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Income Investor: my yield-seeking portfolio

Our income-hunting columnist explains the underlying features of his investments, and tells us how he's done so far this year.

 
Income Investor: my yield-seeking portfolio

As described in my previous article, there are many possible sources of investment income. However, in this series of articles, I am concentrating on my own particular subset of holdings, which I believe is suitable for a reasonably cautious, UK-based investor to manage on a DIY basis.

This portfolio includes: cash savings, dividend-bearing shares, corporate bonds, preference shares, permanent interest-bearing shares (Pibs) and a couple of other similar financial instruments.

With the current surge in the markets, this portfolio is up nearly 20% in 2012 so far (total return) with a current yield (excluding cash savings returns) of around 6.5% – not a spectacular result, perhaps, but not bad for a medium-risk portfolio.

What I look for in my investments

There are a number of general features of the portfolio:

  • All the investments are traded in pounds sterling, avoiding additional currency risks. My future expenditure will be mainly in pounds. Nevertheless, many companies quoted have international activities, giving some geographical spread to my investments.
  • To maximise my after-tax yield and minimise how much the government will take, I use stocks and shares individual savings accounts (ISAs) and a self-invested personal pension (Sipp); I also use my non-working spouse as a cash savings ‘tax haven’.
  • To minimise payments to others, all the investment is DIY: no funds, trusts or other collective investments, with the exception of a couple of specific ETFs.
  • The portfolio is diversified, to reduce risk.
  • Finally, to make it easily manageable, the portfolio is entirely internet-based.

The portfolio contains essentially three main components: cash savings, high-yield dividend shares and high-yield fixed-income securities.

Cash savings include current accounts, ‘easy access’ accounts and fixed-interest savings accounts, all selected on the basis of good interest rates and retaining flexibility to cover foreseen expenditure plus a ‘safety fund’ for any unforeseen costs. Thanks to government guarantees, these savings are risk-free, giving you a ‘baseline’ yield.

High-yield dividend shares

The bulk of the portfolio is invested in high-yield dividend shares and the fixed-income securities, which are diversified between different companies and sectors of the economy. Like many income investors, I was hurt by the 2008 market crisis: many dividends were reduced or cut completely, hitting both income and capital value.

However, I did not sell out and by now much (but definitely not all) of that capital value and income has recovered. As a result of that experience I now keep an approximate 50/50 split between the two types of securities:

  1. High-yield dividend shares can be flaky, but have the potential to keep up with inflation, through increases in the dividend as well as the possibility of growth in the share price.
  2. Fixed-income securities are usually quite reliable (personally I have never lost money on them – but it happens) but can be hammered by inflation. However, getting a good enough yield at the outset will mean that they can perform at least as well as  dividend shares – and much better in many cases.

But the bottom line is the higher the yield, the higher the risk.

If you've enjoyed this article, why not visit DIY Income Investor's blog. The views in this article are the author's own, and do not constitute advice.

19 comments so far. Why not have your say?

Dislexic Landlord

Sep 23, 2012 at 09:37

the bottom line here is buying dividend shares will not make you rich

I think the Isa is the key atleast you dont pay tax on the dividends

But I belive its ony a way of investing a 11k a year and hopefully keeping ahead of inflation

nice way to build a nest egg for old age but i cant get to excited about shares i must admit

Property is the only true genarator of wealth it has always been so and it will be long into the future

I have often said if a punter on here can show me a better way of makeing money than property please lead me to it

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Bill Ritchie

Sep 23, 2012 at 10:30

It is true that property is a good generator of wealth but it is not the only one.

Going down the route of this article is a slower way, but has a degree of less risk.

As for myself, once I had bought and paid for my property, plus paid off all debts, then I concentrated on International stocks with high dividends ( 10% plus).

By looking also for those with monthly pay dates this now gives me a nice monthly income, plus 80% of these stocks have increased their growth by more than 10% annually over the past few years.

Now you tell me how many property owners get that return!

There is a higher risk and this is not for everyone as you have to watch your investments. Although I have not sold any stocks for 2 years now.

Regards,

Bill

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Pertan

Sep 23, 2012 at 11:09

Not all property investments are per definition good investments as people who invested in Spain have found out. Also in my experience timing of the investment is of great importance as many who bought at the top of the market have found out. Furthermore a distinction between commercial and residential needs to be made, as does investing in London or outside. London is a market on its own with many international investors, the same conditions do not exist in the rest of Britain.

