Tuesday, 10 June 2014

Selling the Crown Jewels? (Portfolio Sale)


crown-jewels-1
Source
Yields are falling all around as both dividend shares and fixed-interest prices are rising on the London Stock Exchange. Perhaps it's due to an influx of Euroland money, seeking a safe haven - who knows?

But it is providing a bit of a conundrum for this DIY Income Investor.  The latest portfolio sale is almost shocking - kicking out the poster boy for the portfolio as a whole. It shows how difficult things are to judge right now.

As regular readers will know, the DIY Income Investor portfolio is based on two main types of investments: dividend shares and fixed-income securities (of various flavours). As part of a strategy to reduce administration effort, as well as to diversify geographically, I have been building up the proportion of the portfolio held as Exchange Traded Funds (ETFs) in both main types of investment. These ETFs reached a high water mark of around one-third of the portfolio - but I have recently been selling some of them because of the low yields.

The latest portfolio sale is the classic UK dividend share ETF, iShares' FTSE UK Dividend Plus with the stockmarket ticker symbol IUKD. The ETF invests in physical index securities and offers exposure to the 50 highest yielding UK stocks within the universe of the FTSE 350 Index, excluding investment trusts. It is (or should I say, was) almost the ideal holding for this kind of  income-oriented portfolio.

IUKD has its critics - primarily for being too crudely based on yield in the choice of constituent companies, while neglecting other key fundamentals; in other words, there is less emphasis on the sustainability of the dividends, although iShares seems to have tinkered a little with the model. What is clear is that this ETF was hammered during the 2007/8 crash.

I bought this ETF (my first ETF, come to think of it) three years ago in March 2011. The yield has now fallen to under 4% and I have made a capital gain of 25% (in addition to the dividend payments) - not bad for what is a highly diversified investment. What is probably means in broader terms is that the UK-quoted market in dividend shares is probably over-heating.

To recall, my 'sell' indicator starts flashing when the capital gain is over 5 times the annual income. A yield of under 4% is also a strong reason to sell and find something better.

My IUKD holding was a relatively small but this and other recent ETF sales mean that the proportion of ETFs  in the portfolio now have fallen to under 30%. More worryingly, the level of cash in the portfolio (which has little or no return in my collection of ISAs and SIPPs) has ballooned to over 11%.

For an income-oriented investor like me, this is a concern, to say the least. My wife and I have not yet made use of our annual ISA allowances yet (which rise to £15k each in July). I don't think I will rush to either - not when I can earn over 6% with Ratesetter (assuming we can stay within our Income Tax allowances).

Ideas on an electronic postcard please...

[Sale price: £9.282]




I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

5 comments:

  1. Yes I sold a few months ago. Good one to note for future market turmoil and come back in about 6000. Same with IDVY and IAPD

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  2. Essentially, you are betting on a crash. Hmm.

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  3. Have you explored GLI Finance (GLIF)? In transition from a loans-based portfolio to the finance of peer to peer and SME lending. Projected yield around 8%; quarterly dividends.

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  4. I wonder if some of your cash could find a happy home with Infinis Energy (INFI). Probably dividend of nearly 9%. Risks as ever.- Thanks for the site

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