Discount Watch

We estimate there to be eight investment companies trading at a 52-week high discounts this week – including Octopus Renewables Infrastructure and Finsbury Growth & Income. Do their appearance herald another rough patch for the renewables and UK equity income sectors or are company-specific reasons the driver?

ByFrank Buhagiar•28 May, 2024•

We estimate that eight investment companies saw their discounts hit 12-month highs over the course of the week ended Friday 24 May 2024 – one more than the previous week’s seven.

Not much change in terms of the headline number, but two new additions to the list of 52-week high discounters worth mentioning. Firstly, Octopus Renewables Infrastructure (ORIT). For having dominated the list earlier this year, renewable energy infrastructure companies have seen their share prices bounce off their year-high discounts. So much so that, for the past few weeks, there has not been a renewable energy infrastructure company in sight on the Discount Watch List. So does, ORIT’s reappearance herald another rough patch for the sector or is there a company-specific reason at play here?  ORIT’s share price turned lower from mid-May onward, around the time the company announced it was no longer considering a possible combination with Aquila European Renewables (AERI). The market expressing its disappointment at the failed union perhaps?

Next up, Finsbury Growth & Income (FGT). As with renewables, UK equity income trusts had, up until recently, been a feature but their numbers too have dwindled. Publication of FGT’s latest monthly factsheet on 15 May appears to be the driver, specifically the performance table. NAV/share price off -3.0%/-3.2% respectively during the month of April. The index by contrast was up +2.5%. Another company-specific reason as opposed to a sector-wide issue?

The top-five discounters

Fund	Discnt	Sector
Ceiba Investments CBA	-68.99%	Property
Life Science REIT LABS	-57.73%	Property
VPC Specialty Lending Investments VSL	-43.92%	Debt
JPEL Private Equity JPEL	-40.67%	Private Equity
Octopus Renewables Infrastructure ORIT	-36.12%	Renewables

The full list

Fund	Discnt	Sector
VPC Specialty Lending Investments VSL	-43.92%	Debt
Develop North DVNO	-1.36%	Debt
JPEL Private Equity JPEL	-40.67%	Private Equity
Life Science REIT LABS	-57.73%	Property
Ceiba Investments CBA	-68.99%	Property
Octopus Renewables Infrastructure ORIT	-36.12%	Renewables
Finsbury Growth & Income FGT	-8.78%	UK Equity Income
Invesco Perpetual UK Smallers IPU	-17.32%	UK Smaller Co

Dividends really do matter over the long term, even in North America

Investors in America have swarmed into growth stocks with rampant earnings growth and fat margins, ignoring boring old dividends. But those humble dividend cheques matter over the long term, even in North America, the home of the Magnificent Seven.

ByDavid Stevenson

A few weeks ago, the social network tech leviathan Meta announced that it would pay its first dividend, at a $0.50 quarterly rate, with a yield of 0.51% (using the closing price on the day). That annual dividend will cost the firm $4.4 billion. The payout in absolute terms makes it the 31st biggest dividend payer in the S&P 500 and should increase the S&P 500 yield by 0.74%, to 1.4609% from 1.4501% pa.

For many investors, this seemed a surprise at the time – a growth stock paying a dividend? Surely the best thing to do is to keep reinvesting back in the business. But Meta’s boss Mark Zuckerberg has realised once essential bit of investment logic. At some point, your potential growth rate slows down and at that point, you need to reward patient investors for providing you with the cash to expand. Cue a dividend. It’s also very normal for US corporations to pay a dividend. According to analysts at S&P Dow Jones, the total dividend payout for all stocks in the benchmark S&P 500 index hit – by February 1, 2024 – $600 billion. Ten years ago, that total payout amounted to just $330 billion. Those increasing dividend payouts remind us that investors in equities receive a return from many different sources. The dividend cheque is a direct return of course, and that payout can increase over time as the corporation grows its profits. Many investors then choose to reinvest that dividend back into those shares. In addition, shares can also be re-rated i.e. the multiple investors are willing to pay for those shares changes over time. In the last few decades, that multiple for US stocks has increased.

