James Yardley, senior research analyst at the VT Chelsea Managed Monthly Income fund Provided by City AM
In this weekly series, investment reporter Elliot Gulliver-Needham sits down with a fund manager for a Q&A. This week, we’re hearing from James Yardley, senior research analyst at the VT Chelsea Managed Monthly Income fund.
Top holdings
How does your fund stand out from others in the same market?
Our investors love the fund’s consistent monthly income. The fund pays out exactly the same amount for 11 months of the year with a final remainder payout with any income left over. It’s a fund of funds which combines open-ended Funds, ETFs and investment trusts.
This allows us to get income from a very wide range of sources. Alongside traditional stocks and bonds, the fund also has exposure to infrastructure, renewable energy, supermarkets, GP surgeries and care homes to name a few.
Whilst peers were forced to cut their dividends during Covid, this fund did not. The monthly dividend payout has only ever increased since our launch seven years ago and we model our dividends years ahead.
We have added a huge amount of value from our investment trusts over the past seven years even as much of the sector has struggled. We are able to vary our weights between open-ended funds, ETFs and investment trusts depending on discounts, dividend yields and market sentiment.
Another big differentiator is the fund’s costs. A traditional criticism of fund of funds is they are prohibitively expensive. With this fund’s launch, we were determined to change this – it has a very low AMC, and any discounts or special share classes it obtains all go back into the fund. Its OCF is just 0.71 per cent.
Which of your holdings are you most excited about
We’re really excited about investment trusts.
A combination of technical reasons, higher interest rates, regulations and some individual stock blow-ups has meant the sector is very out of favour. This is providing some amazing opportunities.
Our favourite holding is currently Assura. This REIT, specialising in GP surgeries, gets almost all its rent from the NHS. This is a very boring but reliable strategy. Exactly what we like.
The fund’s earnings and dividends have increased year on year over the past decade. Despite this, the share price has been incredibly volatile, having declined by over 50 per cent while the yield has simultaneously risen to almost 8.5 per cent.
The trust has also locked in the majority of its debt at very low rates for the long term. We think this trust will do very well if rates ever start to come down and, in the meantime, we are happy to be patient and collect the dividends.
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Yields just over 5% so not suitable for the blog, maybe one to consider if u are in a de-accumulation stage along with SMIF yielding 8% for a monthly income stream at the safer end of the market.
How I’d aim to build a £48,000 income from FTSE shares and never work again The Motley Fool
by Zaven Boyrazian, MSc
FTSE shares can be a powerful passive income-generating tool for prudent investors. The UK’s home to some of the most generous dividend-paying enterprises on the planet. And while not all of them are sound investments, the vast pool of opportunities provides investors with ample choice.
In fact, given sufficient time, putting aside £500 each month for top-notch FTSE stocks could be the key to unlocking a £48k income stream in the long run. And those who start early may even get to enjoy an earlier retirement.
Earning income from a portfolio Having cash appear in a bank account from an investment portfolio is relatively straightforward. Investors just need to buy and hold dividend stocks and, usually every quarter, money will magically materialise. However, for those seeking to earn the equivalent of a five-figure salary, taking dividends may not be the smart move. Instead, these payments should be automatically reinvested. This results in owning more shares in each business so that the next time dividends are paid out, investors end up receiving more, even if dividends don’t get hiked, in a snowballing compounding process.
If we use the FTSE 100 as a benchmark, investors who historically reinvested their dividends have earned close to 8% a year instead of just 4% on average. By investing £500 a month at these rates for 35 years, that’s the equivalent of having a portfolio worth £457k at 4%, or £1.2m at 8%!
In terms of income, that’s the equivalent of having either £18,280 without reinvesting during the first 35 years or £48,000 with reinvestments each year. Of course, this is assuming that another market crash or correction doesn’t come along to throw a spanner into the works.
Finding suitable stocks Clearly, dividend reinvestment delivers the best results, providing investors are able to wait before taking their dividend profits. However, it’s important to remember that not all dividends are worth the same. Reinvesting capital into a struggling business that’s likely to cut shareholder payouts isn’t prudent capital allocation.
