Thursday, 16 April 2015

A Simple Decision (Portfolio Buy)

Source

The perennial question: what to buy now?

This time - thanks to the new focus of the DIY Income Investor portfolio on building up the ETF (Exchange Traded Fund) holdings - the decision is relatively simple.  

The sale of an ETF with a low yield has provided some cash for reinvestment. Let's run over the decision process:
  • the longer-term strategy is to build up the proportion of ETFs (particularly as the security sold was an ETF)
  • the target is a balance between dividend-paying shares and coupon-paying bonds (to contribute towards stability of portfolio performance)
  • the current yield on purchase should be over 5%
  • the ETF holdings should themselves be fairly well diversified (i.e. not too much invested in any single ETF)

Quite often, the most suitable purchase will be a top-up of an existing holding. Looking at the portfolio:
  • ETFs accounted for 45% of the portfolio - so there was plenty of room to increase them (without crowding out the more risky, but more lucrative, directly-held securities)
  • Of the total ETF holdings, the fixed-income (bond) ETFs accounted for around two-thirds - indicating a need to build up the dividend-share ETFs
  • Only one dividend-share ETF has a yield of over 5%
  • This dividend-share is not 'over-subscribed'

And that dividend-share was IAPD - iShares DJ Asia/Pacific Select Dividend 30. The ETF invests in the 30 highest dividend-paying stocks from developed countries in Asia/Pacific. The companies included are required to have a non-negative historical three-year dividend-per-share growth rate and an average dividend to earnings-per-share ratio of less than 85%. The index is weighted according to dividend yield with an overall current yield is around 5.5% (but this will obviously change over time).

The relatively high yield (for the type of ETF that I focus on) is a function of the reduced share prices of the underlying assets - probably a result of this region of the world being out-of-favour, due to muted economic activity and low current demand (particularly from China) for raw materials. The basic idea of 'buying on yield' is to bag these out-of-favour securities and wait for them to recover - as they almost always seem to! In the meantime you pick up a nice income.

Job done.

[Purchase price: £20.29]


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.

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