Here’s how I’d turn FTSE 100 dividend shares into a second income for life Provided by The Motley Fool

by Harshil Pate

There’s a lot to like about dividend shares. For one, they can make an excellent source of passive income.

Once the shares are bought, there’s very little left to do except wait. Long-term investments require a long-term mindset, after all.

Doing so can have a snowball effect after several years, due to the compounding effect.

Finding the best dividend shares

I’d begin by searching for quality shares that offer both growth and income. After all, dividends need to be paid from earnings. So growing earnings can lead to growing dividends.

I’d also look for a long track record of consistently paying dividends. This shows a company’s long-standing approach to distributing cash to shareholders.

Of course, there’s no guarantee that earnings will grow and no certainty that dividends will continue to be paid. But a substantial dividend history can reduce this risk.

Risk can also be lowered by owning a selection of shares, across a variety of sectors. Doing so avoids putting all my eggs in one basket.

Digging for growth

One large-cap share that meets this criteria is Footsie mining giant Rio Tinto (LSE:RIO). It has consistently paid dividends for over a decade.

Bear in mind that it’s a cyclical business though, and demand for its iron ore can fluctuate. But as a low-cost producer, I reckon Rio could withstand such swings in demand.

Also, more than half of its sales are from China. When China expands construction projects, it can have a material effect on Rio’s earnings. But of course, the opposite is also true.

Future growth is likely to come from metals needed for the energy transition and ongoing urbanisation. Rio expects demand to grow by 3.9% per year for the next nine years.

It’s all about the dividend

For shares like Rio Tinto, dividends can have a weighted effect on total returns. For instance, over the past decade, its share price has risen by around 5% a year. If that sounds mediocre, I’d probably agree.

But by factoring in dividends, its total return amounted to a healthier 10% a year. That significantly beats the FTSE 100 average of 6%.

Right now, Rio has a dividend yield of 6.5%. It also ticks some boxes when it comes to business quality. For instance, it offers a return on capital employed of 16% and an operating profit margin of 27%, both meeting my double-digit requirement.

Just like Rio Tinto, I can find several other FTSE dividend shares that tick my boxes. IG Group and BP come to mind. If I had available cash, I’d buy all three to target a solid second income for life.

££££££££££££

remember to leave some of your retained capital to those wee cats and dogs.

GL

The Fund Monitor

Menhaden Resource Efficiency recommences its share buyback programme, Riverstone commits a further £20m to its buyback programme and Tritax Big Box gets a rating upgrade.

By Frank Buhagiar 09 Jul 2024

Menhaden Resource Efficiency hits the buyback trail again

Menhaden Resource Efficiency (MHN) put out a short and sweet press release announcing that it was recommencing its share buyback programme in light of the Company’s wide share price discount to its net asset value. The shares have been trading at around a 40% discount to net assets, not far off the 52-week high discount of 42%.

Riverstone Energy tacks on another £20m to buyback programme

Riverstone Energy (RSE) announced it is committing a further £20m to its buyback programme. That represents around 9% of the fund’s market cap. RSE no stranger to buying back its own shares. Since October 2023, the company has acquired 110,407 of its shares at a total cost of approximately £0.7 million ($0.9 million). But that’s nothing compared to the 15,047,619 ordinary shares acquired via the tender offer earlier this year at a cost of £158 million.

Tritax Big Box gets a rating upgrade

Tritax Big Box (BBOX) noted Moody’s Ratings has upgraded its credit rating outlook on the logistics REIT to Baa1 (positive) from Baa1 (stable) and reaffirmed its long-term corporate credit rating. BBOX puts the upgrade down to growing scale, increased portfolio diversification and ‘a continued focus on high-quality logistics assets, which are supported by the recent acquisition of UK Commercial Property REIT Limited (UKCM).’

Dividend Watch

Artemis Alpha’s (ATS) total payout for the year came in at 6.8p a share, a 9.7% increase on the previous year’s 6.2p a share. That comes after the 4.26p final dividend was announced alongside the latest full-year results. ATS has a policy to “deliver growth in dividends at a rate in excess of inflation”.