Instead, investors must pay close attention to the opportunities they’re presented with. As I previously mentioned, not all FTSE shares are good investments. Therefore, even if a high yield is being offered, discipline’s required to avoid falling into traps.
That’s why a company like Admiral (LSE:ADM) looks potentially interesting. The insurance business continues to be a dominant force in its industry. And based on its latest results, it’s easy to see why.
Despite the adverse market conditions, Admiral managed to get more customers through its doors despite higher insurance premiums. As such, total turnover in 2023 increased by 31%, with pre-tax profits up 23%. Subsequently, the return on equity reached 36% compared to 29% the year prior, with solvency ratios improving across the board.
Needless to say, those are some desirable traits for a source of dividends. But obviously, they come with some risk factors. With around half of its customer base concentrated in motor insurance, the impact of inflation is significant. Don’t forget motor insurance policies have a high chance of receiving claims compared to other insurance products. And they’re notoriously expensive, especially now that car parts have risen drastically in cost.
Nevertheless, Admiral’s management has demonstrated the prudence of its strategy, making this a risk potentially worth taking.
The post How I’d aim to build a £48,000 income from FTSE shares and never work again ! appeared first on The Motley Fool UK.
Do you like the idea of dividend income ?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over ?
Ah, retirement. No more snarled commutes, demanding bosses or tight deadlines. But after saving for decades, you now have to figure out how to turn your nest egg into a cash spigot. “It’s a big moment going from earning an income to not earning an income. There’s a lot of emotion and change,” says Jeffrey DeMaso, editor of The Independent Vanguard Adviser, a newsletter for Vanguard fund investors.
Re-engineering your portfolio from accumulation mode to decumulation mode can be daunting. You’ll have to get a handle on how much you need for essential expenses, and you’ll need a strategy to cover them for the rest of your life. “The biggest fear people have about retirement is running out of money,” says Anne Ackerley, head of retirement business at BlackRock.
Fortunately, a variety of products and services – some new, others new-ish – are designed to help people spend and invest their savings wisely in retirement. Some are available only in certain workplace retirement savings plans, so access depends on whether it’s offered in your plan. Other funds or services are available to all individual investors. We’ll walk you through some of the options. All data and returns are through November 30, unless otherwise noted.
Like their conventional target-date-fund predecessors, target-date-plus-annuity strategies invest in multiple asset classes that shift over time to a more conservative mix as you age. The twist is, at a certain point along that glidepath some of your contributions are directed to an annuity. BlackRock’s LifePath Paycheck and Nuveen’s Lifecycle Income series are two examples. Both will be available in some retirement plans this year.
The way the annuity portion works varies. Nuveen’s funds invest a portion of the bond portfolio in an annuity at the start of the series’ glidepath, 45 years before retirement. The annuity allocation starts at 2.5% of the portfolio and increases to 40% at the end of the glidepath. Allocations to the annuity contract included in BlackRock’s LifePath Paycheck series, by contrast, start when investors hit age 55. The annuity makes up 8% of the overall portfolio to start and climbs to 30% over the next 10 years. In both series, the annuities have the risk-and-return profile of a broad-market bond fund.
Both the BlackRock LifePath Paycheck and the Nuveen Lifecycle Income series allow investors to choose when to turn on the income. At what age those payments can begin, however, depends on the strategy. Investors can also choose never to turn on the income feature if they don’t want or need it. Plus, the annuities are institutionally priced (read: less expensive). There’s no transaction fee or sales charge related to the annuity part of the target-date strategies, though there is a fee that the insurance company pockets. According to Nuveen, it is reflected in the annuity payout.
Expect more retirement funds with annuities to appear in workplace retirement plans. “Within 10 years, target-date funds with income are going to be the main thing in retirement plans,” says BlackRock’s Ackerley.
Not all retirement income strategies in 401(k) plans are tied to annuities. The Fidelity Managed Retirement target-date funds employ a cash-withdrawal strategy that starts at 4% of assets and gradually increases over time as you age. Choose the fund that aligns closest to the year you turn 70. Experts set the glidepath and do the ongoing asset allocation for these 401(k) offerings, as well as create a payout schedule for you. “The idea is to provide stable payments and still have a remaining balance,” says Sarah O’Toole, a Fidelity institutional portfolio manager.
