Portfolio Sale: Catlin Group (LSE: CGL)

It's 20/12/2012 (at least the way we write it in the UK) and I've sold all my Catlin Group shares.

This was my biggest high-yield dividend shareholding - and I rated it a HOLD back in February. So, what has changed - do I think, perhaps, that the end of the world is coming?

Portfolio (Partial) Sale: BT Group (LSE:BT.A)

The Christmas decorations are up, the presents are bought and there's undrunken mulled wine in the fridge.

But before we hit the seasonal over-eating and lethargy, there was an opportunity for a little trimming of the portfolio.

Corporate Bonds: Going International?

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The DIY Income Investor portfolio is doing very well this year, with total return approaching 30%. This has been achieved by a high-yield portfolio equally invested in dividend shares and and various fixed-income securities, all quoted on the London Stock Exchange.

But this return is exceptional and indicates to me the need to review potential risks sitting in the portfolio. One of these is perhaps an over-reliance on the UK market.

Portfolio Review: Resolution (LSE:RSL)

I bought Resolution over a year ago, primarily for its high yield.

But yield is not everything: I also look for a sustainable market model and sound corporate management.

So, after a year, how is it doing?

Free Ebook Updated

As I have been developing the blog, I have been putting the best of the posts together to document the DIY Income Investor approach in an e-book 'Building Wealth as a DIY Income Investor'.

The latest pdf version can be downloaded for free here (Version 4 - updated 4th December 2012) - running to over 160 pages of text, tips and links to other resources. This is a great way to get up to speed on the blog if you are new.

Dividends and the S&P 500

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The DIY Income Investor portfolio is 50% invested in high-yield dividend-paying shares. But what proportion of equity market returns are due to dividends? And should that guide our investing strategy?

As it turns out, this is quite a tricky question to answer. Of course, dividends represent 'cash-in-hand' for investors - but this cash is taken out of the businesses that generated the cash. And most companies can get a better rate of return by retaining earnings and reinvesting in the business. So, logically, companies with higher dividend yields - on average - should show slower capital or market price growth.

So what happened in the S&P 500 in the last 20 years?

Lifestyle, Income Investing and Mr Micawber

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Your choice of investment style and lifestyle are intimately connected. For me, the logic of investing for income comes from a pretty simple mental model of the mechanism that money plays in my life.

This logic is not new - as Charles Dickens put it into the mouth of Mr Micawber over 150 years ago: essentially your financial success depends on your lifestyle, in particular the balance between income and expenditure.

A DIY Starter Pack of ETFs

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The two key problems that many new DIY Income Investors have are lack of knowledge/experience and limited financial resources, both of which mean that it is difficult to invest effectively and diversify properly. Diversification is most challenging in corporate bonds, which often have relatively large minimum purchases (e,g, over £10,000).

One way to deal with this might be to start by building up a DIY portfolio of income-oriented ETFs (and possibly one OEIC).

The QE Conundrum

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QE - or 'quantitative easing' - is a once-in-a-generation financial phenomenon: there is no remotely similar parallel to refer to in order to understand the potential consequences.

It started out as a bold (some would say 'last ditch') attempt to generate growth in the UK economy. And now, with sleight-of-hand accounting the Bank of England is transferring the income it has earned from QE back to the Treasury.

But how will it end? And what should DIY Income Investors do about it? Here's my best guess...

The Tail Does Not Wag The Dog

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Sometimes it is good to stand back to take in the big picture. 

As readers will know, high-yield dividend shares - bought on the London Stock Exchange (LSE) form a major part of the DIY Income Investor portfolio.

But here are two questions:

• what proportion of shares is owned by UK individuals?
• who owns more of these shares: UK pension funds or UK individual investors?

FTSE Dividend Yield vs Gilts - The Circle Has Turned

Swings and roundabouts
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The yield on UK gilts - government loan stock - sets a 'risk-free' baseline for the financial markets: 'risk-free' in the sense that default risk (the risk of losing your money) is close to zero, although inflation can always erode the capital value of fixed-interest securities (i.e. excluding inflation-linked securities).

