Retirement Investment Trust Income Portfolio - 12 Year Performance


I operate a number of different portfolios all of which are income oriented.  I accept that this strategy isn´t the most popular in investment circles and there are some very valid reasons for criticising it.  However whichever strategy one adopts - living off dividends or drawdown from capital there are compromises. If one has a total market or growth biased portfolio in retirement one is usually forced to invest 40% or so in low growth financial instruments such as bonds or cash in order to reduce the volatility of the portfolio so that erosion of capital is minimised when drawing down during market downturns.  This reduces the total return from the portfolio.

Investing for dividends restricts the pool of shares and geographic regions that are available. The SP500 outperforms the FTSE100 but has an average yield of less than 2% compared to the nearly 4.5% of the FTSE100.  Shares paying a reasonable level of dividends are generally mature, low growth companies or utilities so there are non of the often spectacular share price gains associated with the technology sector.  However, the managers of dividend companies strive to maintain their payouts even during times of market crisis - their share price may follow the market down by 30-50% but the fundamentals of the business haven´t changed so they can usually maintain or even increase their dividends when the market crashes.

A dividend portfolio strategy certainly isn´t for everyone and is probably not appropriate during the accumulation phase of retirement planning.  It´s certainly worth considering when the objective is income and not capital protection or reduction in volatility.  So in much the same way that many investors increase their bond holdings on the run up to retirement I reoriented my portfolio to be income generating.  I started this prior to the 2007/8 crash (the FTSE peaked in summer 2007 and bottomed out spring of 2009 nearly 50% down) so its interesting to review how things worked out over the last 12 years or so.  Here I´ll look solely at my Investment Trust portfolio and to simplify things I´m assuming I invested £10,000 across the 7 trusts at the end of 2006 - pretty much the top of the market.




So how did the dividend payouts fare?






Total dividend increased from £475 in 2007 (yield 4.2%) to £758 in 2018 (yield 4.5%).  The average annual increase was 4.3% compared to an annual RPI of 2.9%.  There were however 3 years when dividends reduced compare to the previous year with the worst decline being at the depth of the market crash in 2009 (-9.25).


Portfolio Value





The portfolio increased in value (without reinvestment of dividends) form £10,000 to £16,495 over the period to 30th December 2018, an annualised increase of 4.7% compared to 2.7% from the FTSE100 (capital only).


Conclusions

Overall I am pretty happy with the outcome from both income and capital especially as the period examined encompassed one of the worst market downturns we have ever experienced.  However it is disappointing that there were years when the dividend payouts declined to the portfolio did not achieve my objective in this respect.  The income stream could be smoothed out by building up a cash reserve by taking the year 1 dividend payout and thereafter only withdrawing the previous years´ dividends +3.75%.  Not a bad outcome but I situation I wished to avoid.

One of the main reasons to invest in Investment Trusts is to avoid the likelihood of a reduction in dividends as that they can call upon reserves to sustain the dividend payout (up to 15% of income may be put into reserves). Of course this is no free lunch as OEICs during the good years can pay out a higher level of dividends - so the ITs are just doing the job that we would do as individuals - sacrificing today´s spending for a rainy day.  

Would I do things differently based on these results?  Yes!  

Property: The worst performer in terms of dividend and capital was FandC UK Property.  Property is ofter viewed as a diversifier, uncorrelated with the stock market but in fact there is a high degree of correlation. Close ended Investment Trusts don´t suffer the problem that affects OEICs of the need to sell assets to meet redeptions but  high levels of IT gearing can put them in breach of loan covenants resulting in the need to sell properties to reduce borrowings.  

European Assets Trust:  In 2018 the trust decided to set dividends as a % of net asset value.  This resulted in a reduction in dividend and means that payouts will be as volatile as the stock market.  There are many other trusts that use redemptions of their assets to maintain dividend levels such as the JP Morgan Global Income and Growth trust.  I would prefer to avoid these trusts.

Too Much Correlation Between Trusts:  Perpetual Income and Growth and Edinburgh Investment Trust are highly correlated (0.9) - perhaps not surprising as they now share the same manager.  Performance and portfolios are very similar.

Lack of Global Diversification:  Limited exposure to North America and Emerging markets.


Actions

I believe that this Investment Trust portfolio has proved it´s worth but can be improved by eliminating property, ensuring trusts are not so correlated and achieving more geographic diversification.  In a future post I´ll discuss the revised portfolio. 





Post a comment

0 Comments