"Every cloud has a silver lining."
This is a common phrase that you'll hear from time to time. The message is easy to grasp - Look for the positive within every situation. Living by it is a different proposition. We're faced with daily challenges and intermittent crises that we must overcome as humans. Getting past these obstacles may be the goal of many, but this saying suggests that we could find positive outcomes in all situations.
I might not always 'think' to look for the positives in all areas, but I do my best. It's a great saying and I believe the world would be a happier place if we tried to find that silver lining more regularly.
I recently found a positive outcome to a gloomy scenario.....
The fall of Tesco
As a shareholder of Tesco, I was disappointed to hear that they are going to be slashing their dividend payments. I'm comfortable with a drop in share price, but I'm trying to invest in companies that increase their dividend payments year after year. The announcement has left me in a difficult position as I made my investment in April this year. If I sell them now, I will lose a chunk of money. If I keep my investment, I could have my money tied into a company with little return on investment. So what am I to do?
I made the decision to sit tight and wait for their dividend announcement. If the company are looking to progressively increase their dividend from year to year after their cut, I'm likely to keep with them. Further cuts may force my hand.
The 'silver lining' appeared once I decided to investigate my ROI thus far with Tesco. As it turns out, I've already received £36.87 from my investment, which works out at a 3.33% yield. I was surprised and pleased with this outcome. They're due to pay their next dividend in December 2014, even if the amount is much lower than initially intended, it will still increase my total cash received and overall yield.
These numbers peaked my curiosity to how my other investments were doing. How would Tesco compare to GlaxoSmithKline (GSK), and Catlin etc?
Calculating yield received
I added all of the contributions (£) I had received so far from each company. I then worked out the percentage yield for all of them. For every holding I now had; a year to date total in Pounds Sterling received, and a percentage yield to cost.
To get the percentage yield to cost, I added all of the contributions together to get a total amount received by each company. I divided the income I received from all of these investments by the cost of the investment itself, and then multiplied the number by 100 to get a percentage. Simples!
I had quite a range of yields, and it became clear that I wasn't measuring them on an equal field. For example, I invested in GSK in November 2013. I couldn't make a like-for-like comparison on the income I had received from GSK to Catlin (which I purchased in August 2014), as GSK had more time to bring income in for me. I decided to run the numbers for the whole of 2015 for all of my investments so far. I don't know all of the future dividend payments for my companies. In that situation, I used the same figure they paid me the previous year. If I wanted to spend more time on it, I could have averaged out the percentage growth of the dividend from each individual company over a five year period and add that on top of what I received this year. For simplicity I went with the quicker option.
Once I had calculated all of the percentage yield 'estimates', I took a step back and reviewed them all. The results were fascinating!
My average yield for dividend producing stock is 4.84%. My highest yield was 5.94% (Catlin Group) and the lowest was 3.82% (Unilever). I wasn't expecting my average to be as high as it was.
One of the surprise packages was the Income Bond. I started investing in it at the end of 2013. I only invested £50 per month for four months, and decided to cease the regular payments to allow all of my available cash to go towards Dividend paying shares. The 'Income details' on the Bond are variable and not guaranteed, which I'm not a fan of. I'd prefer to know what I'm getting. I also prefer Dividend payments as they show previous payments whilst Bond funds don't. The proposed yield would change every so often, so I wasn't sure what I would end up receiving. This compounded my decision to stop investing in it. After forecasting what I'm likely to receive in 2015, based on the performance of 2014, the Bond totaled a yield of 5.86%! A very satisfying result indeed. This was marginally behind Catlin Group in second position.
I've found there are some advantages to investing in Bond and Funds over Shares. The first one being you can make minimal regular payments on a monthly basis. The Income Bond I have allows contributions as low as £25 per month. This can allow people with less disposable income to invest on a regular basis, rather than waiting for their savings to accumulate over a lengthy period. Once you've invested in the Fund, you can 'add' to it with a minimum £250 lump sum.
The charges are also percentage based so if I invest £5,000 or £50 there's no better 'value' to be had by investing more, like in Shares - where my Broker charges a flat rate for each purchase, plus stamp duty. So the more shares you buy, the better value you're receiving. If I have a poor wage one month, like my October 2014 is going to be, I can still invest money in something and keep the momentum going.
Reinvesting in the Income Bond
These numbers are hard to ignore. Was I missing a trick by stopping my regular payments? Can I continue to make 5.9% yield if I remain invested in Bond Fund? Should I increase my position with it?
I contemplated the decision over a few days, and my verdict was to reinvest more money into it and see how it performs. At the end of last week, I extended my position by £950, from £200 to £1,150. The ex-div date is the 1st October 2014, with the payout date on 30th November 2014. My 'Stock Purchase Post' will follow.....
I haven't made my mind up on whether to make regular monthly payments into this fund. It has opened up my mind to other potential Bonds and Funds out there, so I'll spend some time reviewing if there are any more that are worth investing in.
I've learned not to be closed off to a particular investment option. I had written off bonds and funds, and upon reviewing the yield, I found a very high paying Bond that I want a more money invested in. The assessment was initiated by Tesco's fall, and my curiosity to find out how bad the situation was. I wasn't expecting to find a positive outcome, but it's reminded me to keep looking for it.
Thank you all for reading!
Are you open to alternative investment options? How's your Portfolio performing? Have you recently encountered any 'silver linings'?
Labels: Blog Update, Dividend Income, Strategy