How the pros spot value-trap shares with dividends ‘in danger’

Kyle Caldwell runs through the main warning signs the professionals look out for that point to a dividend in danger.

13th September 2023

by Kyle Caldwell from interactive investor

Income-seeking investors are spoilt for choice, with dividend-paying shares no longer the only game in town.

Prior to interest rates rising from the end of 2021 onwards, investors had no choice but to size up equities to procure a decent level of income. However, now that bonds have re-priced in response to rate rises, yields of 4% to 5% are obtainable on debt that’s deemed relatively low risk. For those who are prepared to stomach greater levels of risk, yields of 5% and 6% can be found on both corporate and government debt.

In addition, savings rates and cash-like investments (money market funds) have seen their income returns increase on the back of interest rate rises. The Bank of England base rate has moved from 0.25% to 5.25% over the course of nearly two years.

However, while bonds are certainly attractive again for income seekers, investors who buying individual bonds today, today, and looking to hold them to maturity, are currently accepting a below-inflation income return. In contrast, while there’s no guarantee, dividend-paying equities offer the prospect of inflation-beating returns through a combination of capital growth and dividend returns.

Job Curtis, fund manager of City of London Ord 

investment trust, one of our Super 60 investment ideas, observes that as companies grow their profits and their dividends, this provides dividend growth over the long term. However, with bonds “the interest is fixed”.

Speaking to interactive investor, Curtis said: “I think this is particularly important in a period when you’ve got inflation. In real terms, if you’ve got a fixed-rate deposit or bond, and inflation is around 8%, within a year your money has lost 8% of its purchasing power.

“While in an equity fund, you’ve at least got the growth in income, which can alleviate that inflationary effect.”  

Drilling down into the dividend

However, a trade-off is that equities are riskier than bonds. The same is true for income-seeking investors, as company dividends can be cut, suspended or cancelled without notice. But with bonds, the income on offer will keep on flowing unless the company falls into financial difficulties.

It is therefore important to drill down into the dividend to assess whether it is sustainable.

Below are some of the main warning signs the professionals look out for that point to a dividend in danger. 

A high dividend yield

A high dividend yield looks attractive on paper, but it should be treated with a healthy dose of scepticism.

As share prices and yields have an inverse relationship, a high yield is often a sign that a stock, for whatever reason, is out of favour.

It is therefore crucial to do some digging to check whether the yield on offer is sustainable to avoid so-called value traps.

George Cooke, manager of Montanaro European Income fund, one of interactive investor’s ACE 40 investment ideas, says: “We view high dividend yields as a warning sign more often than not. If you have a dividend yield of 10% or 15%, it’s usually just the market telling you that you’re about to get a dividend cut rather than this is a stunningly great opportunity.”  

For Simon Gergel, fund manager of Merchants Trust Ord  an attractive yield is important, but does not drive the investment decision.

Gergel said: “We always buy companies where we think we can make a good total return. So, we fish in the pond of high-yielding companies. But once we own them, we’re not concerned whether that dividend is growing fast or not growing much at all.

“We want to buy companies where we think we can make good money, and if we can make good money on the underlying company. Ultimately, we can either get dividend growth from that company, or we can reinvest the proceeds to get dividend growth elsewhere.”

Another thing to bear in mind is that high yields do not mean market-beating returns from a total return perspective – when both capital and income are combined. In addition, dividend growth may be higher for dividend-paying shares with lower yields.

Check the track record for paying dividends

A company’s track record for paying dividends is worth considering. Although a stock that has historically been a generous payer should not be considered a sure bet for dividends continuing to roll in, those businesses which have patchy records should set alarm bells ringing.

However, bear in mind that a dividend track record does not show the fundamentals of a business, such as balance sheet strength and return on capital.

Moreover, to keep the dividend track record going, there’s the risk that some companies will keep on paying dividends for longer than is sustainable, such as through increasing their debt levels to fund income payments. 

William Meadon, fund manager of JPMorgan Claverhouse Ord 

says that the most important things to check are “balance sheet, cash flow, the barriers to entry and how much the underlying company is growing”.

Cooke adds: “First and foremost the companies have to be high-quality and growing. And we think doing it that way round prevents us and helps to stop us from being seduced by an optically high dividend yield, which then turns out to be high for a reason, which is that the company is declining.”

