Investments and Returns - Example

jimjames

I received the annual report for one of my investments recently and with some comments here about investments being too risky or not understood thought it might help to give some numbers. These are for an investment trust - a company setup to invest in shares and the Investment Trust shares are themselves traded on the stock market so easy to see the value and buy/sell them. Some of these investment trusts have existed since 1868 so they have a very long term track record behind them.

Assume in 2011 you invested £10,000 in this investment trust. The price then was £6.60 per share so you'd have got 1515 shares you now own.

In 2011 you'd have received 28.75p income per share as dividends, that's a total of £435.56 and equivalent to 4.3% on your £10,000.

In 2012 the share price had dropped to 640p so your £10,000 would now have been worth £9696, a drop of £304 on your original investment. However if you'd held your nerve and not sold out you'd have received your annual dividends, this year of 29.75p per share, a total of £450.71 so now 4.5% of your £10,000.

In 2013 the share price had grown, this time to 741p so your shares would be worth £11,226. Yet again the dividends increased, this time to 30.75p per share, totalling £465.86.

Come 2014 and the share price had increased again to 779p making your 1515 shares now worth £11,801 and you receive dividends of 31.25p, now reaching £473.

Finally this year your dividends have increased to 32p giving a total income of £484.80 which is 4.8% of your £10k. The share price has dropped back a bit so it's now 705p meaning your investment is £10,680.

In total over 5 years you've received income of £2310.37, equivalent to 4.6% pa on your original £10,000.

In the last 5 years the stock markets have risen and fallen as you'll have seen on the news. Yet all the time you're receiving an income considerably above anything you get from a cash ISA and with no lock in. It's also completely tax free if held in a S&S ISA.

Hopefully this may make investments a little clearer and help reduce some of the misinformation about risks. Yes the price of shares does go up and down but if your main concern is income and you have no need to access the money then it could be worth investigation.

Smithy101

jimjames wrote: »

In total over 5 years you've received income of £2310.37, equivalent to 4.6% on your original £10,000.

Surely you mean you would have received 23.1% in income on your original investment.

But you've written a great post does indeed illustrate the value of stock market based investing.

jimjames

Smithy101 wrote: »

Surely you mean you would have received 23.1% in income on your original investment.

But you've written a great post does indeed illustrate the value of stock market based investing.

Apologies, now corrected. There should have been a "p.a." in there but yes you're correct it's 23% over the 5 years.

Smithy101

jimjames wrote: »

I received the annual report for one of my investments recently and with some comments here about investments being too risky or not understood thought it might help to give some numbers. These are for an investment trust - a company setup to invest in shares and the Investment Trust shares are themselves traded on the stock market so easy to see the value and buy/sell them. Some of these investment trusts have existed since 1868 so they have a very long term track record behind them.

I posted a link to your post on the Which IT forums because I think it's a good post. Some people on there have asked about it being placed there to.

I'll let you decide.......
http://forums.whichinvestmenttrust.com/t/handy-illustration-of-the-value-of-stock-market-investing/754/5

BLB53

This sounds like Murray Income Trust - if so, unfortunately one of my worst performing ITs over recent years.

Total return over past 5 yrs is 37% compared to City of London 75%, Edinburgh 102% and Finsbury G & Inc 120%. Dividend growth is very poor at just over 2% p.a. and the trust is now dipping into capital to maintain increases in its dividend - not a good story!

A recent summary analysis on the Motley Fool http://boards.fool.co.uk/mut-b8-yr-to-jun-2015-13270364.aspx

jimjames

BLB53 wrote: »

This sounds like Murray Income Trust - if so, unfortunately one of my worst performing ITs over recent years.

Well spotted! I didn't mention which trust to avoid clouding with performance. Maybe Murray income is more smoothed so less downs and less ups but as an example of what is possible even just for income is a good way to see I think.

Historically you had to put up with a lower initial income from shares because long term it would grow. Since 2008 that's been turned on its head and you'll get a vastly better income than cash albeit with risk to capital.

george4064

More applicable to me (and applicable to many other investors) and more interesting is if you did the same calculations but to include dividend reinvestment, theis would compound the income returns and therefore increase them along with any dividend per share growth.

jimjames

george4064 wrote: »

More applicable to me (and applicable to many other investors) and more interesting is if you did the same calculations but to include dividend reinvestment, theis would compound the income returns and therefore increase them along with any dividend per share growth.