Analysts look at all these moving parts (dividends, dividend payout growth, dividend reinvestment and multiple expansion) through the lens of what’s called total shareholder returns. Analysts at French investment bank SocGen have looked at different countries in different decades and broken down how that total shareholder return has grown. Looking at returns from 1970 onwards they’ve found that in the UK nearly all the returns from investing in equities through to today have come from the dividend and the subsequent growth of that dividend payout over time. That’s true also for equities in France, Australia and Germany. Looking globally, they found that since 1970 the annualised real return from investing in equities was just over 5% pa of which the real price return (multiples expansion) was just over 2% implying that the rest of the total return comprised dividends, dividend payout growth and dividend reinvestment.

In the US by contrast, multiple expansion was a much more significant element although of course US stocks do pay a dividend – according to academics at Yale, the median dividend yield for the entire period since the end of WW2 was 2.90%. Another study this time by analysts at S&P Dow Jones looked at returns since 1926 and found dividends have contributed approximately 32% of total return for the S&P 500, while capital appreciation (multiple expansion) has contributed 68%. It’s important to say that the contribution of dividends to total returns varies, even in the US. From 1930–2022, dividend income’s contribution to the total return of the S&P 500 Index averaged 41% but peaked at above 50% in the 1940s and 1970s and dipped below 30% in the 1950s, 1990s and 2010s.

And of course, the compounding effect of receiving a dividend cheque, the business increasing the dividend payout every year and the investor subsequently reinvesting the dividend cheque in the stock is huge. According to S&P Dow Jones, if you’d have started in 1930 with $1 invested in US equities, excluding dividends, the return of the S&P 500 on Jan. 1, 1930, would have grown to $214 by the end of July 2023. During the same period, the return of the S&P 500 with dividends reinvested would have been $7,219. Another study this time by US fund management group Hartford noted if we start at 1960, 69% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding.

So, dividends matter, even in the US. And what’s true for the US is also true for its North American peer, Canada. According to Canadian bank RBC, over the past 30 years, dividends have accounted for 30% of the total return from the Canadian equity market, although that fell to 31% over the last 30 years. Over the past 46 years, dividends have contributed an average of 3.2% per year to the S&P/TSX Composite Total Return. Crucially the Canadian equity market now offers a much higher dividend yield over U.S. equities – the yield advantage offered by Canadian equities is currently at one of its widest levels in over 20 years, running at above 3%. That gap is why UK funds such as the Middlefield Canadian Income Trust – an investment trust that focuses on Canadian and to a lesser extent US dividend-paying equities – have proved popular. The Middlefield fund is currently yielding 5.3% on a discount of 15%.

There’s a catch though. While dividends do matter in North America – both in the US and Canada – that doesn’t mean that just blindly investing in the highest-yielding stocks is the best strategy. Numerous studies have shown that investors should avoid the highest-yielding stocks and stick with dividend-paying businesses with more modest yields, strong balance sheets and growth potential. US fund management firm Hartford quotes a study by Wellington Management from a few years back which involved dividing dividend-paying stocks into quintiles by their level of dividend payouts. The first quintile (i.e., top 20%) comprised the highest dividend payers, while the fifth quintile (i.e., bottom 20%) comprised the lowest dividend payers. According to Hartford, “the second-quintile stocks outperformed the S&P 500 Index eight out of the 10 time periods (1930 to 2022), while first- and third-quintile stocks tied for second, beating the Index 67% of the time. Fourth- and fifth-quintile stocks lagged by a significant margin.”

So, although dividends are a useful component of total returns, how you invest to get those dividend cheques matters hugely. Don’t be fooled by high-yielding value traps, think about how the dividend can grow sustainably over time. Study after study has shown that corporations that consistently grow their dividends have historically exhibited strong fundamentals, solid business plans, and a deep commitment to their shareholders. And arguably now is a great time to think about growing the dividend in the US (and Canada). According to equity analysts at French investment bank SocGen, the average dividend payout ratio over the past 96 years has been 56.3%. As of December 31, 2022, the payout ratio stood at just 37.1%, implying plenty of potential for other large corporates to follow the example set by Meta. North America is full of businesses like Meta that are cutting back on their debt, reining in their share buyback programmes and rolling in cash. Maybe the time for the humble dividend cheque might finally have come, even for the go-go momentum-driven markets of North America.

