The Motley Fool

How I plan to retire early with £1,000

a month of passive income

Story by Mark David Hartley 

Passive income is the perfect way to continue receiving an income after retirement. My pension will only stretch so far, so if I want to retire early, I’ll need something extra.

I think the best way to do this is with a portfolio of shares that pay dividends.

How dividends work 

A dividend is like a small gift that companies pay their shareholders every year as a thank-you for investing in them. A 5% dividend yield on a £1 share would pay me 5p for each share I hold. This is in addition to any returns made if the share price increases.

Once the passive income stream has been established, I can begin withdrawing my returns as needed.

Dividend yields change regularly, so it’s impossible to know how much I’ll receive each year. But with a portfolio of well-selected stocks, I can aim for a conservative average of around 5%.

How my strategy could work

I’ll use the small-cap iron casting and machinery firm Castings(LSE:CGS)  as an example.

Its 5% dividend yield is lower than many other UK stocks but it has an excellent track record of making regular payments. I’d aim for a good mix of reliable low-yield dividend shares and less reliable high-yield shares.

Furthermore, it’s currently estimated to be trading at 58%   below fair value so could go up from here. I don’t want to dive into an overvalued dividend stock that could lose value and negate any returns I make from dividends.

On the downside, Castings earnings are forecast to grow at only 3.1%, slower than the UK average of 12.6%. Still, the dividend payments make it worthwhile.

I’ve calculated that I could reach my goal of £1,000 a month in passive income in 20 years with the following strategy.

My outcome is based on a 5% dividend yield with semi-annual payments and an expected 0.2% annual dividend increase. I’ve also calculated an expected 6% annual share price increase. This is based on the past performance of an average basket of well-performing FTSE stocks.

• First, I’d invest £12,000 into a portfolio of shares similar to Castings

• I’d use a dividend reinvestment plan (DRIP) to put any dividends earned back into the investment

• I’d contribute an additional £200 a month to the investment

In 20 years, my investment could have grown to £257,395. At this point, my average annual returns with dividend payments could be £12,081 – just over £1,000 a month.

Risks

There are risks involved with such a strategy. I can’t guarantee the dividend payments will be consistent, or remain at 5%. The share price of any stocks I include could also fall, resulting in financial losses.

For this reason, I need to carefully research all the stocks I add to my portfolio. I should ensure they have a solid history of growth potential and a track record of making reliable dividend payments.

GAVIN LUMSDEN, CITYWIRE INVESTMENT TRUST INSIDER

Refinancing risk sinks shares in Regional Reit

Shares in Regional Reit plunge 39% year to date as investors fret about office investor’s enlarged debt burden and falling occupancy.

BYMICHELLE MCGAGH

Shares in Regional Reit (RGL) have tanked 39% this year despite a lower-than-expected decline in the value of the regional office portfolio.

At the start of this month, Regional reported a 5.9% like-for-like fall in its assets outside of the M25 orbital road in the six months to 31 December.

This was better than the 11% decline in the MSCI UK Monthly Property index but failed to reassure investors, who worry about the trust’s debt and falling occupancy. They have have continued to dump the shares, resulting in a fall of 24%, or 6.8p, this month.

Shares began the year at 35p and now sit at 21.5p. They have plunged from 44.7p last September, leaving Regional on a 64% discount to Deutsche Numis’ estimated net asset value (NAV) per share of 59.6p. The last NAV from the company was 64.4p per share in June.  

The yield on the shares has also widened to 22%, despite the dividend suffering a 27% cut in September as the fund paid just 1.2p in the second quarter, down from 1.65p in the previous three months.

At the heart of investors’ concern is the weight of Regional’s debt burden, as the fall in valuation increased its net loan-to-value (LTV) to 55.1%, although the company says debt remains fully hedged at an average cost of 3.5% with an weighted average maturity of 3.5 years.

Management sold six assets over the second half of 2023 in a bid to pay down debt and reduce its LTV, receiving proceeds of £26.1m before costs.

This took the total number of disposals for 2023 to 10, and further sales are expected as Stephen Inglis, chief executive of London and Scottish Property Investment Management, battles to bring the LTV back to its 40% target.