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Smooth Operator

Sep 23, 2012 at 11:39

You are making a mistake by not getting exposure to Asian currencies.

By focusing on the pound you are missing on high growth markets where central banks are not engaged in QE like the bank of England.

Inflation is on the way and already high in all commodities as BofE matches the Fed by keeping rates artificially low by monetising are sovereign debt.

Property is not without risk - it is an illiquid asset. Long-term means different things to different people. You are betting on rising prices to make a return.

historical UK base rates are 5% meaning a mortgage rate of 8%.

Incomes are not rising to generate rising prices!.

Somehow UK (London ) property market hasn't fallen because of fragile economic situation in Europe & Asians want a bolt hole - how long will it last?

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Dividend Income investor.com

Sep 23, 2012 at 18:16

Check out 10 Secrets of Wealth Creation on the low-down how the rich got wealthy and how you can join them, at http://www.littlesavvyreports.co.uk/10-secrets-of-wealth-creation/

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Thrugelmir

Sep 23, 2012 at 18:29

Property may well of have its day (for some time). Equities have struggled for the past decade. So maybe the tide has turned.

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Dislexic Landlord

Sep 24, 2012 at 09:52

FAO Bill

You do make a good point but you can to look at property from a differant angle

Shares are all well and good and your right But to buy and control a property with the help of senciable lending gives growth and income you can not have not shares

Ive invested in my Isa Self select and its doing ok and the income is tax free BUT

Let me give you a currant example

£21000 in an Isa Income 6% at best I would say £1260 and yes it may grow in capital over the years and lets say it it goes up 30% in a ten year period £27000

Now lets look at the Next Deal in property and this is fact not fiction

Im buying a property at present built 1900,s it waqs two flats but has been converted into a 5 bed house

Cost of Purchase £68000 30% Deposit and other costs £21900

Mortgage 490000 fixed 10 years capital repayment 25 years £319 per month

Rental income £575 so cash positive per year £3072

Now I know you can not rely on 100% occupancey and repirs and insurance all need to be carried out

But If I told you the rent in the very same area was £300 5 years ago you can see how rent is incresing

But lets say it doubles to £1150 per month which it has in the past and I dont see why it would not you can get an ideir ofhow much money can be made

At Year 10 repayment still £3828 per year

Rental income around £12000

Cash positive £8172

Loan left in the region of £30000 started at £49000

Also I think in ten years ther will be capital Growth god knows by how much

I would have paid off some of the mortgage by then too so my risk is getting smaller and smaller

and in a future date I can convert this property back to two Flats

Dont knock the power of property I know it has its problems managemet ect but I dont think I would be where I am now with just investing in shares

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Keith S

Sep 24, 2012 at 11:58

Dislexic landlord

I am really not sure about your figures as there seems a number of issues here.

It would be interesting to know how much the property was worth - or at least sold for - 10 years ago. There are plenty of people who bought property 10 years ago with a view to capital growth who have either seen none, or are sitting on a loss.

Rental income is taxable, so your cash positive calculation is reduced by at least 20%, although 10 year fixed rate mortgage is a good idea. You also mentioned the other costs such as insurance repairs etc. The problem here s that you have little idea what they may be, who pays when a tenant moves out and has trashed the property, certainly know of this in several cases.

Maintenance is a big issue? I assume there is central heating, a new boiler cost £2,000, every 7 or 8 years possibly, personally I think your income over expenditure each year is likely to be less than £1,000 net each year and some years negative. I haven't worked out the rate of return on your investment, but it's pretty low, unless property prices go through the roof as it were, and little sign of that..

Yes rental income has gone up in the last few years, but ask yourself why, could it be because 1st time buyers cannot get a mortgage, a shortage of rental property puts up prices. Over the next 10 years we could easily move to a market where mortgages are easier for 1st time buyers, result many of them buy so a shortgage of people wanting to rent and a decline in rent rates.

Lastly, when you want to realise your investment, the tax man says capital gains tax please.

Yes property is looked at as a "solid" investment, but in my area there are many many properties for sale that were originally let, with prices quite a way below 5 year ago values.

Noone should just invest in property, it has no liquidity and totally unknown future costs. You need diversification and some liquid investments.