The Telegraph says investors should put Alliance Witan on their watch lists, while MoneyWeek believes the combination of HarbourVest’s very strong performance record and ‘inexplicably high discount’ is hard to beat

By
Frank Buhagiar
09 Jul, 2024

Questor: Keep a keen eye on this investment trust about to hit the FTSE 100
The Telegraph’s Questor Column takes a closer look at the latest headline-grabbing deal in London’s investment company space, the proposed combination of long-established global trusts Alliance and Witan. As the article explains, the idea behind the deal is to create a one-stop shop, where investors can gain all their equity exposure via the new trust which will be known as Alliance Witan. Certainly, the two trusts appear a good fit with both adopting a multi-manager approach, whereby external fund managers are mandated to run the bulk of the two funds assets.

With both Alliance and Witan having market caps of over £1billion, the combined £5billion plus fund will likely be a shoe-in for inclusion in the FTSE 100. Promotion to London’s top-tier index not just a nice-to-have. The fund’s profile will be raised, making it easier and likely cheaper to trade in the shares. FTSE 100 inclusion will also put the fund on the radar of a deeper pool of investors. Those investors will also benefit from lower costs as management fees are to be reduced so that total ongoing charges will fall to under 0.6% a year, compared to Witan’s current 0.76% level and Alliance’s 0.62%.

As for performance, Alliance has the upper hand. Since April 2017 when Alliance adopted its multi-manager approach, the fund has grown assets by 102%, or 10.2% a year. That’s comfortably above Witan’s 60% return or 6.8% per annum. All of which leads Questor to conclude ‘investors should put Alliance Witan on their watch lists. A weakening in the share price before or after the transaction completes could provide a good buying opportunity’.

MoneyWeek: Should you invest in HarbourVest ?

The MoneyWeek article opens with a mystery. Private equity fund of funds HarbourVest Global Private Equity’s (HVPE) NAV is up +251% over 10 years and has doubled over five years. Yet the shares trade at a 40% discount to net assets. Why?

One possible answer is that those net assets are overvalued. Quite possible were stock markets selling off, the world hurtling towards recession and the portfolio’s holdings trading on steep valuations. But as MoneyWeek points out ‘markets have been rising steadily against a benign economic backdrop. The average valuation multiple for a representative sample of the portfolio at year-end was a reasonable 14 times cash flow, average cash flow having increased 15% in the year.’ And on valuations, MoneyWeek highlights that during the year ended 31 January 2024, around 10% of HVPE’s portfolio was sold at an average 24% premium to carrying value, suggesting a conservative valuation approach.

The article then runs through a check-list in an attempt to explain that hefty discount such as lack of buybacks, poor liquidity in the shares and high costs. No lack of buybacks though. Since September 2022, HVPE has bought back 2.9 million shares or nearly 4% of those in issue. And with the board allocating $150-$250 million to a buyback pool, more buying appears to be on the table. Nor should the liquidity of the shares be an issue as the private equity fund has a market value of £1.840 billion. As for costs, total expenses in the latest year came in at 1.8% of the average NAV, but as MoneyWeek points out ‘Managing private equity is expensive, with costs more comparable to a listed company than to a fund investing in listed shares, but the returns are significantly higher.’

So, unable to come up with a satisfactory explanation for that HVPE discount, MoneyWeek concludes ‘Within a very undervalued sector, the combination of HVPE’s very strong performance record and inexplicably high discount is hard to beat – especially with the board trying to narrow the discount and add to NAV by buying back shares’.

Here’s how I’d do it.

Story by Harvey Jones

by The Motley Fool

Times are tough but investing a tiny sum such as £3 a day towards building a second income for retirement is well worth the effort.

Everybody needs a bit of cash in an easy access account for emergencies. But for longer-term retirement savings, I believe my money will work a lot harder in stocks and shares.

Stocks beat shares over time

Over the last 20 years, the FTSE 100 has delivered an annual average return of 6.89% a year. That beats even the very best cash savings accounts. It also gives me a better chance of protecting the value of my money against inflation.

Over the long run, history shows that equities beat almost every other type of investment. Better still, by purchasing them inside the £20,000 annual Stocks & Shares ISA allowance, I can take all of my capital growth and dividend income free of tax.

