Once the price stops rising it’s often time to take some cash off the table.

If it then continues to rise u can either buyback or just take some

more cash off the table.

Around the Covid low 3i was yielding nearly 5%.

Belt and Braces.

The Motley Fool

I’m using the Warren Buffett method to target passive income in 2024

Warren Buffett has turned Berkshire Hathaway into a formidable business empire. And dividend stocks, such as Coca-Cola and American Express have been a big part of this. 

Seizing opportunities

When it comes to stocks, a central part of Buffett’s approach involves exploiting opportunities that can be found in times of extreme stress. American Express is a great example.

Back in the 1960s, the company was facing significant losses due to loans made during a major fraud by the Allied Crude Vegetable Oil company. It became known as the salad oil scandal. Buffett took advantage of the downturn in American Express stock to buy 5% of the company.

The results have been spectacular – Berkshire’s stake now returns over $302m per year in dividends. And this continues to grow as the firm reduces its outstanding share count.

The stock market can often overreact to short-term news – both positively and negatively. And seizing opportunities when share prices are irrationally low is a core part of Buffett’s approach.

Focus on quality

His strategy isn’t just about buying cheap shares though. There have been plenty of chances to buy stocks at discount prices that the Berkshire CEO hasn’t looked to take advantage of. 

That means companies that generate impressive returns on the capital they use in their operations. It also means businesses with a ‘moat’ that protects them from competitors.

Buffett’s investment in Apple is a great example. The company’s services division generates huge cash flows and switching costs for customers help the firm defend its market position. 

Passive income

In terms of Berkshire Hathaway, Buffett’s aim is to grow the value of the business. But I think the same principles are applicable to investing in dividend stocks for passive income.

When share prices fall, dividend yields rise. And that can create some attractive opportunities to lock in high yields by buying shares when others are concerned about short-term headwinds.

Equally though, a high dividend yield is no good if the company won’t be able to maintain its payouts. That’s why focusing on quality companies is key to recurring passive income.

By sticking closely to these ideas, I’m hoping to make investments today that can help me earn passive income for years to come. 

Transformational

ROOF

That’s how Chair Juliet Davenport described  full year: “This has been a transformational year for the Company. We have assembled a highly diversified solar portfolio, offering one of the most secure income profiles in the UK listed renewables sector. We are now the partner of choice for some of the largest blue-chip corporations in the UK to help them deliver on their net zero targets. This has been a driving force behind our significant pipeline. We are delighted that our origination and installation strategy has continued to bear fruit, delivering significant valuation upside for shareholders.” As for the numbers: “…we have committed more than £149 million into clean energy solar assets generating an additional 120MW of solar PV capacity and increasing our GAV today to £215 million…Overall NAV per share declined 0.8 pence, driven by a 7.7 pence per share decrease as result of increasing the valuation discount rate to 7.4% from 6.6% (March 2023: 6.2%) as well as dividends paid of 5.0 pence per share…”

In terms of outlook: “…the renewables sector continues to benefit from strong tailwinds, namely energy security and net zero targets both at the corporate and government levels. The Company is experiencing very strong demand and has a strong potential pipeline of value-accretive opportunities totalling £410m. The Company now has a best-in-class reputation for delivering flexible solar solutions, evidenced both by the increasing number of new customer enquiries and feedback from its existing customers…It is our ambition to grow the Company…and in the short term the Company has access to a £20 million accordion which will be used to fund near-term commitments and pipeline. The Investment Adviser is monitoring opportunities to recycle capital from operational assets into installation assets which provide greater opportunities for capital growth. The Company is also working with its advisers to identify potential strategic investors who could provide capital to the Company through a variety of different structures.”