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Dislexic Landlord

Sep 24, 2012 at 13:12

HI Keith

You make a number of good points I will try an answer what I can

You must remember all landlords have differant thoughts on running a bussines

I have quite a large bussiness where I employ a Land Agent some one who works in my office and who is paid by me to run the bussiness on and every day leve fealing with the every day issues of management

No one really knows what value Property will be But the key question is what yeild will I have in 10 years not really the capital value ie if its makeing a good yeild I will never sell it ever If you sell you are indeed right about capital gains so again for the same reason I never sell

at present Im mamageing to buy propertys with a yeild of 10%or over this is key to the investment

Now lets look at repairs and other expences its all tax deductable in other words as a 50% tax payer the dear old HMRC pays half as a ligitmate expence in other words it brings my tax bill down so its not truely a bad thing

and Running a well run bussiness is good for customer relations if a boiler goes wrong it has to be repaired ASAP result lower tax bill and a happy customer

so in a round about way I welcome repairs and other expences its just part of the bussiness

Now lets see your other point about mortgages and 1st time buyers comeing back in the market

another point I do indeed welcome at present there not in the market so I have an open field of good property to but but I bet once the market come back and 1st time buyers are there capital values will rise I may not be buying at this time but the property I do own will grow in value

Its all about cycles I can remmember from 2005 to 2007 there was indeed little point in buying prices were too high yeilds down to 3% you cant make it pay at 3%

now you mention other Landlords who have bought and they are sitting on a loss

the only time a Landlord will lose is if he sells new landlords panick when they seee values dropping larger ones as myself have seen this before and we sit tight and buy more propertys if you understand my poinf 5years to hold investment property is far to short to guage and if you only have a 5 year view BTL and lots of other investments are not the thing to be in

Diversafication is a good word and thats why I have started to buy shares and as a high rate tax payer pension too

I have also bought woodland and land in genaral

I hope this answers the questions raised

there is room for all investments be it stock and shares BTL prumium bonds ect

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Thrugelmir

Sep 25, 2012 at 23:08

Dislexic Landlord.

Plucking figures out of the air such as "Rental income around £12000"

Is akin to the casino betting of the Investment banks and hedge funds in the sub prime crisis in the USA.

A business is run on fact not speculation. Many investors in the UK are basing their decisions on historic data. After 20 years or so of bank deregulation.

Basle 3 is still 6 years away yet is already causing severe lending contraction. As global lending positions are unwound.

In no way suggesting armagedon is on the way. Just a nasty shock, and highly possible a severe correction in asset prices.

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Dislexic Landlord

Sep 26, 2012 at 07:10

Hi Thrugelmir

The figs I use are figs that are true and factual

I spend a lot of time with Spreadsheets looking at Data on the Houseing market in my area

Im trying to do the same thing with Stocks and shares but I dont always find it easy at present but im sure that will come the more I buy shares for income

I belive we are far from the end in the merry go around of world money but there will be oppertunitys to make money

History shows that its all about cycles in any investment and my motto is I want to be a buyer never a seller and I will follow any market uo and down

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Robert Court

Sep 27, 2012 at 18:59

Congratulations to dislexic landlord.

I have nothing but ADMIRATION for landlords who have built up a small property empire over several decades. They work very hard and have to be good landlords if they wish to have a good occupancy rate and they would only have that if they have good people skills.

.Property is just another investment, but a dangerous investment until you have a portfolio of properties built up over time. To start a property empire you probably need to be young and prepared to take quite a large initial risk until a say 70% occupancy rate doesn't cause you to panic; e.g. if you only own three houses and it just happens that all three are unoccupied due to not owning enough properties for your reality to reflect the statistical reality.

From speaking to landlords who have individually owned in the region of 200+ properties they have only become successful due to hard work and being fair to their tenants (many have tenants who have been renting the same property for over ten years which means that the landlord is doing a good job and looking after his investment).

I'm far too old to go into property but I'd imagine that the current rental yield on purchase price on properties bought over 20 years ago MUST be high (even if low as a percentage of the present market value).

Good landlords NEVER wish to sell their properties. Why should they worry about capital gains tax if they enjoy a steadily rising income as a result of decades of hard work?

It's a sort of living pension and if a landlord is also a good manager he or she should be able to employ the right people so that he/she can make himself/herself redundant whilst the money keeps coming in!

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Robert Court

Sep 27, 2012 at 19:10

by the way I rented out a property with a 125% interest free mortgage.

Gross return on what I physically paid out (rental income divided by mortgage payments + landlord's insurance) was 324.5%

Net return (gross return over total costs including leasing agent fees, repairs and income tax) was down to something around 200%.

But on purchase price of the property the gross return was 22.5% and the gross return on the market value was a more sensible 10.588%.

