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I’ve sold the portfolio shares in BSIF for a loss of £1,091.00.

£18,250 2b re-invested today.

The Motley Fool

by Dr. James Fox

We’d all love a passive income, regardless where that comes from. Some people in the UK invest in buy-to-let properties, other try their hand at trading.

How do we invest?

If I were new to investing, I’d start by opening an investment account with a reputable brokerage. This involves researching and selecting a platform that aligns with my needs, offering a user-friendly interface and access to a variety of investment options.

Personally, I use the Hargreaves Lansdown platform, but appreciate there are alternatives with lower trading fees.

After this, I would have to define my financial goals. I need to establish what and when I’m investing for. For example, when will I want to start taking a passive income?

Understanding my risk tolerance is crucial in determining the mix of assets in my portfolio. I’d have to educate myself on different investment vehicles, considering stocks,  bonds, and even cash.

And finally, when I’m ready, I can start purchasing stocks, bonds, or other investment vehicles.

Compounding is key

If I’m investing £50 a week or £200 a month, I need to appreciate that I’m not going to build a huge portfolio over night.

In fact, the longer I leave my money invested, the faster it grows. And that’s all down to the magical power of compounding. While the initial growth may seem gradual, the power of compounding can significantly amplify returns over time.

As such, it’s essential to stay disciplined and resist the urge to react hastily to short-term market fluctuations.

As the portfolio grows, so does the potential for compounding to work its magic. That’s because I can start earning interest on my interest as well as my contributions.

Compounding takes place when I reinvest my returns year after year. This may involve me reinvesting the dividends I receive.

Or if I invest in a stock like ******, which doesn’t offer a dividend, the company essentially reinvests on my behalf. That’s because it’s focused on growth.

Bringing it all together

A novice investor may look to achieve between 6-10% annually in the way of returns. While an experienced investor might aim for higher returns — perhaps around 10-15% annually.

So if I were starting with nothing, and investing £50 a week, here’s how my investment could grow over 35 years, assuming a 10% annualised return. At the end of the period I’d have £759,327, and it would have generated £71,849 in the final year. Even in 35 years, that’s a strong figure.

£££££££££££££

Government loans (Gilts) pay a guaranteed return so your capital is safe.

Can now be bought from online platforms such as AJ Bell as simply as

any other share. Can be useful if u are saving for a specific purpose on a

set day.

At present yielding around 4% so not suitable for inclusion in the blog

portfolio but could be paired trading with a higher yielding Trust to give

a blended yield of 7% with an extra margin of safety.

Wouldn’t it be incredible to have a tax-free source of passive income? The idea of generating income without the burden of taxes is a dream many of us share.

So, what if I had £5,000 in savings? Could I really turn that into £60,000 of passive income within 30 years? Well, it’s certainly possible

Nurturing a portfolio

£5,000 is a great starting point. But in order to make my portfolio grow faster, I’ll need to embrace the concept of regular saving or regular contributions.

This isn’t rocket science. It’s pretty obvious. If I were to contribute £250 a month from my earnings to the portfolio, it would provide me with additional capital for my investments.

Over time, my commitment to regular saving has several benefits, including pound-cost-averaging and harnessing the power of compounding — the snowball effect where my money makes more money.

By consistently adding to my investments, I can create a cycle of growth, where each contribution builds on the previous one.

Compounding

As noted above compounding is central to long-term wealth generation. This is the process of reinvesting my returns year after year.

It might not sound like a world-beating strategy. But it really is. Essentially, when I reinvest my returns year after year, it means I’ll start earning interest on my interest. In turn, this leads to exponential growth.

In the below charts we can see how an original £5,000 investment would grow when contributing £250 a month.

The first chart shows how the investment would grow with a more modest 6% annualised return, while the second chart highlights how my investments would grow at 10%.

Created at thecalculatorsite.com: Growth over 30 years with 6% annualised returns

Created at thecalculatorsite.com: Growth over 30 years with 10% annualised returns

Low double-digit growth is what many seasoned investors will be looking for. And while that might sound unachievable, I can do it too by using online resources like The Motley Fool to help me make the right investment choices.

Because, unfortunately, if I invest poorly, I could lose money.

In the final chart, after 30 years, my investment would be worth around £670,000. That’s a huge amount of money. In fact, it would be growing by a phenomenal £62,000 a year.

So, in theory, I could take that £62,000 and treat it as passive income. It’s worth noting that this may involve selling some holdings as my portfolio is unlikely to generate all that money in the form of dividends.

But finally, and perhaps the most important thing worth noting, is that I’ll want to do all of this within a Stocks and Shares ISA. That’s because the wrapper will shield all my earnings from tax. It could be hugely beneficial.

