No time Toulouse

by Doug Brodie

In this blog:

/1. We don’t use Lowland, but…

/2. The question they all ask

/1. We don’t use Lowland but…

In March 2009 the price of a share of Lowland Investment Company was 38p. In 2022 it paid a dividend of 6.1p. For the 2009 investor that was a 16.05% yield, irrespective of the share price movement over the period. This is not a flash in the pan, Lowland has been doing this for longer than our research covers:

The company started in 1960 and has never reduced or skipped a dividend. The above figures are not guaranteed, however it is probably likely to be consistent as long as there are no gremlins lurking. We are the Gremlin Spotters, it’s our job to pick apart the data, and that happens to be why we don’t currently use Lowland … but that’s a story for another day.

The lesson from this trust is that if you want or need a ‘strong’ annual income, you need to invest in the asset that will deliver it for you. If you need a high income at outset, the compromise is that you have to give up the velocity of the increases, of the type that drove Lowland’s yield to 16%. An average annual increase of 6.8% per year.

At a yield of 16%, the owner of Lowland will get back all the cost of his investment in the next 4 ½ years.

A typical high yielder from outset might be Merchants Trust – if we compare a £100,000 investment into both of these and look at the income they delivered, the difference is easy to see: one rises materially faster than the other.

It basically took five years for Lowland’s income to overtake that from Merchants, so the message is that the earlier you invest, the higher your income will be.

 The trick is to buy the assets five years before you need to draw the income.

When you start your drawdown, you are drawing down cash from the bank account within your SIPP or ISA or bond. All the income and dividends generated from the investments is paid into that account, and you then draw your monthly income from that account.

Dividends don’t arrive on day one, and they don’t arrive in equal amounts every month; this means that when we set up an income account, we have to set aside some cash to enable income and charges to be paid. Normally we aim to carry 3% cash out of a portfolio, and at the end of the year the portfolio assets will have paid around 4% - however that’s 4% of the 97% that is invested, so you’ll have the 3% cash you started with, plus another (97% x 4%) = 3.88%, giving you 6.88% gross out of which to pay the charges – let’s assume a grand total of 1.2% per annum.

At the end of year one your 3% cash has now grown to 5.68%, at the end of year two it’ll be 8.5% and year three will be 11.45% (dividends growing at 3.5% pa). At the end of year three your year one 4% has now grown to 4.45%, and from then on you are always drawing your income from a pot of cash in your SIPP/ISA without ever having to sell any assets.

If you don’t buy the assets now, and you need income straight away you give yourself the fretful choice of either starting with, say, 8% in cash to draw from straight away, and investing just 92% of the portfolio, or taking the income as it comes and hoping the immediate income will be as you need. This is not a good idea, should be avoided at all costs, and what we see happening every time an investor wants to invest for income and take the income immediately.

/2. The question they all ask

There’s a price to pay for immediate income higher than the average, and that is very transparent when looking at the share price charts of Merchants and Lowland (other investment trusts are available …)

In our experience, purchasing an income portfolio three years before income drawdown is needed provides an income more than 10% higher than that at outset, and a further 5% more of the portfolio to be invested for life.

Doug