Net return on market value? More like 5% I'd imagine but the whole point is that I wasn't using any of my own money as in the entire period I owned the property the mortgage payments came to less than the extra 25% I got 'cash in hand' when I bought it!

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Dislexic Landlord

Sep 28, 2012 at 06:28

FAO Robert Court

I just wanted to say thank you for the very kind comments

YOu are 100% correct infact Im thinking do You Know Me LOL

Any bussiness is hard work you have to put in a great deal of effort and customer relations is top dog in my bussiness

I think your last comment is the best one in genaral you build a bussiness with other folks money

IfI had not borrowerd I would not have the bussiness I have today

And thats the big differance between Stocks and Shares ect

BTL gives the person with very little cash to become indipendant

A lot of commitators on Citywire dont like BTL

The truth is BTL has been around in History since man built his first dwelling

THanks DL

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Robert Court

Sep 28, 2012 at 07:15

DL

Thanks, but I never built a property business.

The property in question was the first property I bought when I was already 50 years old back in 2005; although as a young man I'd saved enough to buy a 'bog standard' semi 3 bedroomed house with double garage etc with zero mortgage in the 1980's.

It was the roof over my head and only rented out for a year once I decided to move abroad.

The yield on my investments from the profit on the sale of my house is less than half the former rental yield but has been added to a growing portfolio of investments that gives me enough income to live on.

Any future pension(s) will be, hopefully, just a bonus and not something I'll depend on.

You have a sensible head on either young or not so young shoulders and I believe you have done well from your property business so far and shall continue to do so whatever the market conditions.

I have no idea how many properties you own but suggest that when you decide to retire that you sell one each year (choose those that have had the least capital gain), invest the money slowly and live happily ever after or at least to a ripe old age!

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Dislexic Landlord

Sep 28, 2012 at 07:51

FAO Robert

I dont think I will ever really retire I love my bussiness although I do know as i get Gray I will not maybe want the work load i have at present

My life goal is to build a large bussiness to pass on to my family

when I do Pass my Property will all go to a family trust so my family will benifit from my work

All I ask is hopefully one day when they are sitting in the office they look at my picture and say if it was not for her we would have nothing today

She did a good job with what she had and she was fair to all who met her

hopefully this will not be for a long time to come thanks DL

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Christopher

Feb 14, 2013 at 20:29

DL Have to admit I am a fan of yours and in a small way I follow you. Try to keep tenants happy, try to use a bit of gearing, try to keep property in good repair, try never to sell.

By the way I think BTL must go back to when man built his SECOND dwelling?

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john edwards

Feb 14, 2013 at 22:12

I am 72 and was forced to became a reluctant landlord at age 68 when the interest paid on my bank and building society savings dramatically fell and I now needed immediate income to live on.

Luckily my tenants have all paid their rents and done no damage and as these young couple have moved back into their parents home so as to save todays 30% plus deposits for their hoped for future home... I find like D.L. that guided by my agent who finds my tenants.. the rents have gently increased...I treat my tenants well and so far these young couples and single ladies have treated me likewise...I have a feeling I am very lucky.

The past three years this is not the happy situation of a very fair long term landlord I know up in Newcastle... who has increasing ongoing nightmare tenant situations on their hands...basically under the labor government housing benefit was required to be paid to the tenant...today these tenants are smart enough to simply no longer pay it on to their landlord...they spend it on gambling and booze and foreign holidays and the usual drugs etc.....they live rent free...and it is thought thanks to the labor minister Mr John Prescott who they credit with his good idea of making them responsible citizens...these tenants thanks to John are presently protected by more rights than the landlord....the landlords who lose time and income when they eventually regain their property after months of expensive legal bills..simply now respond in kind and leave the properties empty, default, liquidate, and if the bill is big enough go bankrupt... thanks to the labor governments good intentions there is a shortage of rental property.

I do not blame the poster above who decided to simply go abroad.

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Dislexic Landlord

Feb 15, 2013 at 07:13

Dear John Edwards

You are indeed right with your comment

Buying the house is the easy part of being a Landlord

Selection Tenants is another matter altogether

I use a very long deep process which takes time and effort

I too have had some problems Drug Dealers Non Payers Flits I think Ive seen most things

Its all about Management and I found when I did have a problem It was my failing of not doing though vetting checks

Being a Landlord is not easy especialy for Landlords who only have a handfull of properties

When you have a large bussiness you can afford losses athough I would prefer not to have them ofcourse

THe plus side is its tax deductable LOL

FAO Chris

Thanks for your kind comments all the best

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