Bear

Trusts still not favoured by Mr. Market.

Could still go lower which would mean the yield increases.

Bull

Some great yields which could turbo-charge your portfolio, best to diversify just in case the Trust you choose is a clunker.

If u want to DYOR for high yielding Trusts for your portfolio.

GSEO will be leaving the watch list as it yields below 7% after

it rose by 29%.

Bear

The Trusts that have increased the most from their low are more high risk as they could return to their low or lower.

RGL. Trusts don’t trade at big yields for no reason, although Mr. Market isn’t always right but the risks are much higher.

Bull

They are the Trusts favoured by the market, for whatever reason.

The fcast for the blog portfolio using this tax year, ending next month, the total would be £10,880,00, compounded at 7% for the next nine years would achieve a pension of

£20,019,00 pa

The blog portfolio will retain the end of the year for reporting its income.

Compound growth: A powerful argument for investing long term.

Provided by This Is Money

Investing over many years eventually reaches a ‘tipping point’ where your returns double what you’ve put in to date, highlights new research from Interactive Investor.

In a powerful argument for investing long term, compound growth can account for an ever larger share of your portfolio or pension fund over the years.

Putting £250 per month into investments returning 5 per cent a year would see a gain of £83 on your £3,000 total contributions, or 3 per cent, in year one.

This means that your returns after that year would represent just a small percentage of the total pot. 

But by year 10, the power of compounding would mean the portion delivered by investment growth would make up 30 per cent of the overall portfolio, and by year 20 it would be 72 per cent.

At year 26 it would hit 105 per cent – with a pot containing £78,000 worth of your monthly contributions over the period now worth £160,229.

Then you’ve reached the tipping point where your returns double what you’ve put in.

If you paid in the same amount but achieved an annual investment return of 7 per cent, it would take 18 years to reach the investment ‘tipping point’, calculates ii.

When considering compounding, you also need to take into account inflation and charges.

Compounding returns offer a layer of protection against investment volatility, says Myron Jobson, senior personal finance analyst at ii.

‘Generally, as your investment grows, compounding becomes more significant, and there’s a point where growth outpaces new contributions.

‘This varies for each individual’s investment strategy and market conditions. 

‘In our scenario, the investment tipping point is 26 years, but the reality is many investors will hit their financial goal, be it investing to buy a home or for retirement, a lot sooner.’

Five per cent growth: Impact of compounding interest over 30 years on £250 monthly contributions (Source: Interactive Investor) 

Jobson explains: ‘The nature of investing means the annual rate of return isn’t fixed, meaning you can earn more or less in a given year, depending on the market environment.

‘Investing as much and as early as you can – ensuring that all expenses can be met and maintaining a rainy-day fund – can pay dividends over the years. The key is to stay the course, don’t make unnecessary changes, and reinvest dividends and interest earned on investments.’

Jobson adds that for pension savers, retirement investments are turbocharged by the tax relief and employer cash that are added to your own contributions.

‘This dual advantage not only amplifies the initial investment but also leverages compounding over time, accelerating the growth of the pension fund.’

Seven per cent growth: Impact of compounding interest over 30 years on £250 monthly  contributions (Source: Interactive Investor)

Pensions and the magic of compound growth 

Even if you don’t have a stocks and shares Isa, the magic of compound returns is probably already benefiting you, if you are one of the millions of Brits contributing to workplace or personal pensions every month, writes Becky O’Connor, director of public affairs at PensionBee.

Pensions are possibly the longest-term investment you will ever have, which makes them particularly fertile ground for compounding to work its magic.

Think of your own and your employer’s pension contributions as the seeds, tax relief as the water, your investment plan as the soil and compound growth as the sunshine, helping to grow what eventually becomes a mature pension pot for when you retire.

The investment ‘tipping point’: When do your returns overtake total contributions?

One of the beauties of pensions is that if you start paying into them early, as so many workers now do thanks to auto-enrolment kicking in at age 22 (set to come down to 18), you will benefit from around 45 years of compound growth from the investments within that pension.

In fact, assuming roughly similar average annual investment returns, the impact of compound growth for younger pension savers who maximise their workplace pension contributions in their early career rather than starting with lower contributions or even foregoing a pension altogether for more immediate priorities, can be really astonishing.

Someone who makes the same annual contribution of £2,000 a year for their whole working life, but misses five years of pension contributions in their twenties would have a pot £22,000 lower at retirement, at £121,450 rather than £143,215.

“Compounding can work against you too, in that percentage fees on investment products can add up the wrong way, magnifying the reduction in your investment pot over time”

However, if they choose to keep paying in when they are young and instead miss those five years of contributions when they are older, from 60 to 65, the impact on their pension pot is much smaller – with a pot size around £11,000 lower, at £131,895, highlighting the greater importance of contributions made early on to eventual pot size.

