Despite any positive joy from the stock market, income seekers should still be able to achieve positive returns. To test this theory, I thought it was time to review the Switzer Super Report Income Portfolio to see how it is doing.
The good news is the return is positive – it’s better than the market! However, with all the anxiety about, we’re not opening the bubbly just yet.
On 19 December, we introduced our income-biased portfolio of stocks. Several subscribers have asked us to provide a regular update on its performance – this is the third review (see 23 January and 12 March editions).
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.
Some of the key construction rules we applied are:
- 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.
Our income-biased portfolio (per $100,000 invested) and its performance from 15 December 2011 to 25 May 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. AGL in trading halt prior to rights issue, price as at 23/5/12.
All stocks bar National Australia Bank (NAB) have declared interim dividends and gone ex-dividend. With the possible exception of David Jones, all were in line with forecasts and there were no surprises. When the dividend income of $2,392 is added to the nominal loss of $1,591, the portfolio is up $801.
So, how has 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, while in a bear market, we expect it to moderately outperform.
However, it is income we are after, so we measure the performance against the S&P/ASX200 Accumulation index. Further, as the accumulation index doesn’t take into account the taxation benefits that come from selecting fully franked stocks in a self-managed super fund (SMSF), we have included the value of the portfolio ‘grossed up’ to show this tax benefit.
While the overall market hasn’t done much and it’s probably too early to rebalance, the individual stock moves do highlight the old adage about diversification. I’m tempted to cut the DJs position, take some profits on Ramsay (have a look at their 10-year chart – it must be the best in the market), and increase exposure to Telstra. The AGL rights issue will provide an opportunity to go a little more overweight in the utilities sector – this is probably the time to take a more serious look at a rebalance.
Speaking of stocks such as Ramsay, the health care sector is the star performer this calendar year. Something to consider as you reflect on the individual stocks in your portfolio.
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.