Income Investor - Just Starting Out

mbbetter

Hi all,

This is probably a bit more of a rambling post rather than any sort of question or great illumination. Having dabbled with a bit of share [STRIKE]gambling[/STRIKE] dealing in 2007 at very low stakes, trying to day/week trade for a profit – I decided it wasn’t for me (because I didn't really understand it) and pulled out. Back then I didn’t have much capital, had just bought a house and had no appetite for risk.

Fast forward to today and I’m in a very different place and state of mind.

Having discovered the notion of “income investing” I’m looking to get into individual shares or EFT’s (not quite sure what these are yet) that may pay dividends. I’m will look to invest around £100 a month into the stock market. I rekon I have around another 2-3months of research to undertake before I go ahead with this.

On the research list for me:

· It appears ISA Self Select Shares are the way to go forwards for tax protection (I think on dividends) and capital gains.
· I’m looking to invest regular and often and timing isn’t that important. A product like Halifax regular investor may be the way to go.
· Can dividends be paid out as cash or invested back as stock, how would that sit with my philosophy.
· Is £100 stake a viable amount to get in on the action, given fees and other costs.
· Learn and understand ex-dividend date, payout ratios etc.
· Are there products that help spread the risk (at lower income return) than individual stocks.


My overall philosophy is:

· Have no real plan for capital gains – if that happens great, but a real focus on income.
· For each £100 is invested see it as gone from the net worth just concentrate on the income.
· All income to be re-invested into income generation at this stage.
· Avoid tax (higher rate) and fees wherever possible.
· This should be a drip feed approach and no targets, but at least aim for income growth YoY

Is anyone else an income investor – are there any resources I can look into?

Cheers!

p.s

For some reason I’m really digging Vodafone as the company to first dip into this.

coastline

The Halifax website should be able to tell you all you need to know about its regular saver account...I think you can invest as little as £50 per purchase maybe even less...all they do is set a date in the month for this process..
As far as I'm aware you choose the share to purchase and simply set the amount of cash to deal on that given day in the month...I don't think you need to invest every month..just when it suits you..
Not sure why you're investing for dividends when most pay out less than 5% per year...and unless you're investing thousands of pounds the payout will only be pocket money...thats 50 pounds on £1,000 worth of shares..if lucky..
I'd forget ETF's until you're more familiar with markets...they aren't that straight forward..

Linton

I have an income portfolio that currently generates about 10% of my annual cash needs. I am less convinced about the benefits of using an income portfolio to achieve capital growth, but if that's what you want to do....

Generally £100 isnt enough to buy individual shares as there are charges of around £10 for a transaction. However the Halifax and iii regular investment schemes are designed for people in your position and are fine for buying the popular FTSE shares, which is what you will be largely or entirely investing in.

You need to work within an ISA, partially because of the tax situation though as a small investor tax wont be an issue unless you are a higher rate tax payer. However the main reason for using an ISA is that you dont need to keep detailed records for your tax returns.

Dividends will normally be paid as cash into your ISA. You could reinvest them within the same share but I guess it would be less hassle to simply include them in the monthly share purchase.

You will need to identify the higher dividend paying shares and also be able to check that current % dividends arent high simply because the company is in difficulties and the share price has fallen badly. www.digitallook.com has a share screener and detailed company information that should help. There are other sources of info - www.advfn.com has a lot of company data. www.motleyfool.co.uk has an active forum (board) devoted to their flavour of income investing HYP - High Yield Portfolio. Somewhere there is a regularly published spreadsheet with yield data for all FTSE350 shares but I cant find it at the moment.

If you want income from assets other than shares, the best bet are perhaps corporate bond funds. However the higher the return, the more likely the fund price is to follow equity prices as high returns may depend on riskier companies which have a higher probability of going bust in the bad times.

In my view Vodaphone is certainly a must for any income investor - high dividend, solid cash generating company.

Linton

coastline wrote: »

The Halifax website should be able to tell you all you need to know about its regular saver account...I think you can invest as little as £50 per purchase maybe even less...all they do is set a date in the month for this process..
As far as I'm aware you choose the share to purchase and simply set the amount of cash to deal on that given day in the month...I don't think you need to invest every month..just when it suits you..
Not sure why you're investing for dividends when most pay out less than 5% per year...and unless you're investing thousands of pounds the payout will only be pocket money...thats 50 pounds on £1,000 worth of shares..if lucky..
I'd forget ETF's until you're more familiar with markets...they aren't that straight forward..