Of course if your investment grows by significantly more than the fee, the impact of this is reduced, but it’s worth keeping an eye on and making sure you aren’t being charged over the odds for an investment that isn’t delivering.

Let’s assume u bought the 3 Trusts above, equal weight and

the dividend yield at the time was 7%, it wasn’t but it matters

little.

Your 10k capital has decreased but u have earned £700 in dividends.

In ten years time if nothing changes and u are able to re-invest the dividends at 7%, your capital will have been returned. Your account would be

10k of dividends

plus the value of your Trusts.

As the intention is to never sell the Trusts and to use the dividends for a pension the value of you Trusts matters little to u, maybe more to those wee cats and dogs u are going to leave your capital too but they don’t know that fact.

Now after ten years u still have 7% income from your Trusts.

If the 10k is invested in Dividend Income shares yielding 7% your initial 10k

will be yielding 14%.

The more years u have of re-investing the bigger your Snowball will be.

Your dividends should grow over the ten year period, not included in the calculations and if/when share prices improve, your buying yield will remain the same but your running yield will fall, so u might have the chance to flip your Trusts but that’s another post for another day.

GetRichSlow

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.

By
David 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.

A 10-year anniversary: the TRIGger for a closer look at The Renewables Infrastructure Group
Anyone out there know what they will be doing in 10 years’ time? Well, Doceo Insights has a good idea of what it will be writing about in March 2034…

By
Frank Buhagiar

Can you remember what you were you doing on Monday 29 July 2013? Lying on a beach somewhere hot perhaps (at the time 2013 was the ninth warmest summer on record in the UK)? Chances are the then Team TRIG (The Renewables Infrastructure Group) will have no trouble remembering what they got up to on that particular summer’s day – celebrating the company’s IPO (Initial Public Offering) on the London Stock Exchange and the successful raising of £300 million. A 10-year anniversary? An opportunity to see how far TRIG has come since those heady days of summer 2013 that just can’t be ignored…

Rewind
Back to 2013, what did TRIG look like and what did it do with the funds raised at IPO? A delve back into the archives unearths the company’s 2013 Annual Report which states: “IPO proceeds used to acquire an initial portfolio of 18 high quality wind and solar assets – diversified by technology, weather systems, power markets and regulatory regimes – which is performing in line with expectations”. By November 2013, the portfolio had expanded to 20 projects: “In accordance with TRIG’s strategy set out at the IPO, initial portfolio expanded with acquisition of two solar parks in November to bring portfolio to 20 investments at 31 December 2013 (14 onshore wind and 6 solar PV assets in the UK, Ireland and France with total generating capacity of 288.4MW)…” As for a portfolio valuation, the Report goes on to say: “Directors’ Valuation of the portfolio at 31 December 2013 of £300.6 million (compared with £279.4 million as at 29 July 2013)…”

20 wind and solar assets; total generating capacity of 288.4MW; £300 million portfolio valuation. We have a starting point.

Fast forward
To today, specifically to 28 February 2024 when TRIG announced its full-year results for the year ended 31 December 2023. Helpfully, Chair Richard Morse used his statement to reflect on how far the company has come since its IPO 10 years ago: “The past year marks a decade since TRIG’s IPO in 2013. Our diversified portfolio now has generation capacity of 2.8GW, ten times that at IPO, and can produce enough clean energy to power 1.9m homes and displace 2.3m tonnes of CO2 per annum. The portfolio’s strong, inflation-linked cash flows have supported healthy dividend coverage and enabled TRIG to fund organically the delivery of 300MW of new generation capacity since IPO. This year, robust cash flows were achieved despite the strained macroeconomic environment as interest rates rose to the highest levels during the Company’s history. This macroeconomic backdrop has negatively impacted the share prices of renewables investment companies, including TRIG.”

And the portfolio’s valuation has increased ten-fold too: “The Company’s Net Asset Value as at 31 December 2023 was 127.7p per share (31 December 2022: 134.6p per share) and the Company’s Portfolio Valuation was £3,509m.”

TRIG has come a long way in 10 years.

Fast forward x2
Question is where will TRIG be in 10 years’ time in 2033? Sadly, no crystal ball to hand. Next best thing though, a host of broker comments on the back of the company’s latest results to consult. While the brokers do not attempt to predict what TRIG will look like in 10 years’ time, they do at least provide some useful insights that can help inform a shorter-term outlook for the company.

