Four per cent. It’s the holy grail for many investors. How do they generate a 4 per cent income in perpetuity without risking capital? Answer, they can’t. Not in these low-return times. Risk-free returns are running at less than 2 per cent. Anyone who claims that more income than that can be squeezed out without taking some risk is not to be trusted.
Financial advisers sometimes come up with elaborate mechanisms to help their clients achieve 4 per cent while trying to minimise risk. Usually it involves eating into capital, in the hope that rising asset prices will eventually more than compensate.
Perhaps an easier way is simply to invest in a range of well diversified investment trusts . . . and wait a few years. For savers in their 40s, 50s and 60s not in any hurry for immediate high income but expecting greater needs later, it makes great sense.
Master Adviser, a London firm of financial advisers, has crunched the numbers going back 50 years, looking at how long it takes before investors in mainstream investment trusts can have the 4 per cent income goal in the bag — permanently.
It looked at 29 well-established, mainstream trusts invested in global and UK equities and examined how long before the dividend as a percentage of the investor’s “in price” broke through 4 per cent and never again fell below it. The quickest was Perpetual Income and Growth, which took only six years. The slowest was Foreign & Colonial, which took 18 years.
Many investment trusts are cautious beasts that pay relatively low dividends and keep cash tucked away for a rainy day. Their initial yields can be disappointing but they make a virtue of trying never to cut their dividends. City of London is this month expected to hold or lift its payout for the 52nd successive year; Bankers Investment Trust and Alliance Trust are on 51 years, Brunner on 46 years and Witan 43.
There are no guarantees. Clearly trusts would have to reduce their payouts if there were big dividend cuts by a large number of the companies they invest in. But the mainstream trusts tend to diversify by industry (and the global ones by country) and typically hold between 50 and 200 individual stocks.
Moreover, they only have to pay out 85 per cent of their income, and can in good years keep spare cash in reserves — to tide them over in thinner years. Murray International could, in theory, suffer a complete dividend famine from its investments and still maintain its dividend for a year, according to Doug Brodie, managing director of Master Adviser.
He argues that traditional mainstream investment trusts are easily the simplest solution for income seekers. “They are the Russian pencil solution compared to Nasa’s $3 million space pen.”
His methodology is not perfect. There is hindsight bias to this kind of approach, while the choice of a start date just before the era of high inflation helped boost nominal returns. But patience and compound interest remain potent forces. Since 1986, inflation has run at an average of 2.9 per cent a year, while dividend income growth from these trusts has averaged 5.4 per cent a year.
There is usually a trade-off between income and income growth. Low yielders today will tend to grow their dividends faster. High yielders today tend to be more tortoise-like. Global trusts tend to be lower yielders than UK trusts because they invest in companies with faster growth prospects — with progress more likely in share price growth than income.
The writer holds shares in Lowland, Alliance Trust and Foreign & Colonial.
ADVICE Buy, hold and be patient
WHY A reliable, rising source of income over time
Nichols
Not so long ago, Nichols was trumpeting how its growing international business was offsetting flagging sales in the UK (Dominic Walsh writes). Vimto, its main brand, is sold in 85 countries, being particularly popular in the Middle East, where it has become a traditional way of breaking the Ramadan fast, and Africa.
More recently, things have switched around. While sales in the UK are growing strongly, the conflict in Yemen, where a Vimto factory is located, has severely hindered shipments of concentrate to the region, while the shine has come off trading in Africa, although the company insists this is a timing issue.
In the first-half results released yesterday, Nichols lifted UK sales by 13.2 per cent to £53.8 million on the back of a 9 per cent jump for Vimto, representing a significant outperformance against a soft drinks market up by 3.7 per cent by value, according to Nielsen. This performance, nudging the shares 2½p lower to £14.85, was helped by listings in Asda and Morrisons for its new Vimto Remix flavours: watermelon, strawberry and peach.
Vimto’s reformulation of its carbonated version to take it beyond the scope of the sugar tax had not had a single complaint from customers, Marnie Millard, chief executive, claimed.
The squash version of the 110-year-old purple fruit drink, its bestselling variant, was already below the sugar tax level as are all of its drinks, which include the Feel Good, Levi Roots and Sunkist brands, the company said.
International sales fell by 29.9 per cent to £11.2 million, although this was in line with expectations. Ms Millard said she was confident that full-year sales in Africa, which accounts for 60 per cent of international revenue, would grow.
Its first half revenues rose 2.3 per cent to £65 million. Pre-tax profits were up 2.7 per cent to £13.1 million, while underlying earnings increased by 6.2 per cent to £14 million, and the group said that it was confident of meeting full-year earnings forecasts. As a result, it lifted the interim dividend by 11.9 per cent to 11.3p per share and with £37 million of cash on the balance sheet, it is seeking further acquisitions.
ADVICE Hold
WHY UK trading is strong and wider issues should improve
