My Say No. 66 – Affirmation

My Say – No. 66
18th January 2021

Affirmation
It was with bated breath that I waited for the year end results and now that they are in, I can only say how pleased I am and how affirming they are.
For this newsletter let’s begin with the “Mothership”; All Industrials compared to cash.

Although the ASX200 Industrials Index fell by 35% to March, by year end it was only down 2%. Thus, at first sight, the large drop in the dividends of the index, -44%, is a bit daunting. Quite understandable though as every business was facing a very uncertain near term with the impact of COVID but remember, we have been here before and will revisit again; see 1987 and 2008 above.
It is also worth noting that whilst all the commentary is about shares, we should not ignore the other asset class, cash, the bolt hole for all frightened potential investors. Whilst I acknowledge that cash doesn’t go up and down, the opportunity cost of holding it is large and often totally discounted in most people’s minds. If you thought the dividend drop above was hard to swallow, the income returns from deposits (the red) have fallen from their peak in the late 80’s by 80%. Not many headlines about the cash crash and death by a thousand cuts for investors.
I have covered in past newsletters my preference for the Listed Investment Companies (LIC’s) over managed funds, i.e. the difference between a corporate structure and a trust structure. The flexibility of the corporate structure enabling LIC’s to retain income and capital gains for reinvestment and reserves whilst trusts (managed funds and, ETF’s) must distribute all gains and income.

You can see below how the ability to retain profits provides flexibility and has enabled some of the major LIC’s to not only soften the dividend blow for their shareholders by using those retained profits but also, in some cases, still increase their dividends to shareholders this year.

Now let’s look at some of the major index ETF’s and their dividends.

It is abundantly clear that with no ability to retain any income their dividends reflect the full brunt of the actual dividend reductions.
Let’s now consider our personal situation. Our super fund has 27 holdings; roughly a quarter of them LIC’s. Aided by the resilience of the LIC dividends our total dividend income dropped by only 15%. I intend to go on winding down the individual holdings, under advice from my financial adviser, and moving the cash into the LIC’s. The simplified structure is a blessing as it increases our diversification and requires less involvement on my part.
A purer example would be my SMSF in the UK, a legacy of our 18 years there. It has only 4 holdings and all are LIC’s. I’m talking ‘hardcore’. Most of them very old, 2 of them over 100 years. Of this pair, one maintained its dividend whilst the other, founded in 1861, increased its dividend. This happens to be its 54th consecutive year of dividend increase and here’s what that looks like; a sight for sore eyes and minds ravaged by senseless media commentary.

In the midst of all this carnage, the result for us, from old blighty, was a small overall increase in our income for the full year.

I put my comfortable feelings down to several things. First and foremost, we hold sufficient cash in our super fund to meet the next 3 years Government mandated minimum pension withdrawals. This ensures we are never forced sellers and provides dry powder for bargain hunting on market dips. Secondly, my investment philosophy of ‘benign neglect’, that is, stick to doing only what you are good at and outsource what you aren’t, followed closely by my two golden rules: SPEND LESS THAN YOU EARN and BORROW LESS THAN YOU CAN AFFORD.

Finally, and most importantly, is the consistency of the objective of the Listed Company’s I invest in. For example, Milton’s Investment Philosophy is clear.
“Milton is predominantly a long-term investor in companies listed on the ASX that are well managed, with a profitable history and an expectation of increasing dividends and distributions. Turnover of investments is low and capital gains arising from disposals are reinvested.”

Another of my domestic favourites is Whitefield particularly as it is industrial shares only; no resources.
“Whitefield Ltd is an ASX listed investment company holding a diversified portfolio of ASX listed Industrial (non-resource) shares. An investment in WHF Ordinary shares provides an investor with a stream of fully franked dividends as well as the potential to benefit from growth in the underlying value of the investment portfolio over time. The company was founded and listed on the ASX in 1923.”

None of the, ‘we are a value, top down, bottom up, thematic, etc, etc.

The investment objective of City of London is a pearl.
“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 continues to recognise the importance of dividend income to shareholders.”
Having been around for over 160 years, with a simple investment discipline, how comforting that umpteen changes of staff over the decades have dedicated themselves to maintaining the discipline. Unlike much of the fluff that has entered the market in recent decades.

A Happy New Year to all.