The Results Round-Up – The Week’s Investment Trust Results
Which investment trust’s NAV total return has beaten the benchmark for four consecutive years? And which portfolio manager found it difficult to write his latest half-year report?

By
Frank Buhagiar

Doceo

Edinburgh’s (EDIN) excellent outcome
EDIN easily beat the benchmark over the full year – NAV per share (with debt at fair value) came in at +13.4% on a total return basis compared to the FTSE All-Share’s +8.4%. That makes it four consecutive years of NAV outperformance. The full-year dividend is on course to exceed its target too – up +3.8%, compared to the +3.2% rise in CPI inflation. Unsurprising then that Chair Elisabeth Stheeman described the performance as ‘an excellent outcome’.

Tough act to follow for the new portfolio managers but Imran Sattarr sounds up for it. For despite UK equities being out of fashion, for a host of well-rehearsed reasons and despite it being hard to spot a catalyst for a turnaround in sentiment, ‘strong businesses generating attractive returns don’t go unnoticed for long.’

Numis: ‘The fund seeks to deliver in a range of economic conditions, given its ‘all weather’ approach which offers exposure to growth, value, and recovery stocks.’

JPMorgan: ‘We think EDIN remains an attractive opportunity and it is our top pick for exposure to UK equities within the investment companies sector.’

Investec: ‘We regard Edinburgh Investment Trust as a strong investment proposition which is enhanced by both the current discount and the potential for an improvement in sentiment towards UK equites.’

Finsbury Growth & Income (FGT) should be able to do better
FGT’s +5.9% NAV per share total return for the half year couldn’t quite match the FTSE All-Share’s +6.9%. Portfolio Manager Nick Train admits he found ‘this a difficult report to write’ as ‘this was yet another six-month period when I, with my colleagues underperformed our benchmark. We really should be able to do better than this’.

A standout reason for the poor run, not enough exposure to technology companies or those well-placed to exploit it. Action has been taken though, with exposure to companies that stand to benefit from technology increased. So, while disappointed, Train is optimistic for the future, believing ‘there is tremendous value building in the portfolio. Specifically, I believe we own significant positions in a number of businesses that could grow their market capitalisations multiple times over the next decade or more.’ Bullish stuff.

Winterflood: ‘Technology allocation increased from c.30% of portfolio in early 2020 to over 55% today.’

Henderson European Focus (HEFT) staying out of trouble
HEFT’s NAV per share total return stood at +17.9% for the half year – the benchmark could ‘only’ muster +14.9%. All bodes well for the proposed combination with stablemate Henderson EuroTrust (HNE). As for the main driver of performance, according to the Fund Managers, ‘staying out of trouble felt like the most notable achievement’. HEFT has now outperformed the FTSE World Europe (ex UK) index over six months, one year, three years, five years, seven years and 10 years – the full house!

Numis: ‘The portfolio is positioned toward companies that the managers believe will benefit from the capital expenditure required to support themes such as: de-globalisation and the onshoring of supply chains, electrification/energy efficiency, automation, digitalisation, and artificial intelligence (AI).’

CT UK Equity Capital & Income’s (CTUK) pleasant surprise
CTUK’s+12.9% NAV total return for the half year, almost double that of the FTSE All-Share’s +6.9%. Chair, Jane Lewis, is surprised by the market’s positive performance, ‘it is perhaps surprising that the UK stock market has made any progress over the six months under review’, after all the UK was in recession, the reporting season was widely-viewed as disappointing and there was no shortage of geopolitical tension. And the Managers think UK stocks still offer good value. Because of this, Lewis thinks ‘This certainly provides scope for additional progress.’

Winterflood: ‘Strongest stock contributors were CRH (+54%), Intermediate Capital Group (+51%) and DS Smith (+41%).’