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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

If I invested £3 a day from age 25 and it grew at 6.89% a year, I’d have an impressive £453,989 by age 65. That’s not a bad return from £3 a day. This assumes I increase my contribution by 5% each year, to keep pace with prices.

If I was 45, my £3 a day would have much less time to compound. It would be worth just £70,499 by 65. That is better than nothing but it shows the cost of putting off investing. If I had no savings at 45, I’d be looking to invest much more than £3 a day. If I put away £10 a day instead, I’d have £234,831 by age 65.

These figures are not guaranteed. Stock markets are volatile, and nobody knows how well they will perform in future.

I like high-yield shares

Either way, I would reinvest all my dividends back into my portfolio while I was working, then draw them as income after retirement

So how much of a second income can a portfolio of shares generate? Let’s say, to keep things simple, that I had £100,000. Placed in FTSE shares that yielded on average 7% a year, I’d have a second income of £7,000.

Next year, the FTSE 100 Index is forecast to yield 4.4%. That would generate income of £4,400 if I placed my £100k into a tracker fund.

Crucially, in both cases I’d still have my capital intact. Its value will rise and fall in line with the stock market. However, history shows that in the long run it should rise and, with luck, so should my second income.

I’ve bought for the blog portfolio 11038 shares in FSFL for 10k.

Declaration of Dividend

Foresight Solar is pleased to announce the first interim dividend, for the period 1 January 2024 to 31 March 2024, of 2.00 pence per ordinary share. The shares will go ex-dividend on 25 July 2024 and the payment will be made on 23 August 2024 to shareholders on the register as at the close of business on 26 July 2024.

The Board confirms its annual dividend target of 8.00 pence per ordinary share for the 2024 financial year.

Yielding 8.8%

I’ve sold the blog shares in JLEN for a profit of £433.00 including dividends received. The total blog profit in JLEN is now £1888.81

BlackRock Sustainable American Income

This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
BRSA’s portfolio trades at a significant P/E discount to the US market and is defensively positioned…

Overview
BlackRock Sustainable American Income (BRSA) is a value-focused portfolio of largely US-listed stocks, with an explicit ESG mandate. BRSA also makes full use of its ability to invest in non-US stocks when comparable valuations make for an attractive alternative, with for example Shell currently a top-ten holding in the holding in the trust, both on valuation grounds and on ESG grounds, which is explored in the ESG section.

The team’s focus on value sets the trust apart from many of its peer group and the wider US funds’ universe. Over the last five years BRSA has performed in line with its reference index, the Russell 1000 Value Index, but value investing has lagged the wider market and BRSA has lagged the Morningstar North American investment trust peer group, which is on average more growth-orientated than BRSA. This has led to a very wide gap in valuation between BRSA’s portfolio, on an average P/E of c. 12x and the S&P 500 Index on c. 19x. The very narrow range of stocks that drove the S&P 500 Index’s performance in 2023 has exacerbated this gap, and the team have identified a number of sectors on historically low valuations, notably healthcare.

BRSA currently yields 4.3%. Since 2018, BRSA has paid a dividend totalling 8.0p each year, and for the current financial year ending 31/10/2024 the board has guided investors to expect the same. Dividends are paid from a mixture of revenue and distributable reserves.

BRSA currently trades on a c. 12% discount. Having historically traded at a narrower-than-average discount for the peer group, it recently widened towards the peer group average and the board has increased the rate of share buy-backs in response. With the team currently taking a defensive stance within the portfolio, the trust is currently ungeared awaiting an opportune period to re-apply leverage to the portfolio.

Analyst’s View
Many investors were caught on the wrong side of the ‘magnificent seven’ trade in 2023, which saw a very narrow group of large-cap technology-focused stocks in the US drive the overall market’s performance to an unusual extent. It’s writ large that BRSA’s value-based approach means that it was never likely to own these stocks, and as the team point out, the overall valuation on the US market is now at what they consider to be quite a stretched level, even as many stocks continue to trade at attractive valuations, with BRSA’s portfolio’s average P/E at 12x compared to the S&P 500 Index’s 19x. BRSA’s value approach did identify some winners last year, with Cognizant Technology Solutions and Cardinal Health. Cognizant, an IT services company, trades at a large discount to its closest peers. Cardinal Health, a healthcare services and products company that specialises in the distribution of pharmaceuticals and medical supplies, has seen some recent management changes that the team view as a positive to further drive value.