By contrast, yield from dividends is usually seen as having a risk premium because you can quite easily lose some - or all - of your money. And pension funds, in particular, have to look at risk very seriously.

What is perhaps surprising is that this dividend risk premium is now positive and is at a generational high - with dividends now paying a premium over gilt yields last seen in the early 1950s. And bear in mind that Mr Market's memory usually only goes back a year or two!

The Importance of Reinvesting Income

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As a DIY Income Investor you generate income - and you reinvest it, don't you, rather than spend it?

After all, this seems to be the way to become wealthy over time. And if you don't believe me, take a look at this study...

Portfolio Buy: State Bank of India (UK) Savings Bond 4.5%

Managing your cash is a key skill. Debt is not allowed in the DIY Income Investor approach, so you need cash (i.e. rather than credit) for day-to-day expenses and for longer-term purchases or one-off costs, for which you will need an appropriately-sized 'emergency fund'. 

A further role of cash is as a 'risk-free' income investment (as long as you can keep ahead of inflation) - perhaps while you wait on the sidelines until the financial markets settle down (will they ever?).

A Nation of Financial DIY?

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There's no 'free lunch' - well, not usually, that is. Whenever I am offered something, I always think: who's paying for this? Why am I being offered this? Is it likely to be to my benefit or someone else's?

This might seem like jaded and cynical thinking - but in the area of investing it is probably good practice.

And many investors are about to find out that what they thought was maybe free, wasn't.

The Rise and Rise of Sainsbury

It is satisfying when one of your investments performs well. But what should you do then? Just sit back and enjoy the warm glow?

The DIY Income Investor approach is usually a 'buy and hold' strategy - but, in my view, there are times to think about selling.

My holding in Sainsbury, which was providing a good yield has been showing a consistent increase in share price over the last few months and is now showing a nice capital gain. Should I realise the capital gain or just continue to hold?

Portfolio Buy: Provident Financial 7% 2020

The search for yield in the UK is getting harder and harder. Perhaps this is a good thing, as it implies that market risks are seen as falling, as well being a result of governments around the world pumping money into governments stocks (and reducing benchmark 'risk-free' yields).

This has impacted yields on corporate bonds, where there are few attractive yields remaining. One of the more reasonable long-term corporate bond options is the Provident Financial 7% 2020 bond (i.e. 7% coupon, maturing in 2020). But buying any long-term bond has its risks - how does this bond measure up?

The Mind of a DIY Income Investor

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Your actions are a result of your thoughts - and I think a DIY Income Investor needs to be a thoughtful (and patient) type of investor.
 
Let me tell you a little about what has formed my own DIY Income Investing thought processes.

The Making of a DIY Income Investor

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As is pretty obvious, I advocate an investment style that is addressed primarily at generating income rather than ('overnight'?) capital gain. What is more, I strive to Do It Myself.

So what has led me to adopt this particular approach? How did I come to inhabit this particular niche in the private investor biosphere?

Retired? Get 25% Instant Return!

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You're retired, you've taken your pension and you're done with  all of that. Or are you?

Assuming you have enough income, not necessarily.

And just to make it interesting, how about a 25% instant return on your money?

Pennies From Heaven

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For me, there is always something magical about interest on savings. You don't do anything more than give a bank a wad of cash (usually electronically, in my case); it goes quiet for a while and then out trickles some interest, which together with other rivulets of cash feeds a growing river of income. (At least that is the theory.)

But, as in the film Neverending Story the approaching wave of darkness - The Nothing - threatens to destroy this magical world of interest...

Is the US Bankrupt?

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The DIY Income Investor portfolio is limited to securities quoted in Pounds Sterling on the London Stock Exchange - and I don't recommend currency speculation, unless you really know what you are doing.

However, most of the companies and banks that are quoted on the FTSE are participants - to a lesser or greater extent - in the worldwide economy. And the main engine of that world economy is the US.

But is it possible that the US is already bankrupt - a dead man walking?