The The SPDR S&P UK Dividend Aristocrats ETF
UKDV is one way to gain exposure to stocks with long dividend track records. It tracks the 40 highest-yielding UK companies that have increased or maintained dividend payments for at least seven consecutive years. Its top five holdings are

British American Tobacco IG Group Holdings Intermediate Capital Primary Health Properties and Legal & General Group

Payout pledges can be broken

A commitment from the management of a company to maintain a future dividend payment should, in theory, be seen as a positive. However, the reality is that there have been far too many broken promises over the years for investors to bank on such pledges.

During the Covid-19 pandemic, oil major Shell ended its remarkable dividend run by cutting its income payout for the first time since the Second World War.

Direct LineThe firm unexpectedly cut the dividend at the start of 2023, just months after former chief executive Penny James had said it was safe. Following the dividend cut, James stepped down.

In response, Curtis sold down Direct Line, but retained a holding. He explained: “Sometimes when a dividend cut happens, it can be after a period of share price underperformance. And if you sold out of the stock, you’d be throwing out the baby with the bathwater so to speak and doing it at the worst possible moment.

“But, in the case of Direct Line, we’ve reduced the holding quite substantially and so sold more than half our holding because there are other companies in insurance and financials generally which have carried on paying and growing their dividends, so are, in the short term, more help to us.

“But Direct Line has got very good recovery prospects in my opinion. It is a kind of leading insurer in motor and property insurance in the UK and it’s been a very strong brand, so I didn’t really want to sell out of it entirely, so we’ve kept a smaller holding.”

Dividend cover

This is considered a key metric to assess whether a company is in a healthy position to distribute dividends. It is calculated by dividing earnings per share (EPS) by the dividend per share (DPS).

As a rule of thumb, a low dividend cover ratio – around one times or lower – suggests dividends are vulnerable, as a company is using most, if not all, its profits to fund the dividend. A figure of two or more is seen as comfortable because it’s a sign a business is not over-distributing.

Those firms that do hand back more cash than they can afford risk damaging their longer-term growth prospects through lack of investment in the business.

Curtis points out: “It’s very important that companies are also investing in themselves enough for the future, making enough capital expenditure on plants and equipment or their brands because, unless they are investing enough for the future, you won’t get the future growth.

“I should also say that I prefer companies with strong balance sheets. Those companies are much more resilient when times are tough and the economy’s turning down. In that type of situation, companies that are highly indebted are going to be more at risk. They might well be under pressure to cut their dividends.”

Dividend payout ratios

Another thing to be aware of is that some companies have strict dividend payout ratios, which is the percentage of earnings paid to shareholders via dividends.

Some mining companies fall into this camp. As a result, if they make less money, dividends are cut. The sector is not a reliable dividend payer, as dividends fluctuate depending on the performance of the iron ore price. 

Debt levels on the rise

When the dividend is being funded out of debt, it is a potential red flag. One way for private investors to work this out is by looking at the free cash flow measure. This takes into account how much money a company has left over once all business expenses have been made, including interest on borrowings.

Those businesses that pay their dividends without resorting to borrowing will have a positive free cash flow figure.

But bear in mind that a negative score does not always mean the dividend is under threat. If money is borrowed cleverly and efficiently, the business will ultimately become more profitable.

Henry Dixon, fund manager of Man GLG Income, one of interactive investor’s Super 60 investment ideas, says that financial leverage is certainly a warning sign that a dividend may not be sustainable.

He says: “Value traps are just such a painful part of the job, and you do everything you can to insulate yourself from that.

“And you try and work out a common theme of value traps and what happens. I definitely would observe that financial leverage can certainly get in the way of realising the value that might be on offer.”

DIY Investor Diary: how my ISA and SIPP are invested differently

The latest ii customer to feature in our series explains how and why he is taking more risk with his SIPP compared to his stocks and shares ISA.

14th November 2023

by Kyle Caldwell from interactive investor

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Buying shares involves more work and effort than outsourcing the investment decision-making process to a fund manager, or following the up and down fortunes of a passively managed index fund or exchange-traded fund (ETF). 

Of course, not everyone who buys shares in individual companies is a forensic accountant. In addition, many investors do not fully understand accounting jargon or every industry valuation measure.

However, this doesn’t mean that you shouldn’t buy shares. People choose to do so for many reasons. You might enjoy the intellectual stimulation, or you could be interested in smaller, more speculative companies that aren’t available in funds or investment trusts.

In return for the higher risk that comes with buying individual shares, the potential reward can be higher too. This is a major part of the appeal.

The latest investor to be profiled in our DIY Investor Diary series mainly picks his own shares. He holds around 20 stocks, alongside a couple of ETFs and one active fund, Fundsmith Equity.