Investors wondering whether the US equity market cares about dividends could do worse than examine the positive share-price reaction of Meta upon its recent announcement that it would commence paying a dividend. Meta isn’t in BRSA’s portfolio on valuation grounds, but we think it is perhaps an interesting juncture for the US market. BRSA’s own portfolio has a yield of 2.5% and an historical dividend growth rate of c. 9%, higher than the S&P 500 Index’s yield of 1.7% and growth of c. 5%. Long-term, valuation and dividend growth can really matter for equity returns, and while the abovementioned Meta’s dividend yield is fractional in comparison to its market cap, perhaps this marks an interesting moment for US investors to re-appraise the value of a dividend policy? We think BRSA could perform well in such a scenario.

Bull
Portfolio at a significant P/E discount to US equities
Consistent record of dividend paying
Shares currently trading on wider-than-average discount

Bear
The value style has remained out of favour in 2023
Dividend has not grown since 2018
Some investors may prefer 100% North American exposure

The highest the yield has been was 2%, currently 0.77%, so not for an de-accumulation portfolio. U could of course now take out all the profit an invest in a higher yielder and hope history repeats. Stick to your plan until it sticks to u.

Strategy

A really great stockmarket, the best, some tell me the best they’ve ever seen

US equities should be the bedrock of any diversified portfolio…

Alan Ray

Updated 03 Jul 2024

Kepler

Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

We’ll let you into a secret. It’s a pretty safe bet, even without the advantage of privileged information, that by the fall, we will all have read, or at least will have been invited to read, some comments about what the US election means for markets. It’s a rather enjoyable internet rabbit hole, if one has a few minutes to spare, to search for something like ‘how does the S&P 500 Index perform under different presidents’ and we expect there will be at least one cut-and-paste of this topic sent to our inboxes before November. On the Thursday before the first presidential debate, we drafted something to the effect that we are in the relatively unusual position of both the main candidates having already served a term and both having seen the S&P 500 Index rise under their tenure, although obviously we accept that the incumbent has a few months to go. By the Friday after the debate, it seems possible that a third scenario, or candidate, could emerge, and all we can say to anyone thinking of writing the abovementioned article then is ‘good luck with all that’.

We Brits probably need a break from politics right now, so let’s park that thought and just for fun make some polarising statements about investment instead. The trouble with US equities, for a UK investor, is that there is a very limited ‘equity income’ opportunity, and as we know equity income is a big priority for many investors. Dividend yields are much lower in the US, and companies prefer to either invest excess cash, or return it via share buy-backs. Thus, while UK investors are probably well aware that the US equity market generally provides a better engine for capital growth, they favour the home team, as it pays a regular dividend.

On the other hand, the trouble with UK equities is that by far the largest group of funds that invest in it are equity income funds, that keep a tight leash on the companies they own, rewarding them for paying out profits as dividends and punishing them if they dare to drop the dividend, even if it’s for good long-term investment reasons.

In writing these two paragraphs, the writer is deliberately setting out two opposing views in simple terms, because the longer, more nuanced version might take a while, and in this era of instant reactions, no one has time for that, right? Suffice to say that a) there are plenty of exceptions to both sides of this argument and b) no one should feel any guilt about investing in companies that pay dividends. Some businesses really are better as dividend machines and investors should be very happy to own them. That said, readers of the financial press will have found it virtually impossible to avoid the existential angst playing out in the press around the London Stock Exchange’s inability to attract or retain high growth companies. It would be wrong to say that ‘equity income culture’ has not been discussed as one factor, but it seems to be playing a much smaller role in the discussion than various other ‘solutions’ such as incentivising or compelling investors to invest in the UK. If the answer is ‘let’s force institutions to own UK equities, and that extra capital is bound to attract companies they actually want to own’ then we think the wrong question is being asked.