Winterflood notes: “NAV per share -0.9% to 92.0p. Key drivers were: (i) £15m gain from installation assets signing PPAs or reaching energisation (operational assets increased over the year from 62MW to 147MW) (+10.0p); (ii) adjustments for new contract pricing (+3.0p); (iii) net cash generated minus fund costs (+0.6p); more than offset by (iv) increase in unlevered discount rate from 6.6% to 7.4% (-7.7p); (v) reduction in inflation forecasts (-0.9p); (vi) lower power price forecasts (-0.9p); and (vii) dividend paid (-5.0p)…Electricity generation was 36.3GWh over the year, +0.7% above budget…”

Liberum is a buyer: “ROOF made some good portfolio strides in the FY and post-period, growing to become the UK’s largest commercial and industrial solar platform. The long-duration contracted cash flow model is an ongoing differentiator, with c.80% of revenues contracted over 10-years, which is c.25 percentage points ahead of peers and this effect leads to ROOF’s relatively low sensitivity to power prices (-4.6% NAV impact from a 10% decline in power prices). 92% of income is subject to annual inflation or fixed uplifts, with 47% benefitting from uncapped RPI or CPI uplifts. 79% of the portfolio is fully operational and 21% is in the installation phase, with full energisation expected by Q1 2024. In addition to increasing the distributions received base, this should provide a catalyst for NAV uplifts. We are BUYers with a 100p TP on ROOF’s shares.”

Mindset of the week

“Overall, we enter the new year with the mindset that we are continuing to travel towards the danger, rather than away from it, and we will not let a disappointing 2023 obscure what we see in front of us.”  RICA monthly investment report for December 2023 during which NAV/share price rose 2.1%/4.2% respectively.

To optimise shareholder value

abrdn Diversified Income & Growth (ADIG)

Annual Report from abrdn Diversified Income & Growth (ADIG) . Chair Davina Walter had this to say: “…our Investment Manager has continued to pursue its strategy of seeking to provide income and capital appreciation over the long term from a genuinely diversified portfolio, providing access to a wide selection of asset classes, an attractive and dependable level of income and defensive characteristics relative to the volatility of equity markets. Despite the Board’s confidence in the investment strategy, the persistent and entrenched discount to Net Asset Value…led the Directors to commence a strategic review in June 2023 to consider how the Company could best restore and deliver value to shareholders.” And as the Chair explains: “In the light of the feedback received and the persistent discount to net asset value…at which the Company’s shares continued to trade, the Board concluded that it was in the best interests of shareholders as a whole to put forward proposals for a managed wind-down of the Company.”

As for how the fund performed over the year, the investment managers reported: “…a total NAV return of 0.4% with 3.6% volatility, a good risk adjusted return per unit of risk taken. This compared with a 13.2% return in equities as measured by the FTSE All-Share Index with 11.6% volatility, and -0.6% in government bonds as measured by the ICE BofA UK Gilt Index with a volatility of 11.5.” Back to the Chair for the outlook: “Global markets continue to be volatile, and, whilst there are some positive signs of recovery as inflation abates, the medium-term outlook for UK equity markets remains subdued, especially in terms of the investment trust sector. This is likely to continue to weigh on ADIG’s valuation relative to NAV, hence the proposals we are putting forward for an orderly Managed Wind Down which seeks to optimise shareholder value.”

Comment from Winterflood: “Under the managed wind-down announced in December 2023 (subject to shareholder approval at 27 February AGM), the Board expects that £115m will be returned to shareholders in H1 2024 at, or close to, NAV. Further returns of cash will follow as value is realised from the private markets portfolio (58.4% of 30 September NAV). c.£107.3m (valuation as at 30 November 2023) of private holdings expected to mature by 2027. Remaining £81.5m expected to mature between 2029 and 3033, and opportunistic secondary sales would be considered. The fund will cease to make new investments but will fund existing commitments. Outstanding debt (£16.1m of secured bonds with 6.25% coupon maturing in 2031) will be repaid in 2024.”

