Moving from growth to income/passive and defensive - appraisal please ?

frugal90

My portfolio has largely been growth oriented but now coming on 60 I want to start to re-structure it to income, with some passive and defensive. Thinking 60% income paying IT's or etc, 20 % vwrl or vls 100 or BlackRock consensus and 20% CGT IT.   Plan would be to take dividend income when stocks are high to replenish cash for retirement fun. Others to hedge inflation, with rebalance maybe once a year.   Looking for honest appraisal and suggestions for sustainable income of say 4% . How many IT's which ones or etf? Teachers pension covers basic needs, this is extras money for holidays etc. Pot is just over £400k along with my wife's holding 

JohnWinder

You can do some modelling at firecal.com.  From the history, 4%/year as spending was not sustainable past about 25 years; and the portfolio 'lasted longer' if it was 60% equity and 40% bonds unlike your 100% equity. But the all equity had better returns in many instances.

frugal90

Thanks for the link. Our plan would be to take dividends when stockmarket is high but re-invest when low. Keep 3 years cash . Our teachers pensions will cover living costs, the income from the dividends will fund adventures. 

Audaxer

frugal90 said:

Thanks for the link. Our plan would be to take dividends when stockmarket is high but re-invest when low. Keep 3 years cash . Our teachers pensions will cover living costs, the income from the dividends will fund adventures. 

That sounds okay, but if we have 3 years of a bear market and you reinvest the dividends and use you cash buffer instead, you will have a bigger pot if markets rise in year 4, but no cash buffer left. I think in that situation I would still take most of the dividends and top up with some of the cash buffer, rather than use it all up. It's either that or cut down on the fun adventures during bear years 

masonic

Agree, tightening your belt to exploit cheaper share prices does not seem to be the best prioritisation in your situation. It's unlikely reinvesting would make a significant difference, so it may be better to leave markets to do what they do and enjoy life.

NedS

I've taken a similar approach and have detailed my income portfolio here:

https://forums.moneysavingexpert.com/discussion/6260952/ideas-for-your-income-portfolio#latest

I'm currently seeing a forward yield of ~6% (6.5% on book cost) and the portfolio has held up rather well in the first 3 weeks of this year, up 2.5% where a FTSE all world tracker is down 4.4% and tech heavy growth portfolios much more.

A sustainable yield of 4% should be very achievable. I've targeted a higher yield of 5% plus, but if you intend on managing withdraws and reinvesting surplus income, that will help grow future dividends to counter inflation and sustaining your target. At the moment I am reinvesting all dividend income and still adding contributions for a few more years before retirement, but the income portfolio is already yielding the income I will need from it once I retire.

The renewables section of my portfolio have been acting like bonds, damping volatility and yielding 6-7% dividends. Whether they can grow those dividends in line with inflation will remain key. I try to look for companies whose income is linked to inflation.

It's taken me 18 months to build my portfolio, and key to that has been waiting for good opportunities to buy - not so great buying a 5% yielding stock that then suffers a 15% drop in share price, so price is important. There are always opportunities for those with patience. The other main challenge has been achieving sufficient diversification when you are selecting from a reduced investment pool.

To be honest, I have not found much enthusiasm for the income approach here (where a total returns approach is preferred), but the AIC website has been a great resource and the Lemon Fool forum has a more diverse set of categories covering all investment styles

https://www.theaic.co.uk/aic/find-compare-investment-companies?sortid=Name&desc=false

https://www.lemonfool.co.uk/index.php

Audaxer

NedS said:

It's taken me 18 months to build my portfolio, and key to that has been waiting for good opportunities to buy - not so great buying a 5% yielding stock that then suffers a 15% drop in share price, so price is important. There are always opportunities for those with patience. 

It's okay being patient, but when do you decide to buy - do you only buy after a certain percentage fall from a previous high?

I also like renewables for income, and have been considering buying more renewables ITs, but I'm a bit concerned at buying at high premiums, although as some of the premiums are consistently high, I'm not sure if it should be a concern if everything else looks good about them?

NedS

Audaxer said:

It's okay being patient, but when do you decide to buy - do you only buy after a certain percentage fall from a previous high?

A number of factors, depending upon whether it's a fund/IT or a single company share. I will research the share/IT and set a price I feel comfortable building a position at. If it reaches that price, great - if not, other opportunities come along. I always have a watch list and am always refining and updating it. I don't always get it right - big regrets are missing out on LGEN and NG as I was too pessimistic at the time and now they've risen well, but there are always more opportunities.

I'm just trying to minimise further downside risk as my number one rule is not to lose capital. I bought BATS in Feb 2021 @2539p and topped up again in Oct 2021 at around the same price. At the time I calculated fair value to be around 3300p based on risk free rate and thought the risk of the share price dropping significantly below 2500p was far outweighed by the potential for it to rerate towards fair value, and I'm happy to take the 8.5% dividend whilst waiting. As it has happened, I was right on this occasion and have seen a ~28% return in just under a year. I'm now considering trimming/selling my holding as I view the risk of downside to be far greater and I'm pretty sure BATS will be cheaper at some point in the next 12 months than it is now (although maybe not at the 2500p levels again).

Audaxer said:

I also like renewables for income, and have been considering buying more renewables ITs, but I'm a bit concerned at buying at high premiums, although as some of the premiums are consistently high, I'm not sure if it should be a concern if everything else looks good about them?

Yes, some do trade on hefty premiums to NAV which brings with it added risks that the premium could narrow.

Some of the solar funds are trading closer to NAV (FSFL, NESF, BSIF) and have also seen large price drops in the last 18 months giving potentially attractive entry points.

The other thing these renewables trusts often do is have regular share offers to raise further funds, at a price far closer to their NAV if they are trading on a premium. UKW was a recent example, where it was trading at ~142p, announced a share offer at 132p, the share price dropped, discount to NAV narrowed, topped up at the cheaper price, and within a month the premium to NAV has widened again and we are back at 142p. That's just easy, relatively risk free money, all the time underpinned by a great dividend.

JLEN have an open offer at the moment at 101p, which again looks like an attractive opportunity to increase my holding so I've elected to top up.

I'd like to hold more energy storage (GSF, GRID) but the premiums are too hefty for me at present, so I'm waiting for a better opportunity to add more on these. I can sell overweight positions at the time or reinvest dividends to take advantage of any opportunities.

These aren't the most exciting things to hold, but they have proved a great dampener to volatility and have paid a reliable dividend yield. The opportunity to trade changes in the premium to NAV is a bonus. How well they can perform in a high inflationary environment is yet to be seen.