My Investing Experiments

I, like many people, have been disappointed with the low level returns from investing in cash ISA's for the last few years. Back in March I wrote a post on taking some of my money from my 'Cash ISA' over to my 'Stocks and Shares ISA' in order to maximise my allowance for the 13/14 financial year and make my money work harder for me. I transferred over £4,745 and ended up using £4,742.04 of it by purchasing shares in Centrica, BP, Pearson, and Unilever. 

Was it a good move? Did I make more/less income? Is the value worth more/less now?

At the time of transfer, I had just over £11,500 in cash. I was (and still am) earning 1.49% interest, which was providing me £14.28 in interest each month. If I had kept that money in the account, for the last six months, I would earned approx £85.94.

Since the transfer, I've earned £151.56 in dividends from those companies in the same time period. If I divide that figure by six, it equates to £25.26 per month. Which is a 76% increase in incomeI reinvested the income into new investments in my portfolio. (I haven't tracked the performance of these investments)

Overall the investments have gone up in value during the time frame. The prices below are accurate as of Friday 26th September 2014. 

Cost Value Difference
BP £1,182.40 £1,088.84 -£93.56
Centrica £1,197.98 £1,102.49 -£95.49
Pearson £1,185.24 £1,442.61 £257.37
Unilever £1,176.42 £1,255.87 £79.45
TOTAL £4,742.04 £4,889.81 £147.77

I'm pleased with this outcome, but not completely surprised. I wasn't sure if the value would go up or down. Six months is a short time in the stock market for growth (for me). I recently explained in my Investment Strategy post that I'm an Income Investor, so I'm not concerned with the short to mid term stock value fluctuations of the market either. I was confident that my income would increase and I'm glad to see a respectable one too. I believe I'll see the gap between the two increase further over time.

So what next? 

I watched a very interesting program recently on BBC called Traders: Millions By The Minute. A personal favourite Blog of mine, 'Under The Money Tree', wrote a nice post on the 2 part program - Check it out here. I agree with his views, and I certainly wouldn't be interested in Day Trading, I think it's far too risky and stressful. It did open my eyes up to Growth Investing though. After writing the post on Investment Strategy it made me think about how I could possibly use a growth strategy to develop more capital to invest in Dividend Growth Stock or other Income streams. 

This led me back to my Cash ISA pot. At this point, it has just under £7,000 in it. My monthly interest is £8.70. Do I really need £7,000 sat in an account doing very little? After much deliberation, I decided 'No' I don't. 

The money was initially intended to be invested in a Buy-to-Let Property. I changed my strategy for a combination of reasons:

I won't completely write off the prospect of Property Investing, but for now, I'm happy to continue putting money into shares, bonds and funds.  

NEW Experiment 

Once I had made my decision, I transferred £5,000 from my cash ISA, leaving just under £2,000, to start a new Investing account with iWeb, which is outside an ISA*. I considered investing in a SIPP, but I want to be able to take the money out when I make a profit, which could be in months or the next few years. On a side note, I may still open a SIPP at some point in the future. 

*I'm a low level tax payer, so I only pay tax on Capital Gains over £11,000 in a year. This amount would cover my annual expenses so I'm not concerned about it currently. I actually look forward to the time when it might become a problem for me. 

I've been very impressed with iWeb so far. They charge £25 to open an account, and then there aren't any other annual or monthly account charges. They only charge £5 a trade (plus stamp duty), so they are one of the lowest priced brokers out there. I thought the quality is likely to be poor, and although I think their website isn't particularly modern looking, it's functionality is right up there with other websites and trading platforms I've used before. 

I took some time researching companies that interest me, and show potential to grow. I wanted to see a low PEG rating (0.7 and below). A company with an increasing EPS over the last 3-5 years. I also wanted to read good reports on the future of the business. I looked at other companies in the sector to compare stats against, and I wanted to have a mix of companies that pay high dividends, to companies that don't pay any at all. After a couple of days I purchased shares in 5 companies. Each one cost approx £995 including charges. This allowed me to spread the risk of my investments, whilst keeping Broker fees below 1%, which is an acceptable amount for me. 

Here are the 5 companies I purchased:

  1. Barrett Developments (BDEV)
  2. Berkeley Group Holdings (BKG)
  3. Esure Group (ESUR)
  4. Lloyds Banking Group (LLOY)
  5. Taylor Wimpey (TW.)

Barrett's yield is quite modest at 2.5%, but it's growth potential is large. It had a PEG of 0.3 for 2013, and it's currently at 0.1 for 2014. The yield is expected to grow, as is their share price, which I found reassuring. 