This investor, who is in his early 30s and works in the financial services industry, decided to be more active with his savings and investments about two years ago.

He explains: “Beforehand, I simply used my company pension and savings accounts, as I wanted to be sure I could commit sufficient time to properly managing my own portfolio before investing more actively.”

While he had built up knowledge in his line of work, the DIY investor also swotted up further before taking the plunge into the stock market. As well as wanting to take control of his own finances to grow wealth over the long term, he also views investing as a bit of a hobby.

He holds an ISA, SIPP and general investment account with interactive investor. He contributes to his SIPP monthly alongside his employer, and adds lump sums to the ISA and general investment account.

For both ISAs and SIPPs, all income and capital gains on investments grow free of tax. Both offer a wide variety of investment options – shares, funds, investment trusts and ETFs.

However, as ISAs offer much more flexibility, since you can withdraw from them whenever you like, this tax wrapper can be utilised to save towards a specific goal. In contrast, a SIPP is a retirement pot, as money cannot be withdrawn before the age of 55, rising to 57 from 2028.

Due to the difference in when money can be accessed, the DIY investor manages his ISA and SIPP in different ways.

His ISA is more conservative, reflected in the holding of a couple of ETFs and Fundsmith Equity. In contrast, the SIPP is more aggressive, with around 20 positions.

“Given the longer-term goals of the SIPP, I take on considerably more risk, investing in single stocks and keeping quite a concentrated portfolio.

“With my ISA, I don’t want to see a lot of volatility. My ISA strategy is to build up sufficient savings to go towards deposits for a house, car or other potential shorter-term goals. As such, I look to preserve capital via diversification by holding funds which contain many stocks. This makes it simpler and more cost effective for when I need to sell the positions in the ISA for these goals.”

To narrow down the universe of thousands of companies that he could potentially invest in, our DIY investor has a couple of stock screeners in place in an attempt to find good value companies with strong margins and strong profit levels. He also looks for potential catalysts to drive share prices higher. As well as looking for certain attributes, he picks up ideas from reading articles and research pieces.

“When I look for new stocks, I generally look to add positions that are different to what is in the portfolio already, so as to keep up diversification. Valuation is key, I want to get value for money.”

“When I started investing, it was scattergun approach, with a number of familiar UK names. I didn’t carry out too much due diligence on each stock. This was not a good strategy, and could have been replicated much easier and more cost effectively by holding a UK-focused fund or ETF.

“I wasn’t sufficiently diversified, and to change that I have been moving to having more of an international portfolio.”

Typically, one or two trades are made each month, with around 30 shares on a watchlist.

His top tip for fellow investors is “not to become too emotionally tied to a holding”.

He adds: “It is important to continually reassess your thoughts, thesis and approach. It is always worth challenging your own perspective. And when things change, don’t be afraid to cut losses.”

Basing investment decisions on emotion and falling in love with stocks are major pitfalls that can prove detrimental to returns. Instead, as he wisely remarks, it is important to “be clear in your investment goals and build your portfolio accordingly”.

He adds: “Large institutional investors and funds have to manage their liquidity risk, making sure the liquidity of the assets they invest in matches the liabilities of their fund.

“Although it’s a bit different when it comes to individual investors, as they are unlikely to hold large enough holdings in a single stock or fund that could be a liquidity issue, it is still important to understand the liabilities (retirement income, saving for a deposit, etc) and having a portfolio of assets which matches those specific goals in a cost-effective manner.”

His views on active versus passive investing is that there’s a place for both. However, overall he prefers to pick his own stocks.

He likes the investment style of Terry Smith of Fundsmith Equity, which is why it is the only active fund he owns.

He describes ETFs as “great tools for investors” that offer a “much easier and much more cost-efficient way to run a diversified portfolio than holding 50-100 single stocks”.

“Additionally, you can get exposure to other asset classes, such as corporate bonds or derivative strategies, which can be interesting portfolio diversifiers,” he points out. 

When buying individual shares, putting in the time and being dedicated are key. Questions to ask yourself and things to bear in mind when buying shares include:

• How does the business make money ? What is the business model ?
• What is its financial position? You will need to read the balance sheet and analyse cash flow
• Analyse the risks the firm faces to understand if it might be more or less profitable in the future
• Is now a good time to buy? You need to take into account the various valuation metrics that indicate whether a share is overvalued or undervalued
• Are you investing for growth, income or both? If you want a certain level of income, you will need to consider whether the company pays dividends, and whether those dividends are sustainable going forwards. This article has plenty of pointers on how to delve into a dividend.

