SRE. Thanks for clearing that up. I like VSL, but it's certainly not for widows and orphans, but you do get that almost 9% yield and you'll see lots of regualar insider buying.

Good luck with your strategy. Thanks for the coment about RMDL.

I only invest dividend income, but I do that every month as I get something every month. Mainly IT's, but after I've finished my tops up, between 1 and 3 stocks usually, I put the remainder to work in ETF's either using trading credits or a £1.50 deal my broker has. I like to top-up my existing holdings first, I run broad portfolio, and increasingly the higher yielding stocks are my first choice. If I have at least £250 left over I top-up my ETF's. In the past that's been IUKP, at the moment IEUR, and going forward mayebe IAPD. I'd rather been invested than not, and there aren't many options for income over 5% (on very small amounts of cash), so with very tight spreads and almost nothing in dealing costs it's attractive. ETF's are my sweeper account. I usally only go in strong with ETF's when there's almost blood on the street, so most of the original holding date back to 08/09/10. I was buying IWRD & IUSA as many were getting out of the market! I aslo did very well with USA healthcare of around Obama Care and not so badly after the Brexit vote. I now have a core mainly of income style ETF's and global property. With 2 main indexes FTSE 100 & S&P500.

[BusyBumbleBee]

Interesting, formoverfunction

You say

there aren't many options for income over 5% (on very small amounts of cash)

That is precisely the reason why I tend to sell and buy at the same time so that spare cash gets invested alongside the proceeds of a sale thus really minimising costs. It helps if the companies are registered in the Channel Islands as there is no stamp duty.

I dipped into these yesterday as I had some spare cash in the pot and have been rewarded today with an SP uplift. However, as you know I don't like small trades as you lose so much in charges so sold some JLEN to make a worthwhile purchase. There were two other reasons for buying this one. It is registered in the channel Islands - so no stamp duty and it pays a dividend in October which was a blank month for me. The trade met all the criteria for this investment style including increasing the annual income from the pot (earnings enhancing as it were!).

The Interim Report published today was very upbeat and showed a NAV of 113.6pps (31 Dec 2017: 105.9pps) And a promise to pay a Full Year Dividend of 8.05 pence.

PS I don't understand ETFs so don't touch them - need to get myself up to speed here.

[formoverfunction]

Interesting, formoverfunction

You say

there aren't many options for income over 5% (on very small amounts of cash)

That is precisely the reason why I tend to sell and buy at the same time so that spare cash gets invested alongside the proceeds of a sale thus really minimising costs. It helps if the companies are registered in the Channel Islands as there is no stamp duty.

I dipped into these yesterday as I had some spare cash in the pot and have been rewarded today with an SP uplift. However, as you know I don't like small trades as you lose so much in charges so sold some JLEN to make a worthwhile purchase. There were two other reasons for buying this one. It is registered in the channel Islands - so no stamp duty and it pays a dividend in October which was a blank month for me. The trade met all the criteria for this investment style including increasing the annual income from the pot (earnings enhancing as it were!).

The Interim Report published today was very upbeat and showed a NAV of 113.6pps (31 Dec 2017: 105.9pps) And a promise to pay a Full Year Dividend of 8.05 pence.

PS I don't understand ETFs so don't touch them - need to get myself up to speed here.

"PS I don't understand ETFs so don't touch them - need to get myself up to speed here"

You don't pay stamp duty with ETF's, so you might like them. My broker charges a flat charge and then gives you trading credits to the same value and offers a very nice £1.50 trade service, so buying an ETF becomes quite cheap. I find after I've made monthly top-ups, usually around £2k per line, I always end up with "spare change' and if that's over £250 I buy the ETF's and hold them. So I expect this month I'll be adding £250 of IAPD for the sum of £1.50. Year to date, it's down nearly 12%, yields 5.45%. Over the last decade I've done that most months and created a resonable size holding of income and property focused ETF's.

I very rarely sell stock, unless I've always see that stock as a trading position, as I prefer just slowly building up the portfolio with considerd "adds".

Now that's all income derived from the portfolio it's slightly more risk focused. I bought some NRR for example this morning.

I expect this month to be buying NNR (which I did this morning), IAPD, and I have a short list for the last one. September is bumper month for dividends I find. I had HHI, UEM, HICL and STAN on my initial "add" list.

Our spare cash, the stuff we get from working (my partners still works), goes into start-ups for the SEIS/EIS relief and I'm exploring the potential of using WiseAlpha to get exposure to Senior Secured Debt, by making small regular investments.

I've been doing that for the last 10 years and I've found a way of investing that works for me. Mainly slowly with regular top-ups and very large bets when there's sign of stress., so there's often very long periods of pedestrian activity.