Demonstrating that the share market is a ‘stock pickers’ market at the moment and it is the small cap stocks that are performing, our high-income portfolio has lagged the broader market over the last six weeks. However, given recent dividend payments, the portfolio is up overall.
We introduced you to our ‘income biased’ portfolio of stocks in December last year. Several subscribers have requested that we provide a regular update on how it is performing – this is the second review (see January 23 edition for the first review [1]).
The portfolio is forecast to generate a dividend yield of 5.82% pa, which given it is 97% franked, will translate to a forecast 6.87% pa after tax income return in accumulation, and for a fund in pension phase, 8.08% pa.
Some of the key construction rules we applied included:
- We started with a ‘top down approach’ with the sectors, and introduced biases that favoured lower price to equity (PE), higher yielding sectors.
- In the major sectors (financials, materials, consumer staples and energy), our sector biases were not more than 33% away from index.
- To balance the ‘diversification need’ and ‘monitoring effort’, we sought 15 to 20 stocks.
- We confined our stock universe to the ASX100, avoided chronically underperforming industries and looked for companies that pay franked dividends and have a strong record of earnings consistency.
Our income-biased portfolio (per $100,000 invested) and its performance from its creation on 15 December 2011 to 8 March 2012 is as follows:
Total (value + income) = $100,816
* Income received includes dividends declared and payable, as the Accumulation Indices assume that this is re-invested on the date the stock goes ex-dividend.
With the close of the February reporting season, most of the stocks have now reported and declared a dividend. All of these were in line with our forecasts and there were no surprises. When the dividend income of $1,417 is added to the nominal loss of $601, the portfolio is up $816.
So, how is it doing on a relative basis? In a bull market, we would expect the portfolio to underperform the index due to the underweight position in the ‘growth’ sectors and overweight position in ‘defensive’ sectors, and in a bear market, moderately outperform.
However, it is income that we are after, so we will measure the performance against the S&P/ASX200 Accumulation index. Further, as the accumulation index doesn’t take into account the taxation benefits to SMSFs that come from selecting fully franked stocks, we have included the value of the portfolio ‘grossed up’ for this benefit.
Relative performance
While it’s still early days in the three-month life of this portfolio, it has reversed its position in January (where it was tracking ahead of the indices) and has now started to lag. However, it’s only marginal and occurring in a sideways market overall, so it is too early to rebalance or make any major changes. We will monitor it closely.
As an aside, and to illustrate the opening comment that all the action is in the small caps at the moment, over the period from 15 December, the All Ordinaries is up 1.53% compared with the S&P/ASX200 at 0.75%. Not a big move; however, the divergence has been accelerating since the completion of the profit reporting season and our last review.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: What comes after Greece? [2]
- Lance Lai: Chart of the week: Spark Infrastructure [3]
- Rudi-Filapek Vandyck: The broker wrap: three stock buys and three sells [4]
- Tony Negline: How binding is your death benefit nomination? [5]