Thursday 12 June

3i Infrastructure PLC ex-dividend date
BlackRock Energy & Resources Income Trust PLC ex-dividend date
CT UK Capital & Income Investment Trust PLC ex-dividend date
Empiric Student Property PLC ex-dividend date
Henderson High Income Trust PLC ex-dividend date
JPMorgan US Smaller Cos Investment Trust PLC ex-dividend date
Land Securities Group PLC ex-dividend date
Pacific Assets Trust PLC ex-dividend date
Palace Capital PLC ex-dividend date
Scottish Mortgage Investment Trust PLC ex-dividend date
US Solar Fund PLC ex-dividend date
VPC Specialty Lending Investments PLC dividend payment date
Worldwide Healthcare Trust PLC ex-dividend date

MEET BOB, THE WORLD’S WORST MARKET TIMER

Do you ever feel “the curse” of investing at exactly the wrong point? Like your investing is too late, at the wrong time, or maybe that you’re just unlucky?

Well meet Bob – the World’s Worst Market Timer. Bob began his working career in 1970 at age 22 and was a diligent saver and planner.

His plan was to save $2,000 a year during the 1970’s, then increase his savings by $2,000 each decade. In other words $2,000/year in the 70’s, $4,000/yr in the 80’s, $6,000/year in the 90’s… you get the picture.

Bob started in 1970 with $2,000, added $2,000 in ’71 and ’72, then decided to take the plunge and invest in the S&P 500 at the end of 1972. (Time out: there were no index funds in 1972, but come along with me for illustration purposes).

Now in 1973 – 74, the S&P dropped by nearly 50%. Bob had invested his life savings at the peak, just before it fell in half! Bob was bummed, but Bob had a plan and he was sticking to it. You see Bob never sold his shares. He didn’t want to be wrong twice by investing at the peak and then selling when prices were low. Smart move Bob!

So Bob kept saving $2k/year in the 70’s and then $4k/yr in the 80’s. But he was feeling the sting of his last investment and did not feel comfortable adding to his fund until he had seen the markets rise a fair amount. In August of 1987 Bob decided to put 15 years of his savings to work. Seriously Bob?

This time the market fell more than 30% right after Bob invested. Bob, amazed at his investing prowess, did not sell.

After the 1987 crash, Bob was really planning to wait it out. In the late 1990s everything was on fire. The internet was unbelievable new technology and stocks were flying high. By 1999 Bob had accumulated $68,000 from saving each year. A firm believer that the Y2K bug was boloney, Bob invested his cash in December 1999 just before a 50% decline that lasted until 2002.

The next buy decision in October 2007 would be one more big investment before he would retire. He had saved up $64,000 since 2000, deciding to invest this right before the financial crisis that saw Bob experience another 50% decline. Monkey’s throwing darts were probably better at investing than Bob.

Distraught and disheartened, Bob continued to save each year and accumulated another $40k. He kept his investments in the market until he retired at the end of 2013.

So let’s recap: Bob is definitely has “bad timing”, only investing at market peaks just before severe market declines. Here are the purchase dates, subsequent declines and the amounts Bob invested:

Fortunately Bob was a good saver, and actually a good investor. You see once he made his investment he considered it to be a long-term commitment and never sold his shares. Even the Bear Market of the 70’s, Black Monday in 1987, the Tech Bubble or the Financial Crisis did not cause him to sell or “get out” of the market.

He never sold a single share. So how did he do?

Bob almost fell out of his chair when his advisor told him he was a millionaire! Even though Bob made every single investment at the peak, he still ended up with $1.1M! How you might ask? Bob actually had what we would call “Good Investor Behavior”.

First, Bob was a diligent and consistent saver. He never waivered from his savings plan (recall $2k/year in the 70’s, $4k in the 80’s, $6k in the 90’s, $8k in the 2000’s, $10k in the 2010’s until his retirement in 2013 at age 65).

Second, Bob allowed his investments to compound through the decades, never selling out of the market over his +40 years of investing – his working career.

During that time Bob endured tremendous psychological toil from seeing huge losses accumulate right after he made each investment. But Bob had a long-term perspective and was willing to stick with his savings and investment plan – even if his timing was “a bit off”. He saved and kept his head down.

Certainly you realize Bob is an illustration. We would never advise only investing in a single strategy, let alone a single investment like an index fund. If Bob had invested systematically, the same amount each month, increasing his savings like he did he would have ended up with even more money, (over $2.3M) – but that would not have been Bob, the Worlds Worst Market Timer.