Majedie Investments (MAJE) maintaining discipline
MAJE reported a +13.3% NAV total return for the latest half-year period. Total shareholder return fared even better up +28.1%. Both comfortably above the long-term target of CPI plus 4%. The fund generated returns from areas as diverse as biotech and software as well as Chinese and copper stocks. The Investment Managers are not taking anything for granted, ‘this is no time for complacency’. They go on to cite the number of elections due, stress in commercial real estate markets, geopolitics and full valuations. But the managers have a plan – ‘focus on our best ideas, demand a wide margin of safety, and maintain discipline.’

JPMorgan: ‘The portfolio is mostly listed equities on a look through basis and the six months to 31/3/24 were a strong period for global equity markets although the MAJE portfolio looks very different to a typical global market cap weighted index with no exposure to mega cap technology names’.

HarbourVest Global Private Equity’s (HVPE) reasons to be optimistic
HVPE’s 4% NAV per share growth for the year brings the 10-year return up to +251%, considerably more than the FTSE All-World Index’s +138% (USD) Total Return. Chair, Ed Warner, thinks the private equity fund’s investment case remains compelling, ‘the Company has outperformed public equity markets over the past ten years, and we are optimistic that this will continue in the long term.’ Reasons to be optimistic include not just HVPE’s track record and diversified portfolio, but also the rising number of IPO and M&A transactions which are easing valuation concerns. Speaking of transactions, exits during the year were secured at a 24% premium to carrying value – always helpful to have the numbers on one’s side.

JPMorgan: ‘HVPE is a good product for investors wanting a diversified private equity investment but we prefer other names.’

JPMorgan Asia Growth & Income (JAGI) riding Asia’s powerful drivers
JAGI’s +4.6% return on net assets for the latest half year, a little short of the MSCI AC Asia ex Japan Index’s +5.3%. Chairman, Sir Richard Stagg, puts this down to being underweight, ‘the thriving Indian market’. Several Chinese stocks also underperformed. Longer-term track record stacks up though with JAGI outperforming over five- and ten-year periods. And there’s more to come, if the Portfolio Managers’ Review is anything to go by. For despite persistent uncertainties, both globally and regionally, ‘Asia’s powerful combination of strong growth, innovation, favourable structural trends, and attractive valuations’ will continue to generate ‘many attractive investment opportunities.’

Winterflood: ‘Share price TR +3.4% as discount widened from 9.2% to 10.4%; Board repurchased 5.6m shares (6.2% of issued share capital).’

JPMorgan China Growth & Income (JCGI) believes the worst is over
JCGI’s half-year Chair’s Statement highlights how it was a tough period for Chinese stocks. And it shows in the numbers – the MSCI China Index was down -9.5%. JCGI fared worse as the fund’s growth bias worked against it – total return on net assets (with net dividends reinvested) was -13.1%. Six months’ performance does not make a summer though – over ten years the fund has comfortably outperformed the benchmark.

Chair, Alexandra Mackesy, notes that the investment managers are ‘determined to recover lost performance’ by taking advantage of current low valuations to build up stakes in ‘quality companies that offer robust long-term growth.’ Helpfully, according to the investment managers, ‘the worst is probably behind us both in terms of the slowdown of China’s economic growth, and the derating of Chinese equities.’ Here’s hoping!

Winterflood: ‘Underperformance attributed to growth style bias, as the MSCI China Growth Index declined by -11.6% (in GBP terms), lagging the MSCI China Value Index (-4.8%).’

CT UK High Income (CHI) sees fantastic opportunities
CHI posted a double-digit return for the year (+11.8% NAV total return per share). That compares to the benchmark’s +8.4%. In their review, the Portfolio Managers put the outperformance down to ‘the judicious use of gearing’ and ‘strong stock selection’. Both could well come in handy as the managers plan to take advantage of low valuations in the UK Stock Market to capitalise on what they see as ‘fantastic opportunities’.

JPMorgan: ‘CHI is a unique company in the AIC UK Equity Income sector with its split structure that allows for shareholders to pick between receiving their income in the form of dividends or as capital.’