Challenge of the week

“The challenge for central bankers from here is to thread the needle of holding rates high enough to keep inflationary pressures at bay and bring inflation back to target while at the same time, not tipping economies into recession. The US appears to be treading this path well, while data in the UK and Europe is suggestive of a more imminent downturn.” abrdn Diversified Income & Growth (ADIG) Investment Manager’s Report.

Tip Watch #2: Keep faith in my 2023 investment trust tips – they WILL come good

So says This is Money’s Jeff Prestridge. The commentator opens his above-titled article by highlighting how in 2023 “…equity investing…proved very much hit and miss…” Why? Because of “…a mish mash of factors – from uncertainty over the global economy to continued geopolitical tensions and a toxic mix of persistent inflation and high interest rates.” What’s more “The performance of investment trusts reflects this uncertain backdrop…of the 380 stock market-listed funds covered by the industry’s trade body, the Association of Investment Companies, only 210 (55 per cent) have generated positive returns during 2023 – returns including both dividends and capital gains, but excluding investor costs. Factor those in and the number of positive returners reduces further…Of course, when five-year performance numbers are looked at, the picture changes. Far more funds (three quarters of them) have delivered positive returns.”

As for Prestridge’s 2023 tips: “This time last year, I assembled an investment trust portfolio that I thought could deliver spectacular returns. Not necessarily straightaway, but certainly over three to five years. The portfolio comprised ten trusts…investing in different parts of the world, some for growth, others for a mix of capital and income return…What linked these ten trusts a year ago was the fact that their share prices did not reflect the value of their underlying assets. They were sitting at big double-digit price discounts…My thesis was that these bargain prices would not last forever –resulting at some stage in a performance boost. I thought that maybe the discount propellant might kick in this year.” The ten trusts are listed below:

abrdn New India; Augmentum Fintech; Herald; Seraphim Space; Aberforth Smaller Cos.; Brunner; Invesco Asia; Schroder UK Mid Cap; Templeton Emerging Markets; and VinaCapital Vietnam Opportunity

The article continues: “So what’s happened to these trusts over the year? Have they delivered the stellar returns I thought they were capable of? The answer is no. I know this because I invested £100 in each of these ten trusts at the start of the year via my stocks and shares Isa. Looking at my Isa yesterday, the collective value of these holdings was £845.32. Add in the dividend income I have received of £15.09, and my £1,000 investment is now worth £860.41. In percentage terms, that is a significant fall of 14 per cent.” Despite the disappointing performance, Prestridge is sticking to his guns: “…I still believe that this portfolio will prove itself in time. Tellingly…nine of these trusts still have share prices at a big discount to the value of their underlying assets. These discounts will disappear if market sentiment improves. Maybe that will happen next year, maybe not. But I will hold these ten trusts until they sparkle.”

Funds on the Watch List this week include: SMT, SLFR, CRS, DNA2, TENT, SSIT, PSH, PHI, APEO, CVCG, HHI, BRFI, FSV, SCP, ANII, AUGM, HRI, ASL, BUT, IAT, TEM, VOF, BPCR, MCT, JGGI, AIE
Welcome to this week’s Watch List where you’ll find golden nuggets on trust discounts, dividends, tips and lots more…

By
Frank Buhagiar
08 Jan, 2024

BARGAIN BASEMENT
Discount Watch:

Our estimate of the number of investment companies whose discounts hit 12-month highs over the course of the week ended Friday 05 January 2024 – the same total as the previous week.

No change in the overall number maybe, but all change at the individual trust level. This week’s trio: Third Point Investors (TPOU) from hedge funds; CQS Natural Resources Growth & Income (CYN) from commodities and natural resources; and JPEL Private Equity (JPEL) from private equity.