Barrett Development - The Time's Tempus:
The company announced that it had hit a couple of targets earlier than expected, with return-on-capital nearing 20% for the year to the end of June, versus 11.5% a year ago, and its debt having been eliminated. The firm also jacked up its target for returns going forward. Given the low prices at which it purchased land before the downturn and the smaller sites it is now working on that look entirely doable. Hence, it will now make extra payments to shareholders sooner than expected. Over the next three years a total of £950m will be funnelled back to shareholders, equivalent to about 96p a share or a dividend yield over the period well above 6%. Worth buying for that yield alone, says The Times’s Tempus.

There's a blend of sector, company size and risk in this experiment. Berkeley and Esure have dividends of 7.5% and 7.2% respectfully. This is a percentage I'm usually uncomfortable with. However, both companies have strong potential to continuing growing over the next couple of years which is likely to force the yield down to figure that can be consistently maintained. 
Berkeley's PEG is 0.3, their EPS has increased significantly over the last 5 years. 

Berkely Group - The Time's Tempus:
Berkeley Group is in a class of its own and yet its stock has underperformed that of other housebuilders such as Persimmon, Bellway and Barratt Developments. Arguably, that is because it has the greatest exposure of all to the London market. Nevertheless, and as Shore Capital analyst Robin Hardy has pointed out, historically house price surveys have not had much of an impact on the housebuilders. As well, forecasting house prices is notoriously inaccurate. Furthermore, the builder has decided to maintain the value of its land bank at £3bn while deciding to return £1.7bn to its shareholders up to 2021 and has no gearing. The firm is a developer of huge trophy projects and as long as it can find the kinds of sites which it needs, which seems reasonable, then the shares are still attractive - offering as they do a dividend yield well in excess of 6%. Buy.

Esure's PEG is 0.2 for the close of 2013, and is Berenberg's top pick from the UK's motor insurance sector.  

Esure, famous for the Sheilas' Wheels brand, is now Berenberg's "preferred play" in the sector, as it upgraded the stock from 'hold' to 'buy'. The target for the shares was raised from 267p to 286p.

Lloyds Bank haven't paid dividends in 5 years, but they're close to paying them out to shareholders once again. It's likely to yield a small dividend initially (below 2%), but for 2015 brokers are forecasting yields of over 4%. This should be in line with it's bottom line, which is predicted to increase by 7% in 2015. The increase in profits and return to dividend payments is a sign that the company is moving in the right direction. It has great potential to increase it's income (starting from 0 isn't hard!) and share price over the next couple of years. 

Lloyds Bank: Half year results:
The increasing likelihood of the return to a dividend payment later in the year may also tempt income seeking investors into the stock in anticipation, whilst the bank's outlook for the remainder of the year was extremely upbeat. Some pressure on the share price over the last three months, during which time it has fallen 9%, masks a rather better return over the last year - Lloyds has risen 13%, as compared to a 2% hike for the wider FTSE100. These numbers should provide comfort in the ongoing strength of the Lloyds recovery, with the current market consensus opinion of the shares as a buy likely to remain undisturbed.

Taylor Wimpey had a PEG of 0.1 for 2012, and 0.3 for 2013. Their dividends have been under 1% yield over the last 3 years as they plan on reinvesting and growing their company. TW's profits after tax have grown significantly over the last 5 years, and so has their share price. It has dropped in the last 6 months, and I believe it now offers an opportunity to benefit from some growth over the next 2-5 years.

Taylor Wimpey: Half year results: 
News from the housebuilder generally pleased investors, with the share price up over 0.5% in late morning UK stockmarket trading. The Chief Executive noted that "Our strategy, coupled with the improvements in the UK housing market, has enabled us to significantly improve the quality of our financial performance, whilst delivering sustainable growth of much needed new homes." Group operating profit increased by 45.1% to £192.1 million, whilst completed homes across the UK, rose by 11% to 5,766, with a 10% increase in total average selling price to £206,000. The Chief Executive also went on to note that "In early July we began our cash return to shareholders, a key part of our active management of the cycle, and with confidence in the underlying strength and future performance of the business, we are pleased to announce that we now plan to increase our July 2015 payment." In all, analyst consensus opinion currently points towards a strong buy.

That's it, £5,000 in five promising companies which will provide varying degrees of income and hopefully some profit from growth for me to use towards investing in my Dividend Growth Stock. I plan on 'reviewing' my stock once it's share price is 20% higher than what I bought it for. If there seems to be more growth to come, I may hang onto it for longer, but if the reports and financial figures suggest it's running out of steam I may cash in. I don't plan on selling a stock, but if the share price drops below 7-8% of what I paid for it, and there is another attractive company at a good price, I will consider it.

I will report back to you on how they're doing in 6-12 months time, or sooner if I take action. I hope I'll have another positive outcome to share.

Thank you for reading!

What are your thoughts on my experiment? Am I crazy? Are these good investments in your opinion? Have you tried a new type of investing?

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