So what are the lessons?

If you are going to invest, invest with an optimistic outlook. Long-Term thinking often rewards the optimist. Unless you think the world is coming to an end, optimists are typically rewarded.

Temporary, short-term losses are part of the deal when you invest. How you react to those losses will be one of the biggest determinants of your investment performance.

The biggest factor in investment success is savings. How much you save, and how methodically you save has a much bigger impact than investment return.
Get these three things right along with a disciplined investment strategy and you should do well. Even Bob did well. Nice work Bob.

Buy a tracker, add funds when you can, when nearing retirement have a cash fund in case the market crashes before you start to spend your hard earned.

Forum kikma.sitex sorafmibe1976@gmail.com 2a02:8071:5eb1:9560:cd86:bf1a:b4ac:746b

This article provides a detailed perspective on planning for a comfortable retirement through passive income. It’s interesting how the author emphasizes the importance of tailoring retirement goals based on individual circumstances. The breakdown of income requirements for single and two-person households is quite eye-opening, especially the £43,900 figure for a single person. I wonder, though, how realistic it is for the average person to achieve such a high passive income through investments alone. The author’s strategy of investing in global stocks and maintaining a cash reserve seems balanced, but what about those who may not have the knowledge or confidence to invest in shares? Could there be simpler, less risky alternatives for people who are not as financially savvy? Also, how much of this plan relies on market stability, and what happens if the returns don’t meet expectations? It’s a thought-provoking read, but I’d love to hear more about how to mitigate risks for those who are just starting their retirement planning journey. What would you suggest for someone who’s hesitant to dive into the stock market?

If you buy a world tracker fund, as long as you can choose when to sell you will not lose money, it could be several years though, so if you are saving for a specific reason, like a deposit for a car or a house etc., compound your interest where cash is king.

You may have missed your window on this infrastructure trust’s share price

As the discount narrows to a fairer price, the potential upside has dwindled Markuz Jaffe

29 May 2025

Questor is The Telegraph’s stock-picking column, helping you decode the markets and offering insights on where to invest.

Investors after stable, inflation-linked returns backed by high quality counterparties could do worse than infrastructure. Sub-sectors of the asset class span social infrastructure, such as hospitals and schools, and more economically sensitive investments, such as power generation and transport.

More recently, the significant expansion in digital infrastructure, including data centres, towers and fibre, has captured headlines, driven by the explosion in data consumption globally.

One such access point is Pantheon Infrastructure (PINT), launched in late 2021 with the aim of offering a globally diversified portfolio of high-quality infrastructure assets, co-investing alongside leading private equity houses via individual deals selected by PINT’s manager. Since launch, the company has committed over £500m of investor capital across 13 investments.

PINT’s investment manager, Pantheon, has over 40 years of private markets investing experience, a global investment team and $71bn in discretionary assets under management across real assets, private equity and private credit, as at end-September 2024. This includes $23bn across over 230 private infrastructure investments, of which $4.5bn is invested across 56 private infrastructure co-investments – a significant resource benefitting PINT, despite the trust’s own modest size.

The portfolio is well diversified by sector, with almost half in digital infrastructure, a third in power and utilities and a quarter spread across renewables and energy efficiency, and transport and logistics.

It invests across Europe, North America and the UK, and enjoys a blend of revenue profiles – with the vast majority contracted, supported by almost a fifth in GDP-linked and regulated incomes. To further spread risk, the company makes use of an active currency hedging programme to help reduce portfolio valuation fluctuations due to FX movements.

PINT’s top investments by value highlight this diversification: Calpine, a principally gas-fired US independent power producer; Fudura, a Dutch provider of electricity infrastructure; Primafrio, a European temperature-controlled transportation and logistics firm; National Broadband Ireland, a network developer and operator for the nation; and National Gas, owner and operator of the UK’s sole gas transmission network.

Of these holdings, the most immediately attractive is Calpine, which is set to be bought by Constellation Energy Corporation (CEG). The deal, expected to complete later this year, will grant PINT a mix of CEG shares and cash, split 75pc and 25pc, respectively. While this has introduced some volatility into PINT’s portfolio valuation – the share price of CEG has ranged from a peak of around $350 to a low of $170 in 2025 alone – it also represents PINT’s first disposal, and a potentially significant exit from one of its top performing investments to date.