Deutsche Numis analyst Andrew Rees said a ‘near-term priority’ for the Reit will be the £50m retail bond due for repayment in August this year.

‘Reducing debt will therefore require an acceleration of disposal activity from current levels although we note this remains a challenging market to sell regional offices,’ he said.

‘Without an improvement, or even stabilisation, in occupier appetite, we believe the outlook for Regional remains uncertain and this is reflected in the share price.’

Occupancy has been another area of concern since lockdown prompted a shift to working from home, which left many companies without the need for expensive offices.

While Regional had been confident that local offices – which make up 92% of the fund – would be part of the work-from-home trend that would allow employees access to office facilities closer to home rather than travelling into major cities, the theory has yet to play out.

There are also significant costs in upgrading properties to the top EPC energy certificate rating of B.

The number of properties in the portfolio dropped to 144 in 2023 from 154 in 2022, while the number of occupiers has reduced from 1,076 to 978. On top of lower levels of both offices and occupiers, occupancy overall has fallen from 83% in 2022 to 80% in 2023.

Inglis (pictured) said 2023 was ‘one of the most challenging years for Reits in recent memory’ and Regional was not immune.

He said valuations have been impacted but his asset management initiatives ‘continued to mitigate some of the impact on the portfolio’.

‘The leasing market was slower than anticipated largely due to the uncertainty around working patterns and the geopolitical situation impacting inflation and interest rates, but with some stability we are witnessing increasing numbers of enquiries for our assets,’ said Inglis.

RGL declined to comment on the fall in the share price. 

INVESTMENT OBJECTIVE

The Company’s objective is to provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange. The Board fully recognises the importance of dividend income to shareholders.

Earnings and Dividends

Earnings per share rose marginally compared with the same six-month period last year, from 8.79p to 8.80p. Special dividends, received and accounted as income, were down from £2.4 million to £0.9 million. The trend in ordinary dividends received was similar to City of London’s last financial year, with cuts from mining companies being offset by increases from banks and oil companies.

City of London has declared two interim dividends to date of 5.05p each in respect of this financial year. The Company’s diverse portfolio, strong cash flow and revenue reserve give the Board confidence that, in line with its objective to provide long-term income and capital growth, it will be able to increase the total annual dividend for the 58th consecutive year. The quarterly dividend rate will be reviewed by the Board before the third interim dividend is declared in April 202

EPIC Name Yield

NESF NextEnergy Solar Fund Ltd 10.22
RECI Real Estate Credit Investment PCC Ltd 9.92
TFIF TwentyFour Income Fund Ltd 8.79
BSIF Bluefield Solar Income Fund Ltd 8.43
SUPR Supermarket Income Reit PLC 7.84
AGR Assura PLC 7.42
PHP Primary Health Properties PLC 7.11
MRCH Merchants Trust (The) PLC 5.30
CTY City of London Investment Trust (The) PLC 5.14
IUKD iShares FTSE UK Div Plus (5.5)

If u need income to pay your bills an equally weighted portfolio of

Trusts above pays a blended yield of 7.5%, which should gently increase

over time.

Hopefully when the UK Plc stabilises there should be a capital gain

to be made but if income is your priority that matters little.

I will do some pen portraits, starting next week on the above Trusts.

The company has authority to buyback around 85 million shares,

although they may prefer to buyback considerably less and spend

the capital to improve the prospects of the company for its

shareholders.

Current total bought back around one and a quarter million.

100p going to be support or is it going to continue down ?

Don’t ask me. I know the yield is 8.8%.

Share Buyback Programme

The Board notes the recent weakness in the Company’s share price and the significant discount that the current share price represents to the value of the Company’s assets. Adjusting for the first interim dividend , the closing price of 99 pence per share (as at 14 February 2024) represents a discount of 26% to the 31 December 2023 NAV.

The Board of the Company keeps its capital allocation policy under regular review, evaluating the relative merits of further investment (into both new and existing assets), the management of debt and returning value to shareholders via dividends or through other methods such as share buybacks. As part of this review, and in the context of addressing what the Board views as the excessive discount at which the Company’s shares currently trade relative to the underlying NAV, the Board announces its intention to commence a share buyback programme. In the first instance it has allocated £20 million for the purchase of its own shares.

