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 (
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
Code | Price (£) | Div yield | Sector | |
---|---|---|---|---|
Plus500 | PLUS | 6.00 | 9.8% | Aim: Fin services |
ITV | ITV | 2.04 | 7.8% | Media |
U and I | UAI | 1.84 | 7.6% | Real estate services |
Novae | NVA | 7.86 | 6.3% | Nonlife insurance |
Restaurant Group | RTN | 3.38 | 5.2% | Travel & leisure |
Primary Health Properties | PHP | 1.04 | 5.0% | Reits |
Bodycote | BOY | 5.72 | 4.4% | Engineering |
Bovis Homes | BVS | 9.29 | 4.3% | Home construction |
Bloomsbury Publishing | BMY | 1.64 | 3.9% | Media |
Fidessa | FDSA | 21.57 | 3.9% | Software |