Stick with us, this is a piece about US, or North American, equities we promise. The reason for this preamble is that it is possible that investment trust investors, many of whom are underweight US equities, are in that position not because they don’t follow the above argument, and they have seen versions of the chart below before, but because they want and need dividends. The evidence of this has played out across the investment trust sector over many years, with huge amounts of money raised for income strategies, and many investment trusts with little or no underlying income opting to pay dividends from capital profits. In recent days we have seen two further trusts, Schroder Japan Growth Trust (SJG) and Invesco Global Equity Income (IGET), both announce they will be making a contribution or a larger contribution to their dividends from capital. There is though, another pretty simple way an investor can derive an income from owning an investment trust. One can just sell a few shares at the appropriate interval. We of course know that’s a massive behavioural shift for many investors, but is it so different from accepting dividends from capital profits, which is the path that so many investment trusts have gone down over the last decade? It would allow investors to draw their income while enjoying the return potential which has seen the US soar away from the UK indices in recent decades.

US AND UK EQUITIES OVER TWENTY YEARS

Source: Morningstar
Past performance is not a reliable indicator of future results

In fact, there are some subtle differences between selling shares and receiving a capital dividend. One of the less-well discussed features of paying dividends from capital is that, should an investment trust trade at or above asset value, then the case for paying those dividends begins to weaken, as shareholders are better off if they sell their shares in the market for a higher price than if they receive capital at NAV through a dividend. On the other hand, when an investment trust is trading at a discount, paying a capital dividend is, from a mathematical point of view, the equivalent of the investor being able to sell some shares at net asset value rather than at the share price, which is a very good thing. Thinking of it like that can quickly help the reader see that when shares are at a premium, a capital dividend may not be the best way to receive a distribution. Of course, generally speaking the percentage differences are tiny and may not matter compared to the convenience, but still, geeks like us feel compelled to point it out. But investors thinking about selling shares versus a capital dividend shouldn’t really get too hung up on the differences if considering investment trusts on relatively small discounts or premiums.

For geeks like us though, it’s good to know that the investment trust we consider to be the essential ‘core’ active holding for US equities, JPMorgan American (JAM), doesn’t pay dividends from capital as it invariably trades close to, or above asset value, being on a c. 2% discount at time of writing after a period earlier in 2024 of trading at a premium. JAM also provides the case study that seems to contradict our statement that investment trust investors are underweight the US, since it is a FTSE 250 Index investment trust with total assets of c. £1.9bn, with little or no discount. Then again, the UK equity income sector has total assets of over £12bn, which doesn’t really square with the US’s 70% weight in the MSCI World Index compared to the UK’s c. 4%. Hence our ‘underweight’ contention.

JAM has built an excellent track record of outperformance balanced with that ‘core’ holding status. It has achieved this by marrying two sets of fund managers with biases to value and growth stocks respectively, meeting on the common ground of ‘quality’ to create a 40 or so large-cap portfolio that tends to grow a little faster and trade a little cheaper than the market. What we like about this is that it gives the trust the flexibility to adapt to different phases of the market but emphasising one or the other style, without ever straying too far into deep value or blue-sky growth. The results have been excellent and the fact that JAM has recently returned to a premium rating, during a period when the investment trust sector is experiencing persistent discounts across many areas, says that we aren’t the only ones to have noticed this. A very good track record of buying shares in when JAM strays to even a small discount should give investors confidence that this trust’s board understands that to maintain its reputation as an essential holding in any portfolio requires that the share price reliably tracks the net asset value. Finally, to provide the full ‘core’ equity experience, JAM allocates a small portion of the portfolio, less than 10% and currently c. 7%, to small caps, which is managed in a similar way with a growth and a value manager working together to build a blended portfolio. Thus in the scenario outlined below, JAM still has the potential to outperform.

While large-cap US equities, notably technology and the ‘Mag 7s’, have put US equities firmly in the spotlight over the last year or two, smaller-cap equities have lagged and the managers of both investment trust specialists in this area, Brown Advisory US Smaller Companies (BASC) and JPMorgan US Smaller Companies (JUSC) continue to highlight the valuation disparity between small- and large-cap equities. We’ve seen the same phenomenon in the UK and the rest of Europe, and the disparity is partly explained by higher rates, which can be more challenging for smaller companies themselves but also tend to make equity investors more risk averse, but there’s also the reality that with passive investing playing such an important role in the US in particular, money flowing into equities will tend to hit the large well-known ETFs first. But let’s not forget that a domestic-facing smaller company in the US is addressing a continental-sized market, slightly bigger in GDP terms than Europe, including the UK, and so very often these are large well-established businesses able to survive a downturn.