First a quick overview of the latest numbers courtesy of Winterflood: “Annual results for year to 31 December 2023. NAV per share -5.1% (-6.9p) to 127.7p, driven by lower power price forecasts and higher discount rates. Power prices trended down during 2023 following reductions in gas prices. Since the balance sheet date, forwards for 2024-2026 have further reduced by c.20%. Over a five-year horizon, a 10% reduction in power prices would reduce the fund’s NAV by 2.2p. The weighted average discount rate increased over the year to 8.1% (31 December 2022: 7.2%)…Pro forma portfolio EBITDA was £610m over 2023 (-9.9% YoY) reflecting lower power prices and below budget generation. Generation 6% below budget at 5,986GWh, with some impact from grid downtime in excess of budget allowances, and site-specific factors including repair or enhancement works to improve the operational resilience of generation equipment and electrical infrastructure.”

Winterflood goes on to point out that “TRIG is actively progressing with several further divestment opportunities, with the primary objective of reducing the level of the outstanding RCF…Preliminary offers have been consistent with or above the portfolio valuation. Battery storage is an area of strategic focus, highlighted by recent acquisition of Fig Power, a UK developer with a focus on battery storage systems. The four Spanish Cadiz solar projects reached operations in Q1 2023. Construction has commenced for the Ryton battery storage project in the UK, and development activities continue to progress for the Drakelow battery storage project in the UK and the repowering of five onshore wind projects across France and Northern Ireland.”

No resting on laurels for TRIG after 10 years, it seems – lots still going on at the renewbie.

As for other brokers, below are comments from five other houses:

Liberum is positive: “TRIG’s results were in line with expectations, with NAV performance broadly in line with the peer group during 2023. The sector has been significantly impacted by rising interest rates and lower near-term power prices, although the longer-term outlook has remained fairly stable. The result has been a material de-rating in share prices during 2023, with the sector generating an average TSR of c.-22% and discounts now averaging in excess of 30%. For ratings to improve, interest rates need to start to rollover and the supply/demand imbalance in the market needs to be addressed…Of the 22 trusts in the renewables sector, TRIG are one of the best placed to re-rate in 2024, in our view. The scale, conservative balance sheet, diversification and strong dividend cover mean it is well-placed to survive the current market volatility. We view the 20% discount and 7.3% dividend yield as an attractive entry point for a company with a high degree of inflation linkage and strong track record.”

So too is, Investec: “TRIG currently trades on a material discount to NAV…However, we believe that the market is awaiting confirmation of disposals and for TRIG being closer to a position to undertake share buybacks if the share price continues to remain suppressed. We reiterate our Buy recommendation.”

And Numis: “We view TRIG’s discount of 20% to the latest NAV as excessive given its robust position and scope to continue to deliver attractive levels of capital growth from its asset base and prospective yield of 7.5% as attractive particularly if the fund is able to report some positive news on disposals and reduce the RCF drawings, thereby improving its optionality to react to current markets.”

Jefferies is a holder: “The results are relatively uneventful, with the disposal activity expected during 2024 likely to be much more impactful, particularly given the fund’s greater capital allocation flexibility once a material reduction in the RCF drawings has been achieved.”

While JPMorgan is staying neutral: “…given the size and diversification of the portfolio, and class leading transparency, we remain comfortable with our Neutral recommendation.”

Three positives; two holds/neutrals – on balance a thumbs up for TRIG from the broking community. And a potential trigger for a share price recovery also identified – any positive news on disposal activity that may be forthcoming.

Final word
On TRIG’s outlook goes to the Chair: “…the secular themes of decarbonisation and energy security continue to give us confidence in our strategy and outlook. The deployment and operational performance of renewables assets remains a high priority for governments across Europe. TRIG is well positioned to be at the forefront of the energy transition and our Managers will continue to look for ways to advance our 1GW development pipeline of potential generation and storage capacity, through selective investment to progress TRIG’s strategic priorities and improve shareholder returns. Our balanced portfolio of wind, solar and battery storage projects continue to perform well, deliver inflation-correlated returns, and generate strong operational cash flows with low sensitivity to interest rate movements. By taking a disciplined approach to capital allocation, and with two leading Managers steeped in investment expertise and operational excellence, TRIG is well positioned to build on our strong decade-long track record.”

1GW development pipeline – now that should keep TRIG busy for the next 10 years or so. Chair expecting more of the same then.

A 10-year prediction
Of course, time will tell what the next decade has in store for TRIG. But here’s a 10-yr prediction we can make – chances are that, with a fair wind, sound execution and a wee bit of luck, the title of a Doceo Insights article around March 2034 (specific date to be confirmed) will be something along the lines of: A 20-yr anniversary, the TRIGger for a closer look at The Renewables Infrastructure Group…