BlackRock Frontiers’ (BRFI) five out of six
BRFI, another fund to outperform – a +12.0% NAV total return for the latest half year, comfortably ahead of the benchmark’s +8.6% (in US Dollar terms with dividends reinvested). This means BRFI has outperformed the benchmark in five of the past six half-year periods. According to Chair Katrina Hart, the fund has outperformed by +47% over the last five years. As you’d expect, the Investment Managers have a positive outlook for emerging and frontier markets. Not only are equity markets undervalued but they are under-researched too making the investment universe ‘the perfect hunting ground’.

Numis: ‘We believe BlackRock Frontiers offers highly differentiated exposure and is run by a management team that we rate highly, meaning we believe it warrants a place in many portfolios.’

Dividends received and declared at the end of this month should be £5,276.00 at the halfway reporting stage. The full year is unlikely to be double the six month figure but is still on track for the fcast of income of 8k and the target of 9k.

Net asset value per share increased to 123.6p (30 June 2023: 120.1p).

20/03/24

£10,000 to invest? Here’s how I’d aim to turn that into a £1,013 second income within 10 years© Provided by The Motley Fool

£10,000 to invest? Here’s how I’d aim to turn that into a £1,013 second income within 10 years

Story by Stephen Wright

Investing in property can be a great way of earning a second income. And I think there’s a glaring opportunity in the UK stock market at the moment. 

House prices in the UK are hitting record highs again. But shares in companies that make money by owning and leasing them aren’t – I think this is something investors should take note of.

House prices

Interest rate increases caused house prices to drop. And shares in real estate investment trusts (REITs) that make their money by leasing properties also fell as the value of their assets declined.

The property market didn’t stay down for long, though. A combination of longer mortgage terms and a reduction in construction output caused prices to recover quickly.

Last month, the average house price reached £375,000 – a new record. But REITs haven’t seen a similar recovery and this is where I think there’s a real opportunity for investors. 

There are a couple of REITs that stand out to me at the moment as particularly attractive. And if I were looking to invest £10,000 to generate a second income, this is what I’d be buying.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Primary Health Properties

Primary Health Properties (LSE:PHP) is a FTSE 250 REIT that leases a portfolio of GP surgeries. At today’s prices, the stock comes with a 6.5% dividend yield. 

The high yield probably reflects the fact the company has a lot of debt, which is a risk. If it can’t refinance its loans, the company will have to issue equity to remain solvent.

This can’t be ruled out, but I think the dividend per share would still be attractive even if this happens. And there’s a lot to like about Primary Health Properties if things go even reasonably well. 

Competition is limited and the company’s portfolio is fully occupied, with over half of its rent coming from the UK government. I think it’s well worth the risk at today’s prices. 

The PRS REIT 

The PRS REIT (LSE:PRSR) is another UK REIT that comes with an attractive 5% dividend yield. The business is much more straightforward – it buys houses from developers and leases them to families. 

A shortage of rental accomodation in the UK helps boost demand for the company’s properties. And a rising property market allows it to borrow at more attractive rates to support its growth. 

In an election year, it’s extremely unwise to discount the political risk associated with a company like The PRS REIT. Standards for rental accommodation could change, generating expensive upgrades. 

At the moment, though, the firm is in good shape. Its properties are all above the current required standards and I think the firm can keep generating income for shareholders for some time.

£1,000 in 10 years

With £10,000 to invest, I could divide it between the two REITs on my radar. Investing two-thirds in Primary Health Properties and the balance in The PRS REIT would mean an average yield of 6%. 

Compounding a £10,000 investment at 6% per year would result in £1,013 in passive income in the tenth year. That’s what I’d do to take advantage of what looks to me like a great opportunity.

The post £10,000 to invest? Here’s how I’d aim to turn that into a £1,013 second income within 10 years appeared first on The Motley Fool UK.

£££££££££££££££

The current blended yield of 6%, just under the current blog yield criteria of 7% but at the lower end of the risk profile. The dividends should increase in time to achieve a blended yield of 7% but as always best to DYOR.