Neither of these trusts pays the kind of dividend that an income investor would be attracted to, but again, there is more than one way to take an income. While every small-cap recovery in history is a bit different, falling interest rates and inflation are linking themes. We would though say that interest rate cuts are sometimes driven by the need to stimulate an economy, which means rate cuts aren’t always immediately ‘good news’ and so the path to a small-cap recovery may be more complex than ‘rates go down, small caps go up’. But with the valuation gaps both managers identify being so large, we might expect to see a confirmatory wave of M&A in the US small-cap world presaging an improvement in valuation.

As ever, it’s important not to forget the US’s neighbour Canada, which provides a very different set of opportunities to the US equity market, and for investors unconvinced by our ‘just sell some shares regularly’ argument, has an equity income culture more akin to the UK than the US. Middlefield Canadian Income (MCT) yields c. 5% through a traditional income-based dividend policy and gives investors exposure to Canada’s REIT sector, the trust’s biggest position, alongside the country’s important energy and pipeline infrastructure sectors and Canada’s conservatively managed banking sector. Canada was the first G7 country to cut interest rates earlier this year, and with a c. 25% exposure to interest-rate sensitive REITs, MCT could benefit from a strong recovery in this sector, which like the UK equivalents trades at a very wide discount currently.

Finally, BlackRock Sustainable American Income (BRSA) does pay a yield that is at a level an equity income investor would be interested in. It does this using a mix of current revenue and capital reserves, and over recent years has held the dividend at a constant level, which at time of writing equates to a yield of 4%. BRSA has a long-standing value investment style which has been a performance headwind, but investors who worry about the high valuations that more growth-orientated stocks in the US market trade at might find this value style appealing.

There are, of course, many other ways to invest into the US through investment trusts, and so again we can chip away a little at our own claim that investors are ‘underweight’. The widely owned group of Global trusts will be familiar to all readers, and often the US is the largest single country exposure. We would highlight a couple of other specialist trusts that, notwithstanding global mandates, derive most of their returns from companies listed in the US. Allianz Technology Trust (ATT) provides specialist exposure to the technology sector, and generally has about 90% of the portfolio invested in the US, which is a measure of where much of the technology growth stocks in the world are listed rather than a comment on the manager’s particular preferences. Clearly a sector specialist such as this comes with potentially higher volatility and cyclicality risks than a generalist core trust such as JAM, highlighted above, but there is of course also the potential for higher returns given the nature of the sector ATT specialises in. In a similar vein, International Biotechnology (IBT) provides exposure to the adjacent healthcare and biotechnology space and again the c. 85% exposure to the US is an expression of the US’s importance in this area rather than a management bias. Highlighting these two specialists also helps to highlight that to be diversified across all the important sectors, is not so easy to do without placing the US at the centre of a portfolio. IBT also, income investors will be pleased to know, does pay dividends using capital profits, paying 4% of NAV in four quarterly instalments, which means at its current 11% discount the yield is c. 4.4%. We could obviously reel off a long list of other trusts that also predominantly invest in the US, but these two serve to highlight two of the largest sectors that help set the US apart from other markets.

Conclusion

Eagle-eyed readers may have spotted our choice of ‘fall’ rather than ‘autumn’ in the opening paragraph, and apart from the fact that we just quite like the sound of it, its origins, in old English, are a reminder of the ties that still bind us to the US, however shaky they might appear sometimes. ‘Invest in what you know and understand’ is very good advice and investors shouldn’t feel worried if their comfort zone is UK equity income; it’s a fine way to invest for the long term, and as we’ve discussed before, certainly beats inflation. There’s also no particular reason why an investor needs to care at all what the MSCI World Index, or any other index says about the relative importance of different markets. But given the extraordinary potential of the US’s continental economy to generate equity returns over the long term, discussed a little while ago here, we think it would be a shame if all that was holding investors back was a little thing like dividends.