Good idea, I'll redo as a reinvestment example

Smithy101 wrote: »

I posted a link to your post on the Which IT forums because I think it's a good post. Some people on there have asked about it being placed there to.

I'll let you decide.......
http://forums.whichinvestmenttrust.com/t/handy-illustration-of-the-value-of-stock-market-investing/754/5

I'll let them know but that's fine if it's of use. I've added it to my blog as well now
http://damn-lies-and-statistics.blogspot.co.uk/2015/10/investments-returns-real-life-example.html

jimjames

Assume in 2011 you invested £10,000 in this investment trust. The price then was £6.60 per share so you'd have got 1515 shares you now own.

In 2011 you'd have received 28.75p income per share as dividends, that's a total of £435.56 and equivalent to 4.3% on your £10,000 but rather than taking that income you reinvest it to buy more shares. At £6.60 each that's another 66 shares you can add to your holding bringing the total to 1581.

In 2012 the share price had dropped to 640p so your £10,000 would now have been worth £10118, an increase on your original investment as it now includes reinvested dividends. However if you'd held your nerve and not sold out you'd have received your annual dividends, this year of 29.75p per share now based on the 1581 shares, a total of £470.34 so now 4.7% of your original £10,000. Again you reinvest this and buy another 73 shares with the dividends so your total now is 1654 shares.

In 2013 the share price had grown, this time to 741p so your 1654 shares would be worth £12,256. Yet again the dividends increased, this time to 30.75p per share and with your new total of 1654 shares you get income of £508.60. Once more you reinvest and add another 68 shares to your holding so you have 1722 shares.

Come 2014 and the share price had increased again to 779p making your 1722 shares now worth £13,414 and you receive dividends of 31.25p on them, now giving £538.12 income. Once you reinvest the dividends you get another 69 shares to add, making a total of 1791.

Finally this year your dividends have increased to 32p giving a total income of £573.12 which is 5.7% of your original £10k. The share price has dropped back a bit so it's now 705p meaning your investment of 1791 shares is worth £12,626.

In total over 5 years by reinvesting rather than taking the income out you've ended with an investment worth £12,626 compared to £10,000 originally and are now receiving an income of 5.7% of your original £10,000 investment and have an additional 276 shares now producing an income. This is an example of the great benefit of compounding returns.

Bear in mind this isn't speculation or "what-if" scenarios. These are real numbers showing how one real investment has performed over the last 5 years, a time period with volatility and that some have said the markets are too high to invest in. Even if markets drop now they'd need to fall 26% to take you below your original investment and you'd still be receiving dividends equivalent to 5.7% of your initial investment.

[few assumptions made, some rounding in numbers and that shares are reinvested once at the same price point each year]

kangoora

Cheers for this. What I don't quite understand is what are the advantages of using Investment Trusts over, say, an Equity Income fund such as Woodford or Invesco Perp. Income.

I have some recollection of reading they are close-ended(?) and they keep a reserve plus they can borrow - but still not 100% sure what the benefit is for an investor compared to an equity income fund.

Also, am I right in assuming it's best to hold them in an ISA providing your annual investment is less than your ISA allowance

george4064

kangoora wrote: »

Cheers for this. What I don't quite understand is what are the advantages of using Investment Trusts over, say, an Equity Income fund such as Woodford or Invesco Perp. Income.

I have some recollection of reading they are close-ended(?) and they keep a reserve plus they can borrow - but still not 100% sure what the benefit is for an investor compared to an equity income fund.

Read here: http://www.whatinvestment.co.uk/investing-in-funds/investment-trusts/2116443/investment-trusts-versus-unit-trusts-the-differences.thtml

Personally I invest in investment trusts rather than Unit Trusts for a few reasons;

- They're cheaper (taking into account platform charges too)
- I prefer their closed-ended structure, its a purer way of investing for the manager than of a unit trust
- I like being able to physically see dividends being received and re-invested, compared to Accumulation founds where it all happens in the background
- They're more easily traded on the LSE, rather than daily priced