Ian Cowie: Personal Account

Despite volatile conditions, Britain’s 10 biggest businesses offer an average yield of 5%. Investors should consider taking the plunge.

Dreams of capital gains can disappear in a puff of smoke but the discipline of dividends or investing for income provides a degree of certainty in uncertain times. Despite the decade’s stock market shocks, several leading pooled funds have nearly doubled the annual income they pay to shareholders, according to exclusive research for The Sunday Times.

This shows how medium to long-term investors can obtain yields — or income expressed as a percentage of the price paid for a fund or share — that is far higher than the figures published for investors today. In other words, people planning to obtain pension income from their investments who say “I can’t afford to live on 4%” may reasonably expect rising yields from equities during the decades they are likely to spend in retirement.

For example, City of London, a £1.57bn UK equity income investment trust, is currently shown to be yielding 4.7%. However, anyone who invested £10,000 in these shares 10 years ago and reinvested dividends would now receive annual income of £843 net of basic rate tax, or a yield of 8.4%, according to Morningstar statistics via the Association of Investment Companies (AIC).

Similarly, Bankers, a £1bn global fund, offers a measly yield of 2.5% today but delivers annual income of £470 on £10,000 invested a decade ago. That’s an altogether more acceptable yield of 4.7%.

City and Bankers are particularly notable because both have succeeded in raising their dividends every year for more than half a century — for 52 and 51 years, respectively. So they paid shareholders to be patient despite a series of economic and political shocks that caused share prices to plunge, such as the oil crises of the 1970s, industrial unrest in the 1980s, Britain’s exit from the exchange rate mechanism — a forerunner of the euro — in the 1990s, and the global credit crisis that began more than a decade ago.

These historical facts may help to keep our current hopes and fears about Brexit in perspective. However, it is important to beware that dividends can be cut or cancelled without notice.

Against that backdrop, it is all the more remarkable that no fewer than 20 investment trusts have succeeded in raising income payments to shareholders every year for the past two decades. The AIC has dubbed them “dividend heroes” and the rest of the top 10 by longevity are: Alliance; Caledonia; BMO Global Smaller Companies; F&C Investment Trust; Brunner; JP Morgan Claverhouse; Murray Income; and Witan.

Unit trusts are another form of pooled fund that automatically diminishes risk by diversification, spreading investors’ money over dozens of underlying holdings to reduce exposure to any single company’s setbacks, such as dividend cuts or cancellation. Steve Wilson, a director of independent financial advisers Alan Steel Asset Management, favours Standard Life UK Equity Income Unconstrained, Troy Income and Neptune Income.

He said: “If investors think concerns about Brexit are overdone, the £1.4bn Standard Life fund, managed by Tom Moore, has a 4.5% dividend yield and looks well-suited, having historically done well in rising markets.

“Troy Income, a £2.6bn fund managed by Francis Brooke, is a more defensive option for investors concerned about the short to medium-term outlook. Neptune Income, managed by Robin Geffen, is smaller and more nimble at about £200m with a 4% yield and more diversification, including 10% of assets overseas.”  ,…..

……  How did Alan Dobie and Carl Stick, co-managers of Rathbone Income, keep distributions rising? Stick explained: “In addition to investing in high-yielding stocks, we also invest in those with capacity to grow their payouts.

“One example is Bunzl. While this global distribution firm currently offers a relatively miserly 2% prospective dividend yield, it has raised dividends by an average of 10% a year since 2004. That means investors who bought the stock back then, when it was yielding around 3%, are now receiving a yield of almost 11% on their original investment.”

Meanwhile, most media attention will continue to focus on share-price fluctuations because these are more dramatic and less difficult to report than gradually growing dividends. Markets have never been more volatile than they are now, with autopilot trading by tracker funds adding to uncertainty about the impact of Donald Trump’s next tweet or the Commons Brexit vote on Tuesday.

Fears about the economic outlook have caused fund and share prices to fall, pushing up yields — assuming dividends are maintained. As a result, Britain’s 10 biggest businesses are offering an average yield of about 5% to investors brave enough to buy today.

“Come on in, the water’s freezing” might not sound like much of an invitation to go swimming but income-seeking investors should be tempted. Regardless of whether the Brexit drama ends next week with a rousing rally, a sickening share price slump or just another postponement, I intend to take the plunge again soon.

If you ate out on Christmas Day, this investor thanks you

Never mind macro-economic fears or rising geopolitical tensions — sometimes it’s the little things that remind us life will go on regardless of the worst politicians can do. Well, probably.

Sparkling numbers from Greene King, Britain’s biggest pub company, caused its shares to fizz up by 5.5% on Tuesday, getting my 2018-19 individual savings account (Isa) off to an intoxicating start to the new year. Dry January be damned.

As reported here last April, I invested the full Isa allowance at £4.68 per share when they were priced at 6.7 times corporate earnings and yielding 7%. It would be fair to say this selection prompted quite a bit of tooth-sucking and worldly-wise warnings about the dangers of “value traps”, shares that look good value but turn out to be cheap for bad reasons. Nothing daunted, Greene King ran up to peak at £6.52 last June, before sobering analysis from a broker of the value-trap persuasion blew the froth off the top.  ……

……  Of course, one swallow does not a summer make — any more than one pint a wild night out makes — but I take courage from the fact that the shares remain reasonably priced at £5.82, or 8.8 times earnings, yielding 5.7%.

Better still, the Isa wrapper means there is no further tax to pay. Most importantly, I suspect that people will still be drinking beer long after I have gone, which makes this brewer — founded in 1799 — an ideal ”buy-and-hold” for my ”forever fund”.

Quote courtesy of The Sunday Times, Sunday 13 January 2019

Ian Cowie
The Sunday Times