There are quite a few solid companies paying more than 5% annually: Various insurance companies at around 8.5%, BAE 6.5%, National Grid 5.5% for a starter. Certainly enough to comprise a fairly diversified portfolio. 5% tax free (dividends are tax free for standard rate tax payers) is a pretty good return compared with bank deposits. Obviously shares are rather more risky, but dividends paid are much less variable than capital values.

Personally I would only use an income portfolio for income but there is evidence that focusing on dividend paying shares is a reasonable investment strategy.

mbbetter

Thank you very much for taking the time to provide the advice this is very useful. There are also some nice resources there – appreciated.

It seems I have a lot to learn about investing in general.

I am a higher rate tax payer, so an ISA is the way to go for me. I agree that in the grand scheme of things 5% (if I’m lucky) is pretty poor, but I would take that right now (tax free). I may well change my view in a couple of years, but if this is a way of getting £100 a month into a tax free wrapper at 3+% then I’m ok with that.

Out of interest, I’m assuming that that the share price will often reflect at what point the dividend pay payout is. Presumably one can’t just buy Vodafone shares 2 months before dividend pay out, then cash in once the dividend has been paid – to then invest elsewhere.

Linton

mbbetter wrote: »

....

Out of interest, I’m assuming that that the share price will often reflect at what point the dividend pay payout is. Presumably one can’t just buy Vodafone shares 2 months before dividend pay out, then cash in once the dividend has been paid – to then invest elsewhere.

Yes, generally share prices rise before a payout and drop afterwards. But since dividends are often paid twice or four times a year the effect on share price isnt much more than the daily variability.

BLB53

If you are looking for income, either build up a diverse portfolio of higher yielding shares - maybe 15 to 20 and reinvest the dividends to turbocharge the returns.

Alternatively, buy a few investment trusts from the income & growth sector (see trustnet) eg City of London, Murray International etc.

Last month I downloaded a really good ebook recommended by Monevator which has a step by step guide to generating income - 'Slow & Steady Steps...' by John Hulton.

Of course you could do both shares and ITs. If you are dripping regular money in over a long period I think this is probably the way to get rich slowly.

Good luck.

cheerfulcat

Linton writes

Somewhere there is a regularly published spreadsheet with yield data for all FTSE350 shares but I cant find it at the moment.

http://boards.fool.co.uk/summary-of-spreadsheet-based-financial-tools-12436342.aspx has a list of spreadsheets.

ETA - the HYP board is here - http://boards.fool.co.uk/high-yield-hyp-practical-51676.aspx?mid=12535846

mbbetter

Thanks again - much appreciated.
Income investments are new to me, so very good to read up. I guess looking at 5% isn't really an income - its just keeping up with inflation. But the point for me is to see regular returns.

Also I love a good spreadsheet so will go have a play. I'll look out for the ebook mentioned - may try to find the same info for free if I can.

As coastline points out, I'm playing with "pocket money" returns at this stage, but I have a get rich slowly philosophy which works for me. I'm looking to start with £100 pm and look to increase that as momentum rolls.

(putting inflation aside for a second & the fact that I said no targets) My shortish term aim is to generate enough income to pay for the yearly running of the house (approx £3000 - tax, utilities, maintenance).

I've only posted a couple of times at MSE on the topics of investments, isa's and pensions - investing is intimidating but people here seem a really friendly bunch May take a look at getting involved at Motley Fool but maybe in a few years!...

Thanks again all

PS - quick edit HYP just sounds a bit of a dodgy acronym to me. I understand that what you are pointing to on Motley fool is very different, but just sounds like a HYIP Ponzi scheme http://en.wikipedia.org/wiki/High-yield_investment_program. Completely different I appreciate, but just the acronym puts me off!

cheerfulcat

Hi, mbbetter,

The folks at TMF are just as friendly! Here's another board that might interest you - Investing for income http://boards.fool.co.uk/investing-for-income-51637.aspx?mid=12533443.

BLB53 mentions investment trusts - I think that's probably your best option with smaller amounts to invest. Many of the income ITs are similar to HYPs.
You might like to have a look at the Association of Investment Companies
(AIC) website for more info - http://theaic.co.uk/.

BLB53

I guess looking at 5% isn't really an income - its just keeping up with inflation.

Bear in mind that the 5% is a starting yield. Dividends on equities tend to increase at a faster rate than inflation - typically around 8% pa on average - so after around 10 years the yield will double. Therefore the return on the original capital will be 10%.