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Pension newbie: Top equities for your drawdown portfolio

Our top fund and stock picks for newly retired investors
Pension newbie: Top equities for your drawdown portfolio

Fund choice: City of London Investment Trust

Share price: 362.24p

Market cap: £1.56bn

If your investments provide some or all of your retirement income, they need to be very reliable. And income streams don’t get much more reliable than City of London Investment Trust’s (CTY), which has raised its dividend for 54 years in a row. It mainly invests in UK equities, in particular large, multinational companies – a number of which cut or cancelled their dividends last year. But the trust’s board says that its “diverse portfolio, strong cash flow and revenue reserve” mean that it should be able to raise its dividend for a 55th consecutive year.

Over the second half of 2020 the trust’s earnings per share fell 15.6 per cent compared with the same period in 2019. But this was less severe than in the first half of 2020 and a number of its holdings have returned to the dividend list. The trust also had about 13 per cent of its assets in overseas equities at the end of January, helping to diversify its income sources.

It has revenue reserves worth £45.62m, which could cover 0.56 years worth of the current financial year’s dividend.

The trust has been run by Job Curtis since 1991, who focuses on cash generative businesses that are able to grow their dividends and have attractive yields.

At 0.36 per cent, the trust has one of the lowest ongoing charges of all active funds.

Share choice: Next

Share price: 7418p

Market cap: £9.85bn

Your investments can provide a welcome boost to your income in retirement and although, for many, funds will be the most attractive method of earning that income, direct equity investment should not be overlooked.

For some, that will mean picking a portfolio of regular and reliable dividend payers that return cash to you once or twice a year. But investors should also consider what can be a far more rewarding (and tax-efficient too when done outside an Isa) method of deriving income from your investments, by making regular share sales following capital gains. 

Here, our top pick is Next (NXT). The retailer perhaps had a head-start in the race to turn from a bricks and mortar business to an online seller – its historic catalogue business meant its business model was already suited to deliveries – but that shouldn’t take away from the achievement. E-commerce generated 64 per cent of group sales in the first half of 2020 (the last set of results), meaning the company is well placed to pick up new business as unprepared retailers fall by the wayside. Earnings growth, boosted by a share buyback programme, should keep the share price ticking in the right direction. 

IC model asset allocation – pension newbie

If you’re newly retired and beginning to take your money from your pension (this is known as drawdown), your portfolio asset allocation will depend on its value, your circumstances and your risk appetite.

Investors with over £1m might be happy with the allocation we have modelled for a portfolio of that size. If you have a smaller sum to last you throughout retirement, a more cautious approach is necessary.

What’s in it?

Cash – 5 per cent

Cash is low in these portfolios, because they are invested to generate an income for a retirement that may last 20 years or more.

Other – 10 per cent

Portfolios could benefit from income asset classes such as real estate, but as these holdings can be less liquid (harder to buy and sell) in recessions, they can be risky: for example, in a recession a property might become harder to generate income from (if rental demand is low) and almost impossible to sell.

Fixed Income – 55 to 60 per cent

Our pension drawdown asset allocation is very similar to the Cautious asset allocation.

We retain a high weighting to this asset class because there is scope for strategic bond funds (which invest smartly in different geographies, in bonds with varying maturities and in a blend of government bonds and high quality corporate credit) to offer capital protection and some real income.

Equities – 25 to 30 per cent

Our allocations to equities reflect the need to invest in some riskier assets, which can pay dividends in good times for the economy. Also, positions in high-quality growth stocks can be periodically pruned on the back of a good run – in effect making your own dividends.