PINT targets a net asset value (Nav) total return of 8-10pc per annum, and declared dividends of 4.2p for FY24. Although dividend cover was relatively low for the year (0.7x), the manager expects this to improve as portfolio distributions continue to increase.

PINT’s method of accessing these deals via co-investing is a differentiator from peers and provides investors with a fee-efficient exposure to a basket of quality companies that stand to benefit from secular trends of digitisation, decarbonisation and deglobalisation. PINT itself charges a modest 1pc per annum management fee on the first £750m of net assets, with no performance or transaction fees. Additionally, the portfolio’s weighted average discount rate of 13.6pc as at end-December 2024 highlights the high level of return that the underlying businesses are expected to achieve based on their valuation modelling.

The company has a conservative balance sheet, with no debt drawn at the trust level. PINT’s £115m revolving credit facility provides liquidity but was undrawn at yearend and, combined with £24m in cash against outstanding investment commitments of £19m, marks a robust position for this strategy.

Currently a yield around 4% and the price up 20% since the start of the year, so currently not of interest for the Snowball

Watch List Trusts buying back shares last month.

APAX,FGEN,GCP,HICL,INPP,TRIG,UIL,UKW.

Contriain Investor

Pillar #1 – Consistent Dividend Hikes

Most investors approach dividend paying stocks backward.

Here’s how it usually works …

An investor will scan the markets looking for stocks paying a high dividend. After all, if a company is currently paying a high yield, it’s a great investment, right?

Dead wrong!

In fact, looking at the CURRENT yield is one of the slowest ways to grow your money.

You see, if you’re focused on current yields, you’re too late to the party. All the major gains have already been made. You’ll need to settle for earning a paltry 4%, 5%, maybe 6% per year … with minimal stock-price appreciation, too.

Sure, chasing high current yields will provide you with instant gratification, but it won’t give you the recession-resistant income … or the 15% year on year returns we want.

Instead, you need to focus on consistent dividend hikes.

In my opinion, selecting companies with a proven track of increasing their dividend payments is one of the safest, most reliable ways to get rich in the stock market. You see, every time a company raises its dividend, you start earning more from your original investment.

For example:

On a $1,000 initial investment, $30 in dividends equals a 3% return. Later, if the dividends go up to $40 a year, you are effectively earning 4% on your initial $1,000 investment.

As this trend continues, you could easily be earning 10%, 15%, even 20% per year just from rising dividends, as your initial investment never changes.

However, this ever-growing income from dividend hikes is just ONE part of the puzzle. To engineer real growth and quickly double an initial investment, we must combine Pillar #1 with the next two pillars of “Hidden Yield Stocks.”

Pillar #2 – Lagging Stock Price

After years of active investing, I’ve only ever found one surefire way to predict whether a stock will go up or down.

I call it the “Dividend Magnet,” and here’s how it works …

After you’ve identified stocks that are built on the foundations of Pillar #1 (consistently hiking their dividends), you want to narrow your search to companies whose share price LAGS behind the rate of dividend increase.

Why? Well, it’s simple really …

Share prices almost always increase as dividends increase.

This is because as a company hikes its dividend, mainstream investors tend to flock to the stock, chasing the new, higher yields. And this inevitably bids up the share price.

Let me give you a few examples where the dividend acts like a floor to keep bumping the share price higher:

UnitedHealth Group: Dividend Up 460% Share Price Gains 510%

Mastercard: Dividend Up 500%, Share Price Gains 532%

Cisco Systems: Dividend Up 111%, Share Price Gains 113%

As you can see in these examples, the stock price lags behind the dividend increases at some point in time …

However, as more investors notice the company’s soaring dividend and buy in, the price lag closes—sending the share price soaring.

So, by investing in the right companies whose share prices have fallen behind despite consistent dividend hikes, you can buy the stock, safe in the knowledge the Dividend Magnet will eventually pull the price up.

Now, investing with Pillar No. 1 and No. 2 alone would stand you in great stead.

However, there’s one final Pillar of a “Hidden Yield Stock” that can rapidly accelerate both the share price and dividend payouts …

Pillar #3 – Stock Buybacks

Uncovering companies that are buying back their stocks is one of the fastest ways to accelerate your gains.

You see, when a company buys back its stock, it is improving every single “per share” metric investors watch (earnings, free cash flow, book value, etc.).

After all, if a company reduces the number of its shares by 50%, its earnings per share will automatically DOUBLE without any actual increase in profits. And I probably don’t need to tell you what will happen next …

Investors quickly bid up the stock’s price to bring it back in line with the value it was trading at before. Indeed, my research shows that simply investing in stocks that are reducing their share counts can help you beat the broader market’s performance.