Share repurchases will be carried out under the existing shareholder authority granted at the last Annual General Meeting, held on 28 November 2023, which allows for purchases of Ordinary Shares by the Company in the market for up to 14.99% of the Company’s issued share capital. Any share repurchases will be funded from a combination of available liquidity, excess operating cash flows from the portfolio and the proceeds from any asset sales as already announced. It is expected that any share repurchases will be accretive to NAV per share.

The Company expects to announce its interim results for the half year ended 31 December 2023 on Wednesday, 28 February 2024. Until such announcement, the Company remains in a closed period in respect of those results and thus unable to buy its own shares, but the Board intends to commence share buybacks following the release of the interims and while the Company’s shares continue to trade at an excessive discount to NAV.

Dividend Guidance Reaffirmed

Shareholders will be aware that the Board of Bluefield Solar has recently declared a first interim dividend for the current financial year of 2.20 pps and has reiterated its target dividend for the full year of not less than 8.80 pps. This represents a dividend yield of 8.9%  based on the closing share price of 99p per share on 14 February 2024. The Company’s operations remain robust, trading conditions are attractive, and the Board expects this year’s dividend to be approximately two times covered.

CHAIRMAN’S STATEMENT

Introduction

City of London achieved a 6.5% net asset value total return during the six months to 31 December 2023 against a backdrop of falling inflation and market expectations that interest rates have peaked.

The Markets

Although economic growth slowed, the main developed countries appear to have avoided a significant downturn, with employment remaining at high levels. Inflation fell by more than expected, especially towards the end of the period, with investors anticipating cuts to interest rates by central banks globally during 2024. The 10-year gilt yield, which was 4.4% at the beginning of July, ended 2023 at 3.5%.

The UK equity market returned 5.2%, as measured by the FTSE All-Share Index, with medium-sized and small companies slightly outperforming larger peers. The best performing sector was real estate investment trusts, reflecting the downward move in gilt yields, followed by technology, in line with trends overseas. Some more defensive sectors, such as food & beverage and health care, were notable underperformers.

Net Asset Value Total Return

City of London’s net asset value total return was 6.5% – higher than the FTSE All-Share Index (5.2%) and the AIC UK Equity Income sector average (5.0%), but behind the IA UK Equity Income OEIC sector average (6.9%). The negative impact of the fall in gilt yields on the fair value of the Company’s fixed interest debt detracted performance by 34 basis points. It should be noted, however, that the £30 million 2.67% 2046 and £50 million 2.94% 2049 secured notes, both issued in recent years, provide borrowings at fixed low interest rates for investment in equities by City of London over the next quarter of a century.

Stock and sector selection contributed by 171 bps. The underweight positions in pharmaceuticals and AstraZeneca were respectively the biggest sector and stock contributors. The second biggest sector impact arose from being overweight in real estate investment trusts, with Land Securities a notable stock contributor. The biggest detracting sector was food producers, with Nestlé a detractor over the six months. The second biggest detracting sector was aerospace and defence, where the Company missed out on the rise in Rolls Royce (which was not held) but benefited from its position in BAE Systems. Other notable stock contributors were 3i, whose main asset is its shareholding in Action, a fast-growing discount retailer in Europe, and Round Hill Music Royalties Fund, which was taken over. The biggest detracting stock was St James’s Place, which announced changes in the structure of its customer fees.

Earnings and Dividends

Earnings per share rose marginally compared with the same six-month period last year, from 8.79p to 8.80p. Special dividends, received and accounted as income, were down from £2.4 million to £0.9 million. The trend in ordinary dividends received was similar to City of London’s last financial year, with cuts from mining companies being offset by increases from banks and oil companies.

City of London has declared two interim dividends to date of 5.05p each in respect of this financial year. The Company’s diverse portfolio, strong cash flow and revenue reserve give the Board confidence that, in line with its objective to provide long-term income and capital growth, it will be able to increase the total annual dividend for the 58th consecutive year. The quarterly dividend rate will be reviewed by the Board before the third interim dividend is declared in April 2024.