How investors are getting 15.36% income from a simple, Steady Eddy trust
by Doug Brodie
Of all the recent blogs, this one you need to read. All the trusts share prices have fallen in recent weeks due to the Swiss ripping up of the banking rule books, but the reserves of those trusts have not moved a jot – that simply means that each £1 of income they pay is now cheaper to buy than before the crisis. Cheaper to buy means a higher income yield, the maths is quite simple. Remember that share prices and dividends are not correlated: the blue bars are the share prices – behaving quite predictably as the market moves up and down – the red line is the income: it’s not defying gravity, its supported by reserves. Read on for more on this.
You’ll remember 2008 as being the last time we had a banking crisis, though I wonder if you also remember 2015, the Greek banking crisis: the aftershocks of the banking bail outs was amplified in the Greek banks where this chap was the finance minister for a very brief time (January to July)
The Greek banks needed a European bailout but didn’t want to comply with the terms attached (chiefly ‘don’t spend more than you earn’, and ‘collect the tax from your taxpayers’). The row led to the potential of Greek banks going bust, and so there was a threat of contagion across the European banking sector caused by other banks, insurance companies and funds having already lent money to those banks via the bond market.
That uncertainty is clearly shown in a run-of-the-mill pension portfolio that operates on a total return basis and can be summarised in Vanguard’s own ‘all in one’ LifeStrategy fund with 60% equity and 40% bonds. Both of those assets got hit and the fund fell 10% in the next five months (which is an annualised fall of 24%).
Now look at this chart – this is Lowland Investment Trust, and it shows the dividend income over the five years covering the banking crisis. The dividends increased each year, were never missed, and had nil correlation to the stockmarket.
This is what we work with. As it happens we don’t currently use Lowland in client portfolios due to our preference of trusts with stronger reserves, however it has historically been an exemplary performer and as an investor you should take note because in today’s volatile markets, it’s happening again – the price of the shares is falling while the balance sheet reserves do not.
The reserves are calculated and reported at the end of each financial year; they are not a pot of cash, they are an accounting reserve however they do form part of the intrinsic value per share. This means that if you buy one share of Lowland today for £1.24, you are also a part owner of £8,266,000 of revenue reserves that will be used to pay your income. Further, you are also buying a share in the capital reserves of £235,389,000 that can also be used to support your income.
That £x of dividend income from Lowland costs you £1.24 today, and yet last year you had to pay £1.33 for exactly the same £ of income.
When share prices fall, dividend income automatically becomes cheaper.
This is how Lowland’s reserves moved over 2019, 20, 21 and 22; I have highlighted the reserves for you. You can also see the other key figures – the income received versus the dividends paid out. We track these statistics back to 1986 for all our research pool. You can see clearly here that in 2020 and 2021 Lowland was paying out more in dividends than the income it was receiving – we didn’t like that happening on consecutive years, we sold all our clients out.
This trust is run by two great managers who also run the Law Debenture trust: the decision on how much is paid via the dividends is not made by them, but by the board of directors, who are separate, and rarely investment specialists themselves. The only time we have ever sold out of a trust is due to actions of the directors. Like dentistry, some things are best left to the people who do this all day every day.
But…
Lowland does also have a great track record in consistent increases, and has been the best example we know of why consistent dividend rises work.
The investors who bought Lowland on 1st April 2009 paid 39.7p per share; it’s last four dividends totalled 6.1p, which means those 2009 investors have a yield on their investment of 15.36%.
Let me repeat:
When share prices fall, dividend income automatically becomes cheaper.
It was Mr Buffett who explained to Mr Bezos twenty years ago that the reason people don’t replicate the former’s wealth is that they don’t want to get rich slowly. It’s our role to ensure the investment strategy is, actually, boringly predictable. Our intention is to make your income as reliable as a final salary scheme, and to enable you to have predictions about your future income. The secret is patience.
More reliable than a crystal ball, we use data, a lot of it, and you can see how the projections are calculated. Please use the ‘Get Started’ buttons here on our website, put in your age, the sums you have and when you’d like to draw income. Use the slider bars to vary the portfolios, years and sums and you’ll see the projected monthly income (with or without state pension) how it compares to the FTSE, the % of historical increases, how many years the income beats inflation since 1989 etc etc.