Portfolio Buy: Standard Chartered Perpetual Corporate Bond (LSE:ESC6)

With some cash to get working in my DIY Income Investor portfolio, I have opted for another fixed-income investment - maintaining the broad 50%/50% allocation between these and high-yield dividend shares.

Finding a new purchase proved to be more difficult than expected...

When 'Perpetual' Isn't For Ever

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A puppy is not just for Christmas (as we say in the UK). And so are most of the financial securities bought for the DIY Income Investor portfolio - usually this is a 'buy and hold' strategy. The simple reason is that this is much easier to manage on a DIY basis compared with a strategy that involves a lot of buying and selling.

However, nothing lasts for ever - like the spinning top, entropy increases and eventually triumphs. And sometimes the financial ground can shake underneath you - an unsettling experience.

Portfolio Buy: Intermediate Capital Group (LSE:ICP)

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On a recent visit to Monte Carlo, seeing the expensive yachts on display in the harbour made me wonder about how really rich people invest.

Avoiding tax is probably an important part of it (otherwise, why would they all be squeezed up in that harbour) but the other tools of wealth management are probably closed to us ordinary investors...unless we can access them 'through the back door'.

A Question Of Trust...

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I don't invest in funds, primarily because I don't want to pay someone to do something I can do myself (and possibly do it better); the fees charged can be quite high and would eat up a lot of the potential gains of any underlying investments. So, no funds for the DIY Income Investor.

But investment trusts (which are closed-end funds constituted as public limited companies) are not quite as bad, fees-wise - and they have the flexibility to borrow to improve their performance. So, when The Merchants Trust came up on my yield radar I thought it might be worth a look.

Are You Keeping Up With The Joneses?

Some US Joneses?
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Judging yourself by the absolute returns of your portfolio is OK up to a certain point - for example, you probably want to beat the loss of value due to inflation - but it makes more sense to compare yourself to other investors.

An interesting new tool has been developed by InvestorBee, a new online investment company, on how to compare risk and performance (for UK investors), as well as giving some data on how private investors have performed.

To Sell Or Not To Sell...(Inmarsat)

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It's always nice when one of your investments increases in value - it's a kind of validation of one's skills (although somehow the 'losers' always seem to outnumber the 'gainers').

Still, it does present a bit of a challenge, as selling always seems to be one of the hardest decisions to make - harder even than buying.

Here's the problem...

3 Weeks On Holiday - Piling on the Pounds

I've just spent three weeks on holiday without access to market information, so I wasn't sure how my portfolio was doing. What is more, I didn't have access to my bathroom scales either, so the status of wealth and weight was uncertain.

On returning home, it's a case of 'good news and bad news' - both involving an increase in Pounds.

Summer Break! - Luxury on the Cheap

The DIY Income Investor (and family) is going on holiday soon: 21 days of all-inclusive relaxation, away from the markets, with the portfolio on automatic pilot.

But the important point for today's post is the choice of holiday. One of the fundamental ideas behind the DIY Income Investor approach is to bear down hard on expenditure (whilst in parallel increasing income). Now, in extremis, this might mean putting off the holiday till the next year. But provided the budget allows it, at least get a holiday that is good value.

This year's choice (like last year's, and the one before) comes out at a total price that is less than that of a modest hotel room, but includes excellent food, comfortable accommodation, day-long entertainment and international travel.

The FTSE 100 - Here Today, Gone Tomorrow!

A house built on sand
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The FTSE 100: big, reliable 'Blue Chip' companies quoted on the London Stock Exchange. Shares that you can rely on for a long-term, buy-and-hold investment?

Well, generally yes. However, as I have pointed out before (in relation to dividend-paying shares), things change -possibly more than you think. Our search for stability is maybe illusory.

Portfolio Buy: Carillion (LSE:CLLN)

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The quest for sustainable income for the portfolio continues with the purchase of dividend-earning shares in Carillion. 

