Individual Shares - Review & New Strategy

I have been investing in equities for many years using mainly a combination of individual shares and investment trusts. Historically, one of the main reasons for this twin approach was to try to minimise costs. Unit trusts were more popular with small investors in the 1980s and 90s but usually more expensive than investment trusts.

For the past 7 years or so, since retiring, the aim of my investments has been to generate income and I have naturally gravitated towards building a sustainable higher yielding portfolio. In early 2013, I did a couple of guest posts for RIT “Investing for Income… Using Shares” and “…Using Investment Trusts“.

Shortly after this, I started this blog and I thought it could also be a useful exercise to track my income portfolios and have therefore monitored the progress of an individual shares portfolio and a separate investment trust portfolio.

Volatility

As some readers will know, one of the most difficult aspects for me personally, and maybe for other small investors, is the volatility of the price of individual shares. Much of the time I try to filter out these fluctuations but however much I do this, there’s no escape from the emotional rollercoaster of holding shares.

Of course, this is not so much of a problem when prices are generally rising, as they have been in recent months. The FTSE 100 broke through to its all time high of 7,020 last week.

When I was younger, working full time in my business and various other activities, my shares were probably much less of a focus. Now I am retired and writing my ebooks and blog, the investments are more upfront and dominant - perhaps more significantly, I depend on them for my income.

Another aspect of share price volatility is income yield. If the price goes up 30%, 40% or even 50% in a fairly short time frame, although I will get exactly the same dividend in my account, the yield will have dropped.

Take a couple of examples - I bought L&G around a year back for 205p and a yield of 4.5% - 9.3p per share. Today the sp is up to 295p - an increase of over 40%. After 12 months the dividend has been increased over 20% to 11.25p but the yield has fallen to 3.8%.

Likewise with easyJet, the share price has had a strong run over the past few months - up from around £12.50 to currently £18.50 in just 6 months - a rise of nearly 50%. Although the dividend was increased by 35% this year, the yield has fallen to less than 2.5%.

My instinct is in both cases to hold long term, but I am also aware not to become emotionally attached to any one individual holding - the dramatic rise in capital values offers opportunities to obtain a better income elsewhere.

Dividend Cuts

Share price volatility combined with a drop in income is a double whammy for this income investor who relies on investment income to pay the bills and put food on the table.

Over the past year, 3 of my holdings have announced the dreaded ‘C’ word. My two supermarket holdings Tesco and Sainsbury performed poorly in 2014. Tesco cut its interim dividend by 75% and later cancelled its full year dividend. Sainsbury announced that they would fix dividend cover at 2x earnings - forecast earnings for the coming year are 26p for this year and 22p for next year which implies a dividend of 13p and 11p compared to last years dividend of 17p.

More bad news on income recently when British Gas owner Centrica announced a 30% cut in dividend.

Although my shares portfolio is only around 40% of my equities holding - cuts to 3 of my shares out of 24 will have an impact on overall income for the next year or two which I will need to try and make up elsewhere.

A Quieter Life

By contrast, the volatility on my collective investment holdings is less of a rollercoaster and therefore, from an emotional aspect, I find them much easier to maintain some equilibrium. This is only to be expected given the number of holdings in each trust or fund.

In addition, whilst the income from my shares and trusts are very similar, the total return from my basket of investment trusts has outperformed my shares portfolio in each of the past 5 years. The percentages are fairly modest - last year for example the gap was only 0.2%, the previous year a little higher at 3.1%, 2012 was 2.5%.

These performance figures have been nagging away for the past year or so and have prompted me to seriously question whether the more profitable route over the longer term would be to switch the proceeds of the shares entirely to collectives.

As we have seen with management charges, the effect of an extra 2% or 3% compounded over several years can make quite a difference to your final outcome.

The total return on my equities portfolio for the past 5 yrs has been : 2010 10.4% (13.5%), 2011 1.1% (2.9%), 2012 11.5% (15.5%), 2013 13.9% (21.0%) and 2014 3.5% (1.8%)  [total returns for the Vanguard UK Equity Income fund shown in brackets/bold]. Combined 5 yr total for above returns are 40.4% (54.7%).

When I take a cold, hard look at the analysis and compare performance - firstly shares -v- investment trusts, and secondly my combined income equity -v- Vanguard fund, it is clear that something needs to change and hence a review of the past 5 years leads to the conclusion that a new approach is needed.

New Strategy

I have asked myself a couple of questions -

Does my shares portfolio give me an edge over the other possible strategy options, and

Is all the time and effort I put into researching and running such a portfolio worth it?

If I am honest, the answer to both has to be NO.

Having regard to all of the above, I think it is fairly clear that my individual shares have been the weakest link of my income strategy to-date. A 5 yr time frame comparing parallel portfolios is long enough to draw conclusions and I feel therefore the time has probably come to wind down the shares portfolio and redirect investment towards my investment trusts, ETFs and also to embrace the possibility of more low cost tracker funds such as my recent purchase of Vanguard UK Equity Income.

That’s not to say I will be selling all my shares - for the time being, I will maintain a slimmed down portfolio of what I regard as solid long term core holdings - the likes of Unilever, Next, Reckitt etc. I have however started to sell off some of my shares which have seen significant share price appreciation and which have as a result, become lower yielding holdings.

This process has started with portfolio sales of DS Smith @ 377p, Hargreaves Lansdowne @ 1175p and Sage Group @ 489p. The proceeds of these was £5,560 and from last month, Imperial Tobacco £1,897 have been reinvested into the Vanguard UK income fund.

I will update the individual shares portfolio in the next week or so.

As ever, slow & steady steps…..

Spring is here!