ON THE MOVE
Monthly Mover Watch: two new names

Muscle their way onto Winterflood’s list of top-five monthly movers in the investment company space. Triple Point Energy Transition (TENT) takes fourth spot courtesy of a 23.2% gain on the month. Shares have reacted well to the mid-December announcement: Proposed Orderly Realisation of Assets. Seraphim Space (SSIT), the other newbie occupies fifth place with a 22% share price gain. Not much in the way of news over the past month from SSIT, but the space investor was mentioned in despatches by This is Money’s Jeff Prestridge – see below Media City section.

As for the three funds retaining their places in the top five, these include the seemingly permanent fixture that is SLF Realisation Fund (SLFR), although the monthly gain did shrink to +25% from +36% – a sign perhaps that the tailwind from November’s news of a return of capital to shareholders is on the wane?

No sign of that happening with Crystal Amber (CRS) which is also in return of capital mode via buybacks – shares are up 26.6% compared to last week’s 24.2%; or Doric Nimrod Air Two (DNA2) which recently completed a “Partial Compulsory Redemption of Shares”.

Scottish Mortgage Watch: +4.2%

Scottish Mortgage’s (SMT) monthly share price gain as at Friday 05 January 2024. That’s a sharp reduction on last week’s +12.2%. Similar story in terms of NAV – up 1.6% on the month compared to 4.8% previously; and the wider global IT sector, a +6.8% gain shrunk to +3.9%.

THE CORPORATE BOX
Buyback Watch: BioPharma Credit (BPCR)

Announced buybacks are back on the agenda after issuing an update on its LumiraDx (LMDX) loan. Over to broker Jefferies for a quick summary: “This announcement marks a successful recovery of BPCR’s troubled loan to LMDX. The business being sold to Roche represents 81.5% of the total loan amount outstanding, but 117% of BPCR’s current carrying value for its 50% share of the loan, so implying a small c.2% NAV uplift. We also note there could be a further recovery of value for BPCR and the other senior lenders upon liquidation of the company. Importantly, BPCR is likely to be able to resume share buybacks now it is no longer an insider, with the recent EGM circular highlighting $115m of cash available for repurchases (equivalent to c.9% of NAV), aimed at closing the discount into 5%. All together this points to some healthy upside to the current share price, with the shares currently trading on a 16% discount to NAV, not least because the recovery firmly validates the manager’s process and the strength of security in protecting the principal value of the loan.”

Issue of Equity Watch #1: £1,787,840

The value of shares issued by Ashoka India Equity (AIE) on 2 January 2024. In all, the Company “…issued 740,000 of its ordinary shares of one penny each (Ordinary Shares) pursuant to its block listing facility. The Ordinary Shares will be issued at a price of 241.60 pence per Ordinary Share, a premium to the prevailing net asset value (cum income) per Ordinary Share.”

Issue of Equity Watch #2: £501,000

The amount raised by JPMorgan Global Growth & Income (JGGI) following the issue of “…a further 100,000 Ordinary Shares for cash at 501 pence per share under its Ordinary Share block listing facility.”

Dividend Watch: 5.3p

The amount per share Middlefield Canadian Income Trust (MCT) proposes to pay out in dividends during 2024, an increase on the 5.2p paid out in 2023: “…the board of directors has declared an increase in the quarterly dividend to 1.325 pence per Share…This increase follows the increase to 1.30 pence (from 1.275 pence) announced in January 2023. In 2023, the Fund paid four quarterly dividends totalling 5.2 pence per share (2022: 5.1 pence per share). During 2024, the Fund intends to pay four quarterly dividends each of 1.325 pence per share, in January, April, July and October…”

MEDIA CITY

Tip Watch #1: Investment Ideas of the Year 2024

Courtesy of The Investors’ Chronicle. First a quick reminder that, when it comes to recommendations, the tipster changed tack a few years ago: “…we changed our focus from a series of individual shares to five portfolios of 10 stocks that capture what we think are some of the most interesting opportunities for stockpickers. This year, our biggest tweak has been to reduce the size of those portfolios, which now contain five ideas each.” And one of those five portfolios is comprised entirely of…investment trusts.