The company is a leading integrated support services company with a substantial portfolio of Public Private Partnership projects and extensive construction capabilities. Carillion provides expertise in commercial and industrial building, refurbishment, civil engineering, road and rail construction and maintenance, mechanical and electrical services, facilities management and the UK's Private Finance Initiative - outsourcing government investment.

Morgan Stanley's Pick of FTSE Dividend Shares

The Morgan Stanley Bull
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As a frugal investor, I'm always open to receiving free advice and research. In this case, the corporate suits at Morgan Stanley have kindly provided a list of what they think are attractive, sustainable European dividend shares. 

Think of the kind of salaries that would have been paid to do this bit of research - I'm glad I'm not paying for it!

Anyway, as I don't take any currency risks in my investments (apart from the Pounds that I spend), I've skimmed off just the FTSE results.

The Millionaire Next Door (US)

'The Millionaire Next Door' was the result of a fascinating piece of social research into US millionaire households, trying to understand if there are any 'secrets' that can help the rest of us. The authors - Thomas Stanely and Willam Danko - spent 20 years interviewing members of this elite club and found some surprising characteristics. The resulting book was a New York Times Best Seller for over three years. For a summary and excerpts, see here and here - also the book's website.

Some of the findings are very relevant to a DIY Income Investor.

Portfolio Candidate: HomeServe (LSE:HSV)

Have you ever had a leak at home? Or had your boiler pack up? It's not fun at all, and people are willing to pay to soften the impact of such unhappy events.

As part of a current search for a suitable income-producing investment, I have identified HomeServe, which helps households to deal with these emergencies.

Portfolio Review: Centaur Media (LSE:CAU)

Centaur Media, a FTSE 250 publisher and event organiser, is one of my smaller legacy holdings - as it was not bought on yield grounds I have excluded it up to now from the DIY Income Investor portfolio.

It has fared poorly since purchase, so has not been a good investment. What is more, today its share price has just dropped nearly 15% - on no obvious news that I can identify. However, paradoxically, this means that the yield on Centaur Media has increased substantially;  following today's price fall the yield is now running at over 7% - bringing it firmly into high-yield territory.

So, is this one to shun or take a shine to?

Tortoise Investing

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Right about now is when many investors will be scared away from the stock market, to the point of selling up and hiding in a cave (aka 'buying gold').

But if you are following the DIY Income Investor approach you will be - to some extent - insulated from the unfolding drama. No guarantees, but successful investing is often about adhering to a mental discipline ('mind over stomach') rather than being particularly clever.

So where does the tortoise come in?

Doom and Gloom...and Bargains?

Share prices have been pushed remorselessly down during May, but as the UK Taxman has just given  me some money, I am a cautious buyer.

The generosity of the Taxman is due to an investment in a SIPP (Self-Invested Personal Pension) for my non-working spouse. Very kindly we are given £720 for saving £2880 in the SIPP - this represents an immediate 25% return! Not a bad start. But what to invest in, with Europe crashing around our ears?

Risk and Reward - Revisited

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Risk and reward are the two sides of the investment decision - accompanied by the emotions of fear and greed. Broadly speaking, rewards - in terms of the rate of return that you can obtain - will increase with risk, as the individual investors will usually seek a risk premium.
So, as well as looking for good returns, you need to understand what risks you are taking with your money when investing. Only you know how much risk you are comfortable with - but if you are not fully aware of the risks you could be making the wrong investment decisions.

How Much Is Enough? - The Easterlin Paradox

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What is the link between money and happiness? How rich do you have to be to feel happy? And are rich people consistently happier?

Research shows that having more money does not always make people happier; rather being 'comfortable' seems to have a greater influence on our overall level of happiness.

Peter Lynch's 20 Golden Rules

We amateur DIY Income Investors can always learn something from the *good* professionals - those that have established a track record over several years (i.e. those who have not just succeeded by luck).

Peter Lynch was the manager of the Fidelity Magellan Fund for 13 year until he retired in 1990. During his tenure, Magellan was the top-ranked general equity mutual fund (similar to a unit trust, in the UK). So I'd listen to him.

