Generating a monthly income from the stock market

Steve Clayton - Fund Manager

24 March 2017

With the portfolio nearly all revealed now, Charlie and I thought we’d take a moment to outline how the HL Select UK Income Shares fund will seek to deliver monthly income payments and, importantly, what it means for investors.

Each business we invest in pays dividends at different times throughout the year. Rather than paying out the fund’s income as it arrives, we are looking to smooth the flows, so that there is a hopefully predictable pay-out for eleven months each financial year (to 30 September), with a final variable payment that catches up everything received by the fund, but not already paid out. We would hope, but cannot guarantee, that the final dividend, declared in September and paid late October, will be larger than the regular monthly dividends.

The first income payment will be made into Vantage accounts on 30 April, and initially the fund will aim to pay 0.3p per unit per month up to August 2017, assuming all goes to plan. At the end of October (declared in September), we will pay out any additional income received in that financial year which has not already been paid out.

In October, we will announce the level of “regular” monthlies which we will hope to pay until August 2018. Our 3.9p initial income projection reflects the total dividends that we expect to declare for the fund’s first twelve months, up to and including February 2018 (not a reliable indicator of future income).

Although please remember that no level of income is guaranteed and there will always be risks attached to the income from a fund that invests in shares as dividends vary and are not guaranteed. We have tried to manage that risk through investing in high quality companies, but we cannot eliminate it.

Early Progress

So far, three of the fund’s investments have declared dividends since we launched on March 1st. Dividend increases have ranged between 7% for Legal & General and 26.7% for WPP. When we made our income projection of 3.9p per unit for the first twelve months, we had not factored in these increases.

How have we chosen the stocks?

Both Charlie and I have talked recently about the key sectors we’ve invested in and those which we’ve avidly avoided. Behind both of these decisions is our process. We invest in companies with growth potential which will allow them to raise their dividends. If a company’s dividend keeps rising, there is every chance that the share price will eventually follow. And for our investors, over the long term, this should lead to an attractive total return with an above average monthly income. The value of investments will fall as well as rise, so investors could get back less than they invest.

We believe that dividend payments are more predictable than share prices, because they are far less influenced by sentiment. Getting the dividend right is the key. Historically, stock market dividends have shown good growth, with occasional reversals, although this is not a guide to the future. Our aim is to try and keep the fund focused on stocks we believe are capable of paying through thick and thin, to try and keep our investors’ incomes moving along nicely.

The portfolio breakdown page lists all the stocks we’ve made significant investments in so far, along with their historic yield, size, weighting and our reasons for investing. Some stocks are household names, but we can pick shares from all reaches of the market and below are two good examples of just how diverse our income stream is.

Niche businesses can offer attractive returns, and we think BCA Marketplace is full of potential for growth in income and profits. Operating the UK’s largest chain of car auction sites, BCA has a near monopoly in the activity and also owns WeBuyAnyCar.com to create a further source of vehicles to pass through the auctions.

Sage’s business software lies at the heart of thousands of small businesses accounting systems, making its income robust, for customers are unlikely to relish the prospect of switching supplier and retraining staff to the new systems. Its dividend growth track record is one of the best.

Ultimately, whatever the industry or sector, at the heart of our stock selection process is a focus on cash. Dividends are cash paid back to investors, so the companies paying them must be strong cash generators themselves. We seek out cash generators, with balance sheets we believe are strong enough to weather a storm.

View the portfolio breakdown

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