Our high income portfolio: fourth review

Co-founder of the Switzer Report
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Our high income stock portfolio continues to perform well – outperforming the market, and perhaps more importantly, on track to deliver its forecast income returns. The outperformance is not that surprising considering it is overweight financials, telecommunications and healthcare, and relatively underweight materials and energy.

On 19 December, we introduced our ‘income biased’ portfolio of stocks. The portfolio is forecast to generate a dividend yield of 5.82% per annum, which given it is 97% franked, translates to a forecast 6.87% per annum after-tax income return in accumulation, and for a fund in pension phase, 8.08% per annum.

Since December 15 (the date the portfolio was first priced), the portfolio has risen 4.7%, well ahead of the S&P/ASX200, which is down 1.1% in that time, as well as the S&P/ASX200 Accumulation Index, which is up 1.4%. And that’s without factoring in the taxation benefits of holding fully franked stocks in super, which we’ll break down for you in a moment.

Firstly, let’s look at the change in value and dividend income. Our income biased portfolio (per $100,000 invested) and its performance from 15 December 2011 to 30 June 2012 is as follows:

* 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. Assume AGL 1:6 rights issue at $11.60 taken up – net amount shown in portfolio value. 

Paying dividends

All stocks in the portfolio have declared interim dividends. With the possible exception of David Jones, all dividend payments were in line with forecast and there were no surprises. When the dividend income of $2,737 is added to the nominal profit of $1,948, the portfolio is up $4,685, or 4.7%.

So, how is it doing on a relative basis? In a bull market, we 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 measure the performance against the S&P/ASX200 Accumulation index.

Super benefits

Further, as the accumulation index doesn’t take into account the taxation benefits to an SMSF that come from selecting fully franked stocks, we have included the value of the portfolio ‘grossed up’ for this benefit.

The broader market

Notwithstanding some of the gloom and doom in the media, it is worth noting that the market is actually up over the first six months of 2012. While it is only up by 0.94%, with dividends, this improves to 3.32% (6.75% on an annualised basis – which is better than term deposits!).

The health care sector is the star performer over the first six months, with property trusts and telecommunications (mainly Telstra) not far behind. This is something to consider as you reflect on the individual stocks in your portfolio.

About the portfolio

These are some of the key construction rules we applied to the high income portfolio:

  • we started with a ‘top down approach’ to the sectors, and introduced biases that favour lower PE, higher yielding sectors;
  • in the major sectors (financials, materials, consumer staples and energy), our sector biases are not more than 33% away from index;
  • to balance the “diversification need” and “monitoring effort, we sought 15 to 20 stocks; and
  • we confined our stock universe to the ASX 100, avoided chronically underperforming industries and looked for companies that pay franked dividends and have a strong record of earnings consistency.

Read past updates of the portfolio here.

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. Anyone should consider the appropriateness of the information in regards to their circumstances.

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