Be clear that I'm not saying 'buy funds' or even to invest the way he did, but rather 'listen to what he has to say'.

Portfolio Review: SSE (LSE:SSE)

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The portfolio review now turns (finally) to SSE plc - previously Scottish and Southern Energy, a  Scottish-based power utility operating mainly in the UK and Ireland - it is the second largest supplier of energy (electricity and gas) in the UK  and the largest UK generator of sustainable energy.

The current historic yield is approaching 6% - which is impressive for a company in a highly regulated industry. How do they do? And is this level of income sustainable?

As it happens, the 2011/12 Annual Report came out today...painting a mixed picture.

Portfolio Review: Chesnara (LSE:CSN)

As part of my continuing effort to stay up-to-date with my portfolio, let's review Chesnara. I like the name 'Chesnara' - it sounds a bit like perfume (that might smell of chestnuts?). This anodyne name actually hides what is unkindly called a zombie fund.

I own it because of the yield, which is rapidly approaching 10%!

So, what is the story behind this huge yield?

Sweat Your Cash!

Cash forms an important part of the DIY Income Investor Income Pyramid - including current and, 'easy access' accounts (Level 2) and fixed-period savings bonds (Level 3). Cash is a relatively safe way to hold your wealth, given a good rate of interest and government guarantees in case the bank goes bust (in the UK, up to £85k is guaranteed per banking chain). The main risk is then inflation.

However, you need to 'sweat' your cash, to make sure it is working as hard as possible.

Portfolio Performance vs. Professionals

The theme of this blog is Do-It-Yourself investment. Today, let's take a look at the professional competition: how has the DIY Income Investor portfolio performed against the funds?

Who's Paying For Your Retirement? (UK)

Leading question, of course; but if you thought it might be the UK government, maybe think again.

And the sustainability of some private sector pensions has recently been weakened.

Portfolio Buy: Principality 7% PIBS

I've come over all Welsh - but am I chasing after Fool's Gold or have I really found a seam of gold.

We've talked about PIBS (Permanent Interest-Bearing Shares) several times before, highlighting both the high fixed returns and the risks. PIBS are typically issued by Building Societies (the US equivalent would be Savings & Loan banks) and many PIBS offer high yields.

The Principality 7% PIBS - issued by the Principality Building Society (in Wales) - is a case in point: depending on how you look at it, it may be a bargain or a poor investment.

Portfolio Sale: Halifax 11% 2014 (EH14)

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Sometimes selling a holding in the portfolio feels like harvesting a crop that has grown over a long time. But it just needs a few taps on the keyboard, rather than a skilled sweep of a razor-sharp scythe.

So, apart from having temporarily come over all bucolic, why would anyone sell a corporate bond that is yielding over 10% and which matures in a couple of years? Certainly not fear: Halifax was acquired by the Lloyds Banking Group and this security has become less and less risky as Lloyds has stabilised.

How Reliable Are Dividends? (UK)

Dividends form a major source of income for the DIY Income Investor portfolio - representing Level 6 of the Income Pyramid. But they are only part of the strategy: although they often provide high yields, they are not always reliable. Companies have total discretion over whether or not they pay dividends as well as the level of the dividend.

So how reliable are dividends?

Portfolio Buy: Aviva 8 3/4% Cum Irrd Pref (AV.A)



Another day, another trade. This time, nothing fancy - just a middle-of-the road fixed-income security with a yield of 7.7%: Aviva's 8 3/4% Cumulative Irredeemable Preference Share (AV.A).

Portfolio Buy: Lloyds Banking Group 6.475% Non-Cum Pref Shares (LLPE)

Is it time to live a bit dangerously? That what the latest portfolio purchase would imply.

LLPE is one of the slightly jumbled (and confusing) collection of Lloyds Banking Group securities. This particular flavour is a non-cumulative preference share with a coupon of 6.475% (paid in two installments each year).  At the current price that translates to a yield of nearly 9%. That reflects the risk of buying into a bank that is currently propped up by the UK Taxpayer.