T. Rowe Price has a 401(k) plan offering called Retirement Income 2020 that aims to deliver a 4%-to-5% payout a year in monthly distributions, but it depends on the fund’s return. There are only two vintages so far: 2020 and the soon-to-launch 2025. “When the portfolio does well, the payout goes up. When it doesn’t, the payout goes down a bit,” says fund comanager Andrew Jacobs van Merlen. These strategies are also available to retail investors as mutual funds (more on them later).
Retirement income funds for everyone
If your 401(k) plan doesn’t offer retirement income funds like the ones we just mentioned, or a defined-contribution plan isn’t available to you, you have a handful of mutual funds and financial services to consider. Unfortunately, none feature the guaranteed income of an annuity.
We should note that retirement income funds aren’t a new idea. Several firms, including Fidelity and Vanguard, launched managed-payout funds in 2007 and 2008 that promised to provide a steady income stream. The timing was terrible (around the arrival of the Global Financial Crisis). The funds didn’t catch on.
That said, the stars are aligning for retirement income funds today: More retirees are looking for help managing income, interest rates are higher, and the stock market is recovering.
We don’t expect you to put all your eggs in one basket – or one fund – to create a workable retirement income strategy. In most cases, retirees should consider generating cash flow from multiple strategies and sources. “You’ll need an array of tools and products,” says T. Rowe Price’s Jacobs van Merlen, taking into consideration the risks you’re willing to take, how long you’ll live, and how much you’ve already saved, among other things. Bear that in mind as you peruse the following options.
The aforementioned T. Rowe Price Retirement Income 2020 (symbol TRLAX, expense ratio 0.53%) is available as a mutual fund to individual investors. A 2025 version will launch this year. The minimum investment for either fund is $25,000.
The managers aim to generate a 4%-to-5% payout of the fund’s average net asset value over the past five years, but the monthly distribution will vary from year to year depending on the fund’s performance. (For its first five years, the Income 2025 fund will use the average net asset value of T. Rowe Price’s standard Retirement 2025 target-date fund to calculate the payout rate.) The goal is to “live off the income of the portfolio without dipping into the principal,” says Jacobs van Merlen, though there’s no guarantee on that front. So far, the 2020 fund’s annualized return since inception in mid 2017 is 5.9%, which falls in line with the fund’s annual target payout.
At last report, Retirement Income 2020 held roughly 50% in stocks and 50% in bonds, cash and other assets. The underlying funds include some of the firm’s longtime winners, such as T. Rowe Price Growth Stock, Value and Mid-Cap Growth.
Schwab Monthly Income funds – there are three – launched in March 2008 and have been tweaked over time. Their main objective is to provide a monthly income stream, although payouts can vary from year to year, and even from month to month.
Conservative investors who want to preserve principal should opt for the repetitively named Schwab Monthly Income Income Payout (SWLRX, 0.21%), which holds 30% in stocks and 70% in bonds. Monthly payouts are limited to interest and dividend payments from the portfolio’s underlying funds. In a normal interest rate environment, investors might get an annual payout rate of 3% to 5%; they’d get less in low-rate environments. Over the 12-month period ending in October, the fund’s payout rate was 4.15%. But in low-rate environments, the payout rate was lower (for the calendar year 2022, it was 2.42%).
Moderate-risk investors can choose between the Schwab Monthly Income Target Payout (SWJRX, 0.25%) and the Schwab Monthly Income Flexible Payout (SWKRX, 0.25%). Both hold exchange-traded funds, with 50% of assets in stock funds and 50% in bond funds.
Target Payout aims for a steady annual payout of roughly 5%, though it could be higher or lower. The fund’s payout rate was 3.08% in 2022, and for the 12-month period through October it was 5.39%.
Flexible Payout is designed for investors who can deal with more flexibility in their income stream. The fund aims for an annual payout between 4% and 6%, depending on fund performance and the market environment. In the tough stock and bond market of 2022, the fund paid out 2.96%. But for the year ending in October, the fund’s payout rate was 5.19%. Payments from both funds may include some return of capital.
