Ideas for your Income Portfolio

NedS

An update for 2022:

An update for a year in the life of an income investor. Sometimes going against the grain can work in your favour - the headline figure for the portfolio is up 6.76% (income reinvested) for the year whilst the FTSE All Share was broadly flat and and MSCI world Index fell around 8.9%. So my portfolio has done it's job in what has been a difficult year for many investors.

Some background: The plan was to construct an income portfolio to provide income in the bridging years between early retirement and DB/SPs kicking in, so as to not deplete capital during this time through drawdown. The goal was to provide sufficient income to full utilise my personal tax free allowance of £16760 (inc 25% tax free). I started constructing the portfolio in March 2020 and income for calendar year 2022 was £14400 or £1200/month. I am currently still working but close to retirement, so all income is currently reinvested. The portfolio has fulfilled it's requirements in this difficult year by providing the required income whilst at the same time protecting capital at a time when others have seen large falls.

The Portfolio: I have continued to build the portfolio during 2022, which is now nearly fully invested. Portfolio construction is based around 4 main areas: Equity Income, Infrastructure, Renewables and Alternatives, Property, and credit/debt.

CTY remains the largest holding in the portfolio and my core equity holding at 26.5% and has performed broadly in line with the portfolio at 8.5% for the year. I am seeing a 5.6% yield on average purchase price and am happy to add more on any price weakness next year to help keep the portfolio in balance. I also have a significant holdings in BATS which has performed strongly this year after a price re-rating early in the year. However, for every holding that performs well, there are others where my stock picking skills have been less successful such as DLG, down 13.5% on the year. I only have a small holding, but it serves to remind me why I'm not a professional fund manager! I exited GLO in May following a bid to buy the company at a decent profit. The other main equity holding is HFEL, which whilst has given me a positive return, is currently doing little more than repaying me my own capital as a dividend. I will continue to hold for now but am unsure if I will continue chasing the share price downward.

The Renewables allocation has had a mixed year. I built the holdings during price weakness in summer 2021 at yields of 6-7% and was happy with my holdings. The war in Ukraine and increases in power prices and inflation pushed up NAVs significantly in 2022 such that by September the portfolio overall was up by 12% on YTD, largely driven by gains in my renewables holdings. However, what goes up must come down and Liz Truss' mini-budget in September saw to that, bringing premiums back in line with NAVs or reducing share prices to a discount (an opportunity to top up holdings at attractive yields). This year I opened a position in GRID, exited a short while later taking a quick profit and then failed to take advantage of September's weakness to buy back in. I currently have a very small holding to keep an interest in any future share issues. The only other addition to the portfolio was DGI9, a digital infrastructure fund, whose share price was firstly depressed by rising interest rates and the mini-budget and then capitulated on news of the fund managers sudden resignation. The underlying holdings look solid and an opportunity to buy at a 20% discount to NAV and 7% yield seemed worth the risk, so some dividends were reinvested into DGI9 and a position opened. I plan to add more on any further price drops, but price does now seem to have stabilised.

2022 has been a horrible year for property and worse could still be to come. My two holdings CSH (social housing) and THRL (healthcare) are both down significantly wiping out a lot of the capital gains made from my renewables holdings. Rising interest rates has hit the sector particularly hard and many REITs are now trading on significant discounts. I guess now would be a great time to start building positions at good discounts and favourable yields, but I'm already at allocation. I topped up my holding in THRL during the September crisis and opened a position in Primary Health Properties (PHP) which owns and rents GP surgeries and other similar properties where rents are largely underwritten by NHS or government funding. PHP was a quality holding that had been on my watchlist for a long time, but were too pricey and the prospective yield too low for my liking, but the opportunity to add it to the portfolio on a 6% yield was too good to miss. Property now stands at 13.9% in the portfolio and I'm not looking to add more for now.

Finally we have the credit/debt markets. I'd reduced  then exited my previous holdings in later 2021 / early 2022 due to concerns over rising interest rates, and with hindsight this was the correct decision. I was waiting for an opportunity to open and build positions again, with a few funds on my watchlist holding predominantly short-dated and/or floating rate debt. There's nothing like a good old fashioned crisis to present a buying opportunity, and September's mini-budget came to the rescue and presented the opportunity to purchase increasing yields at discounted prices, so positions in TFIF and RECI at 7% and 9% respective yields, were added to the portfolio representing around 5% each.

Overall I am happy with the current portfolio. It's on a current forward yield of 6.43% and predicted to give £16884 of income based on currently stated target dividends. I hold around 4% cash waiting for the next opportunity/reinvestment. I am still reinvesting dividend income for now, but retirement is close.