12 picks for an income portfolio
An update on how the picks have performed.
Mentioned: Automatic Data Processing Inc (ADP), American Tower Corp (AMT), Aurizon Holdings Ltd (AZJ), Brookfield Infrastructure Partners LP (BIP), Contact Energy Ltd (CEN), CSL Ltd (CSL), Diageo PLC (DEO), Kinder Morgan Inc (KMI), VanEck Australian Equal Wt ETF (MVW), Philip Morris International Inc (PM), Washington H Soul Pattinson & Co Ltd (SOL), Transurban Group (TCL)
On the 20th of June I published the first of two articles on attractive income shares and ETFs for investors. One article focused on opportunities for high growth and one on high yields. I’m a proponent of investors creating a portfolio with a mix of both because it is more likely to align with the goal of generating passive income in the first place.
Many non-retired income investors would benefit from a focus on the future income streams that can be generated. Growing income faster than inflation is the pathway to financial independence as the purchasing power of a portfolio increases over time. Retirees also need to focus on growth. Retirement may last decades and growth is needed to sustain - and ideally increase – living standards.
The two articles were a response to the bleak picture I painted in a previous article at the state of traditional income plays in our local market. And things continue to look bleak. According to Janus Henderson the ASX has suffered a 19% year-on-year decline in dividend payouts.
Pointing out problems is one thing. I wanted to offer a solution. That was the spirit behind my original articles and today’s progress check on how my suggestions are faring. The time that has passed since my last article is a drop in the bucket for a long-term income investor. And I am very much a long-term income investor. You should be too. But transparency matters and I will provide an update roughly every quarter going forward.
My original premise
I had two long-term goals for the shares and ETFs I included on my list. For the more growth orientated bucket I wanted to achieve average income growth of 10% per year. For the higher yielding shares I was targeted average income growth of 8% annually.
In both cases this income growth comes from a combination of dividend reinvestment and dividend growth. In providing this update I used the following assumptions to calculate the results:
- Equal weighted portfolio: I assumed that each of the 13 picks received an equal allocation of $10,000. For the US holdings I used the exchange rate on the 20th of June which makes a $10,000 local investment into $6,654 US. I am going to assume no rebalancing so the equal weighted portfolio is only a day one exercise and the weights will fluctuate over time.
- Dividend reinvestment: I am assuming that dividends are reinvested at the closing price on the day of the dividend payment. This may vary slightly from how a broker processes any automatic reinvestments or how an investor might manually reinvest dividends. In all but the most extreme situations the price will not vary significantly under these scenarios from my approach.
- Income on 20th of June: This represents the dividends and distributions in the preceding 12 months on the 20th of June multiplied by the number of shares held on the 20th of June.
- Income on the 27th of September: This represents the dividends in the proceeding 12 months on the 27th of September multiplied by the number of shares held on the 27th of September.
In the following chart you can see the results of this exercise.
How are things going?
Things are going well. Although I must again point out this is an extremely short time-period. An increase in total income of 4.96% in constant currency terms after a quarter is a strong start. Accounting for the strength in the Aussie dollar since June 20th income is up 2.50% in local currency terms.
Currency matters and there will always be fluctuations. However, since this is a long-term portfolio I’m more interested in what is happening in constant currency terms. I included companies that I thought would grow their dividends. The constant currency view answers this question.
We can break the performance of individual holdings into three categories:
- Income levels fell: Only Aurizon showed a drop in income. One dividend payment was reinvested which accounts for the increase in share count. This was more than offset by a decline in the dividend. The dividend declared in August 2023 fell from 8 cents a share to 7.3 cents a share in 2024.
- Income levels stayed the same: Both Washington H Soul Pattinson and American Tower had flat levels of income. Neither company raised their dividend and neither company had a dividend payment since the 20th of June.
- Income levels increased: The remaining 9 picks had increases in income. This is good news. All 9 increased their dividends / distributions. 7 of the 9 had dividends payments for reinvestment since the 20th of June. This increases the share count and further increases income.
My thesis for each of the picks hasn’t changed so please revisit the original articles to understand my thinking. If there are major develops with any of the picks I will provide updates on my view of the holding in the quarterly review. But so far, so good.
On the surface this is a great start. If the 4.96% increase in income is extrapolated over a year it more than exceeds my target. However, it is important to remember the timing and frequency of when dividends are declared and when they are paid. Especially for the companies and ETF that declare and pay dividends bi-annually which include MVW, SOL, DEO, AZJ, CSL, TCL and CEN. This makes any extrapolation impossible. Regardless, I’m please with the start.
How did the portfolio perform?
I’m an income investor. But that doesn’t mean I don’t want my portfolio to increase in value. I don’t think those goals are mutually exclusive. In fact I believe that shares with growing dividends will outperform the market which I expailned in my article why I’m an income investor. To grow dividends means growing earnings. Something the market tends to reward over the long-term.
The following chart shows the performance of each share in the portfolio. In Aussie dollar terms the return since the 20th of June was 6.76%. That comfortably beats the ASX 200 and S&P 500 return (hedged and unhedged). Do I care? Not really. The time frame is way too short to draw any sort of conclusion.
Final thoughts
To solve any problem requires a focus on the actual problem. Too many investors decide they want income and go out and buy the highest yielding shares. I’m focused on generating passive investor because I want to become financially independent. My hope for this portfolio is that over time I can demonstrate the power of income growth. And I do really hope it demonstrates that since I own every one of the picks other than Washington Soul Patterson.
If you have any questions please email me at mark.lamonica1@morningstar.com
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More on my view of income investing
- Why I'm an income investor
- How to build an income portfolio
- Is this the best metric for income investors?
- 7 ASX and global picks for income growth
- 5 ASX and global picks with high yields