And it’s important to bear in mind that S&P 500 companies are sitting on huge piles of CASH (more than $1 trillion in all!). They’re rolling out fresh buybacks amid continued economic growth post-pandemic, and they’re getting a nice upside kick in return.

You can see this just by looking at the shares of Union Pacific (UNP), which took an impressive 31% of its stock off the market in 10 years, helping drive a 100% gain in the share price!

And that’s just one example. By targeting cash-rich companies that either continue to buy back shares now or have a long record of doing so (even if they’re holding off today), you can set yourself up for HUGE price gains.

In short …

Combine the Three Pillars … Buybacks,

Dividend Hikes and Price Lags, and Your

Yearly Returns Can Be Absolutely Astounding

DIY Investor Diary: why this is the only fund in my SIPP

A DIY investor explains how he is investing during retirement, naming his top tips for younger investors, and explaining why he has opted for just one fund in his self-invested personal pension (SIPP).

24th October 2023

by Kyle Caldwell from interactive investor

In our DIY Investor Diary series, we speak to interactive investor customers to find out how they invest in funds and investment trusts, what their goals and objectives are, current issues and concerns regarding their portfolio, and what they’ve learned along the way. The premise is to try and provide inspiration for other investors, and we would love to hear from more people who would like to be involved.

When it comes to fund investing, one of the most common questions is whether there’s an ideal number of funds for a portfolio to strike enough balance between risk and reward.

However, as is common with other investment-related questions, there’s no “magic number” that investors should be aiming for.

Although, there is a pitfall to avoid: buying too many funds or investment trusts. If you treat funds like sweets and have too many, you risk ending up doing damage through over-diversifying and unwittingly replicating the market. This is known as “diworsification”.

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For example, if you own half a dozen or more UK funds, you could potentially end up owning hundreds of different companies. That makes it harder to beat the stock market because your portfolio ends up looking like it. 

If you want to invest in hundreds of UK shares, this can be done much more cheaply through a passive fund – either an index tracker or exchange-traded fund (ETF).

Therefore, it is important to ensure that each fund is bringing something unique to the party in terms of how it invests and what it is investing in.

The individual profiled in this DIY Investor Diary article ensures that there are no obvious areas of overlap in his fund holdings. He and his wife havehad a stocks and shares ISA for around 20 years, and during this time typically held half a dozen funds in each. 

He said: “I invest in different regions to have diversification, but at the same time I want to avoid being over-diversified, which is why I don’t have a high number of funds. I don’t want to have funds owning the same stocks.

“It is also important to have a manageable number of funds in order to be able to concentrate on them at any one time.”

Examples of funds held over that 20-year period include Artemis Income, Marlborough UK Micro Cap Growth, Jupiter European and Templeton Global Emerging Markets.

Longevity and consistency of performance are among the main qualities he looks for when sizing up funds.

He says: “I like to invest in fund managers who have been running money for a while and those that have a decent track record over three, five and 10 years. I don’t pay much attention to the one-year figure, as anyone can shoot the lights out over the short term.”

However, for his self-invested personal pension (SIPP), just one fund is held: Vanguard LifeStrategy 100% Equity. This passive fund provides diversified exposure to global stock markets by investing in 10 index funds managed by Vanguard. It is considered a potential one-stop shop holding, or a core holding, due its approach.

One of the main reasons why our DIY Investor has opted for just one passive fund is “to keep things simple”.

“It is a very straightforward fund, so I don’t have to think about it much. If I had chosen an active fund or a couple of them, I would need to monitor their performance more closely. I want to enjoy my retirement and focus on that rather than chop and change fund holdings.”

While there are lower-risk options available in the LifeStrategy range, with the four other funds having lower equity content and the balance in bonds, our DIY investor is prepared to accept higher risks in pursuit of potentially greater rewards.

He prefers equities as shares are a growth asset, which is why he went for the 100% option as he doesn’t want exposure to bonds. While the income that bonds offer is more reliable than company dividends, the disadvantage is that as the income is fixed, it does not rise with inflation.

Our DIY investor says that while he is withdrawing from the SIPP, he still wants to see the money that’s remaining growing over time. In addition, he likes the Vanguard fund’s home bias, which is a 25% weighting to UK equities. 

