Join our community of smart investors
OPINION

Instant effect

Instant effect
June 23, 2016
Instant effect

And that's basically why I am - for the third time - producing the Bearbull Instant Income Portfolio. The first time I ran up this income-in-a-trice fund (Bearbull, 17 Jan 2014) the portfolio was an unalloyed success. In the 13 months to its assessment, its value rose almost 11 per cent, while London's All-Share index rose just 2 per cent. That was the happenstance.

The second time (Bearbull, 20 Feb 2015) the outcome was somewhat tarnished (

). In the 16 months to mid June - sorry, I forgot to review it earlier - the average performance of the 11 stocks (assuming an equal weighting) was a 4 per cent loss. That, however, compared decently with the All-Share index, which dropped by 8 per cent. True, that's not much to get excited about, but outperformance of a benchmark index is rarely to be scoffed at. Besides, with an upfront dividend yield of about 5 per cent - usefully more than the All-Share's - the portfolio scraped an overall profit. So it's just about worthwhile proceeding to the third instant-income fund to see whether coincidence turns into something significant.

Let's explain a little more what's happening. The aim is to show that portfolio selection based on ultra-simple rules is as likely to produce acceptable performance as selection that results from time-consuming, detailed research. So all I am doing to generate the instant income fund is to ask a database to list all those shares that produce a yield of at least 3.8 per cent on their previous 12-months' payouts where dividends were covered twice or more by net profits.

These undemanding criteria produce just 50 candidates from the 1,500 or so stocks in the FTSE All-Share and the Aim All-Share indices. Eliminate the investment trusts and we are left with 44. From there, it's a matter of finding 10 or so stocks that seem to have sound finances, that are trading satisfactorily or should have recovery potential, and whose activities don't overlap with one another. Hence the 10 shown in the

.

These range from the fairly racy - financial trading platform Plus500 (PLUS) - to the dull and worthy - housebuilder Bovis (BVS) or specialist engineer Bodycote (BOY). However, the group looks well diversified - there is no overlap of stock market sectors among the 10 and a good spread of activities between financials, services, consumer and capital goods sectors.

However, one feature I have to contend with - and which is increasingly a matter for income-seeking investors to consider - is the extent to which I should include special dividends in the calculation of dividend yields. That's because special payouts are becoming normal. Some companies pay them regularly. For example, ITV (ITV) has made a special payout for each of the past four years and 2015's was two-thirds more than the half-year and final dividend combined (10p compared with 6p). That amount would be unsustainable in the long term, but it might be reasonable to assume that the special payment could average 4p per year - enough, when combined with the conventional dividends - to generate a 4.7 per cent yield.

So here it is, for the third time the Bearbull Instant Income Portfolio; not to be confused, I stress, with the Bearbull Income Portfolio. Yet, actually, another reason for putting it together is to find investment candidates that warrant further attention. Financial software provider Fidessa (FDSA) - long in Bearbull's sights - may be one such, as might Restaurant Group (RTN), whose share price has halved in the past year. Meanwhile, time will tell whether the instant-income fund is an investment version of alchemy. We'll check sometime next year.

  

Instant income portfolio June 2016

 CodePrice (£)Div yieldSector
Plus500PLUS6.009.8%Aim: Fin services
ITVITV2.047.8%Media
U and IUAI1.847.6%Real estate services
Novae NVA7.866.3%Nonlife insurance
Restaurant GroupRTN3.385.2%Travel & leisure
Primary Health PropertiesPHP1.045.0%Reits
BodycoteBOY5.724.4%Engineering
Bovis HomesBVS9.294.3%Home construction
Bloomsbury PublishingBMY1.643.9%Media
FidessaFDSA21.573.9%Software