The Chronicle acknowledges that it’s been a tough time for London’s investment companies: “For the past couple of years, despite facing record discounts to net asset value (NAV), the resounding response from the market has been to shrug and look elsewhere. Although there have been some signs of repair in recent weeks as interest rate expectations have adjusted, the average investment trust’s share price was trading 15 per cent below NAV as of early November, according to Winterflood…” And as the article adds, “…investors should treat discounts the way regular equity investors treat valuations. Just as earnings ultimately drive stock prices, what should matter most to trust holders is underlying growth in NAV. Fortunately, there are some excellent investment trusts out there doing just that, including the five…below.”

Pershing Square (PSH)

Pacific Horizon (PHI)

abrdn Private Equity Opportunities (APEO)

CVC Income & Growth (CVCG)

Henderson High Income (HHI)

Turns out, the above are not the only trusts included in the five portfolios. In the Global Portfolio, there is room for BlackRock Frontiers (BRFI) which is “…still trading at a discount despite a recent rally – looks a smart way to get exposure to nations with strong fundamentals for the year ahead, and with an income kicker.”

Elsewhere, Fidelity Special Values (FSV) is included in the Small Cap Portfolio. As the article explains “…travel deep enough into the lower reaches of the market, and you’ll start to find what would normally look like pricing anomalies.” And that includes investment trusts: “Why…should we make space for…Fidelity Special Values (FSV) investment trust as well as individual companies? For the simple fact that FSV – like so many other well-run trusts – has its own discount.”

Finally, Schroder UK Mid Cap (SCP) finds itself in the Special Situations Portfolio because it “…looks vulnerable to M&A activity given its relatively small size and the presence of activist investor Saba Capital on its shareholder register.”

The Motley Fool

I’d follow Warren Buffett to start building a massive passive income stream

When it comes to earning money without working for it, Warren Buffett certainly knows a thing or two.

In fact, it was Buffett who said that, “if you don’t find a way to make money while you sleep, you will work until you die”.

That may sound dramatic.

By taking a few leaves from his book, I reckon I could potentially build massive passive income streams.

Look where the ball is going

Warren Buffett is a smart enough investor to know that a company’s current performance is not enough to justify an investment.

Instead, he looks at whether he thinks a company has what it takes to do brilliantly in the future – and whether that is reflected in its share price.

So the current dividend yield of a share is not necessarily an indication of what sort of passive income it might generate in future.

Instead, Warren Buffett looks at what sort of business advantages it enjoys and how its finances look. From that he can decide whether he likes the future income generation potential of a business. That in turn influences its ability to pay a dividend.

That has led Buffett to own Dividend Aristocrats like Coca-Cola and American Express, that have raised their dividend annually for decades since he purchased them.

The power of compounding

In fact, in his most recent letter to shareholders of his firm Berkshire Hathaway, Buffett pointed out that he spent $1.4bn on Coca-Cola shares back in the 1980s and 1990s. That holding now generates over $700m of dividends every year.

In other words, Buffett is getting half his original investment back every year as passive income – and still owns the shares, which incidentally have soared in value.

That shows the benefit of finding the right companies to invest in.

But it demonstrates another thing that has been critical to Buffett’s fortune-building.

What does Warren Buffett do with all those dividends? He uses them to make more investments that in turn will hopefully also generate large returns.

Aiming high

That is known as compounding.

When it comes to passive income, it can be tempting to start taking dividends as income immediately.  

For example, imagine I invest £300 each month in shares yielding an average 8%. If I take the dividends out as cash, after 25 years I would be earning £7,200 annually.

But if instead I invested the same amount and compounded the dividends, after 25 years my portfolio would be able to generate almost £22,000 in passive income generally, if I decided to start receiving the dividends as cash.

Warren Buffett often emphasises the power of simplicity. I think building large passive income streams can indeed be simple. But it will not happen unless I take the right steps to make it happen!