He says: “Our occupational pensions are available in full in 2.5 and four years respectively. However, both could be taken immediately if needed. The SIPP withdrawals can reduce at that point if necessary or, more probably, reduce at age 67 when our full state pensions become available, to keep our respective incomes below the 40% tax thresholds. The SIPPs can then grow in the background as part of our inheritance tax planning.”

Our DIY Investor points out that due to having the workplace pensions and state pensions further down the line he is “happy to take on the risk” of having the SIPP invested in one passive fund and 100% in equities.

In addition, to the ISA, SIPP, and workplace pensions, three bank shares are held: Barclays , Lloyds Banking Group and NatWest Group . He views this separate pot as “fun money”, and notes that the “UK banking sector is one we are familiar with investing in.”

The couple also have Premium Bonds and cash savings that are kept below interest tax allowances.

He views the state pension as a “nice to have”, rather than as central to retirement planning. “We are deliberately not relying on the state pensions, regarding them in our overall planning as ‘nice to have’ rather than guaranteed,” he says.

Taking money out of the ISA is being prioritised, due to ISA money typically forming part of an individual’s estate for inheritance tax (IHT) purposes. A SIPP, however, does not form part of an estate for IHT purposes. If you die before age 75, the beneficiary pays no tax. For those who die after 75, beneficiaries will pay tax at their marginal rate on any income they receive.

Our DIY Investor adds: “This is all money set aside for our retirement and we are making a point of enjoying it while we are still fairly young. Our children are all planning and investing towards their own retirements with our support and guidance, although they will get some kind of legacy of course (within overall IHT limits).

“We’re currently drawing slightly over the natural yield from the SIPPs in the knowledge that we have no mortgage or debts, with other savings and investments to fall back on if needed.”

His top tips for fellow investors, and in particular for those who are younger, is to “start as early as possible” to benefit from the wonder of compound interest. “Even if it is only £25 a month, it is worth doing. Also if you are younger, don’t go for cash, go for the stocks and shares ISA instead,” he says.

Another tip is to increase your monthly investments when a pay rise comes into effect to “help keep pace with inflation”.

How much passive income will I need to retire comfortably?

Story by Royston Wild

A senior group of friends enjoying rowing on the River Derwent© 

Provided by The Motley Fool

After spending a lifetime at work, we all hope to enjoy the kick back and enjoy the fruits of our labours. But exactly how much passive income will we need to live comfortably? This can vary substantially from person to person.

The good news is that investors today have more opportunities than ever before to hit their retirement goals. Here’s how I’m confident of achieving a luxurious retirement.

The target

As I mentioned, the exact amount a person needs in later life will vary, depending on factors like their retirement goals, where they live, and their relationship status.

Yet it’s worth considering what the Pensions and Lifetime Savings Association (PLSA) says the average person needs for a comfortable retirement to get a rough ball park estimate.

Source: PLSA

Its latest research shows that the average one-person household requires a £43,900 yearly income for a comfortable lifestyle. This level of income would provide for essentials and extras like a a healthy budget for food and clothes, a replacement car every three years, and a two-week holiday in the Med and frequent trips away each year.

The figure for a two-person household is £60,600.

A £38k+ income

There are many paths individuals can take to hit that goal. They can invest in property, develop a side hustle, or put money in dividend- and capital gains-generating shares, for instance.

I’ve personally chosen to prioritise investing in global stocks to make a retirement income, with some money also put aside in cash accounts to manage risk. With an 80-20 split across these lines, I’m targeting an average annual return of at least 9% on my share investments and 4% on my cash over the period.

Let me show you how this works. With a monthly investment of £400 in shares and cash, I could — if everything goes to plan — have a £641,362 nest egg to retire on.

If I then invested this in 6%-yielding dividend shares, I’d have an annual passive income of £38,482. Added to the State Pension (currently at £11,975), I could easily achieve what I’ll need to retire in comfort.

Of course, investing in shares is riskier than putting all my money in a simple savings account. However, funds and trusts like the iShares Core S&P 500 UCITS ETF (LSE:CSPX) can substantially reduce my risk while still letting me target the strong long-term returns the US stock market can provide.

Remember, though, that performance could be bumpy during broader share market downturns.

This exchange-traded fund (ETF) has holdings in all the businesses listed on the S&P 500 index. As well as providing me with excellent diversification by sector and region, it gives me exposure to world-class companies with market-leading positions and strong balance sheets (like Nvidia and Apple).

Since 2015, this iShares fund has provided an average annual return of 12.5%. If this continues, a regular investment here could put me well on course for a healthy passive income in retirement. It’s why I already hold it in my portfolio.