The catch with these funds is that overall returns have been ho-hum. That may be an acceptable trade-off for investors who want a monthly income stream, but in lean years, you will probably get more capital returned to make that happen. Over the past five years, Flexible Payout’s annualized 2.6% return lags 91% of its peers (moderately conservative allocation funds). Income Payout’s five-year return, 1.9%, lags 78% of its peers (conservative allocation funds).
A trio of American Funds Retirement Income Portfolios are worth a look for investors who are less dependent on a regular check and seek a little more capital appreciation. These funds make quarterly distributions and have no payout target because they’re designed to be a resource for discretionary spending, not necessary expenses. But the experts behind the funds suggest ranges for annual withdrawal rates for each portfolio. In rough markets, for instance, investors should consider lowering their withdrawal rates.
Investors in the series’ most conservative portfolio, American Funds Retirement Income Portfolio – Conservative (FAFWX, 0.64%, yield 3.28%), might consider a suggested annual withdrawal rate of 2.75% to 3.50% of their assets in the fund. The portfolio holds almost 40% in stocks and 60% in bonds and cash. The ideal withdrawal rate for the moderate fund, American Funds Retirement Income Portfolio – Moderate (FBFWX, 0.68%, 3.02%), which holds roughly 50% in stocks and 50% in bonds, ranges between 3.00% and 3.75%. And the most aggressive strategy, the American Funds Retirement Income Portfolio – Enhanced (FCFWX, 0.69%, 2.79%), which holds 60% in stocks, has a suggested withdrawal range of 3.25% to 4.00%.
These portfolios, which hold some of American’s best mutual funds, including American Balanced, have annualized returns over the past five years that are middling at best. But they have experienced below-average risk relative to peer funds. In 2022, when stocks fell 18% and bonds declined 13%, the Conservative and Moderate funds both lost 10.1%; Enhanced lost 11.1%. Those returns ranked among the top 20% of their peers or better.
Finally, investors interested in a digital advisory service might consider Schwab Intelligent Portfolios. The service helps retirees generate a check from their investment portfolio through a feature called Intelligent Income. Based on the sum of money you invest with the robo service, Intelligent Income helps you figure out how much you need to withdraw and how to invest to stay on track, and it lets you set up automatic checks from your account, paid monthly, quarterly or once a year.
You can stop, start or adjust the payout at any time, says Kristina Turczyn, head of digital advice and wealth solutions at Charles Schwab. “We wanted to offer an easy way to automate the process and generate a paycheck from your own investment portfolio.” There’s no advisory fee for Intelligent Portfolios and no additional fee for Intelligent Income.
Note: This item first appeared in Kiplinger’s Personal Finance Magazine
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Remember when compounding u make as much money in the last few years as u would in all the early years.
When the transaction for RGL completes, the target for the blog may be able to be increased to 9.5k, which would equal the planned target for the end of 2027.
So with that in mind, let’s explore some best practices for income investing and how to aim for a £60k long-term portfolio income stream.
Compounding dividends
Across the UK, the average household is able to save roughly £450 a month. Suppose that money is allocated to a FTSE 100 index fund today. In this scenario, investors can expect to earn between 6% and 8% a year moving forward, based on the historical performance of the UK’s flagship index.
Around half of these gains stem from dividends. And at a 4% yield, each £450 monthly investment would unlock roughly £18 of annual passive income. Needless to say, that’s not exactly a life-changing sum. But that quickly changes once compounding enters the picture.
Earning £60,000
Having an extra 26 grand in the bank each year is certainly nothing to scoff at. But by being shrewd and taking on a bit more risk, it’s possible to more than double this second income.
Instead of mimicking market returns with an index fund, investors can take their income portfolio into their own hands. The London Stock Exchange is filled with dividend shares offering yields significantly higher than 4%.
Suppose a portfolio of these enterprises delivers a 6% yield while still delivering another 4% in capital gains? In that case, after 30 years of £450 monthly deposits, a portfolio would reach into the seven-figure territory, generating £60,000 of dividends each year.
Taking a step back
Earning almost twice the average national salary without having to lift a finger is an undeniably awesome prospect. But it’s important to realise that none of it is guaranteed.
