Tweaking my Investment Strategy

When I finally paid off my credit card debts back in 2010, I started to save a bit of money.

Not a huge amount, since I hadn’t come across FI/PF blogs, hadn’t heard of savings rates and what-nots, was too busy enjoying my life debt-free but it was something that was better than nothing.

As the cash grew little by little, I decided I wanted to invest it, so I bought a bunch of funds.

After coming across Monevator and reading Tim Hale’s ‘Smarter Investing’ book, I switched all but one of my funds into index tracker funds to cut down on fees/costs.  I created my Portfolio for All Seasons and set my investment strategy to concentrate on trackers.

Original Plan

My original plan was to build up a large enough pot of investments and to sell off funds gradually, living off the proceeds until I was able to draw down on my company pension at 65 and the state pension at 67.
I wouldn’t be following a 4% SWR (safe withdrawal rate) or anything like that – I had a fixed annual income in mind so the intention was for capital to be largely depleted/spent, not to nothing, but certainly, I wasn’t planning to preserve the majority of it.
However, I need to review my plan, which I had set pretty much at the start of my journey as things have changed since then.
I had decided to dip my toe (in June 2014) into Peer to Peer lending to take advantage of high interest rates but planned on keeping this part of my portfolio small due to the cash being tied up for around 3 years.  This now generates around £11 per month in interest.

I’d never heard of ‘dividend investing’ before until I’d come across the term while reading up on FI and investing in general. Building up a big share portfolio and then living off the dividends sounded (and still sounds) great to me.

Yet, I didn’t want to deviate too much from my original plan (and relative comfort zone) of investing in tracker funds so I thought I’d diversify (in September 2014) by starting up my own little share portfolio and be content with getting small but growing dividend income.

I didn’t have big ambitions – in fact, my goal this year was to just earn enough dividend income to cover my TV licence, ie £145. I surprisingly smashed that goal back in July!

Dividend income this year – December is likely to be similar to June

I’ve revisited my spreadsheets and have calculated that I need to factor in a lot more income from dividends into my plan.

This will partially make up for the shortfall from my reduced company pension (due to the company I work for being sold off and the pension being frozen).

I will still keep to my original investment strategy of investing in tracker funds, but my share/investment trust portfolio will now form a larger part of my overall portfolio than originally planned as I reckon I will need it to be producing an income of at least £3k per year, or around £250 per month.

At the moment, my dividend income is averaging around £25 a month (as at December 2015), so I’m looking at a ten-fold increase!

A pretty daunting prospect – best pull my socks up and get busy saving and investing – need to get Christmas and my holiday out of the way first, though!

28 thoughts on “Tweaking my Investment Strategy

  1. Hi Weenie

    While it is bad news about your company pension, you still are in the position where you are saving a reasonable chunk of your income, and have the brains to review your strategy as things will always change.

    The good news is that you are starting to reach the point where your dividends themselves grow future dividends as you are re-investing them back into more shares. £300 may not seem a fortune, but re-invested at a 4% yield will produce another £12 next year which gets re-invested and the virtuous cycle goes on.

    Before you realise it you will be receiving £50 average a month, then £100 and so on. I think this is what is really awesome about dividends, as even when the market falls the probability is that the dividends will keep rolling in.

    In a few years you will be receiving your £3k per year, and the cherry on the cake is that when you start to take the income to spend, the annual amount will almost certainly grow, and this could grow more than you need to increase your income for inflation to allow your Freedom Fund to keep growing.

    I look forward to seeing you celebrate the future dividend milestones.

    FI UK

  2. One of the nice things about dividend income is that the year-on-year volatility of the income is much much lower than the volatility of the market value of the assets. Probably even more so with ITs which deliberately smooth, but they aren't a big part of my HYP.

    That all makes for an easier ride. And while selling units is intellectually fine in theory, it doesn't feel good, whereas spending divi feels better 😉

  3. Hey Weenie,

    I would echo all of the comments above. As you know I'm predominantly an income investor, and the fund make a smaller proportion of my portfolio. I like Ermine's comment. There's nothing theoretically wrong with selling stock to fund your expenses, but keeping your stock and spending the income (when the time comes), feels much better to me.

    FIUK explained it very well too. YOY growth will naturally happen, so even when you hit your target income, it's likely to continuing growing.

    Dividends are awesome!

    I wish you all the best with your new strategy, and look forward to celebrating your success within the next few years.

  4. Hi Weenie It's funny, over the years I've followed a very similar strategy, moving from trackers to dividends. One comment you made worth mentioning is about your long term spending plans, i.e. depleting your funds as you head toward your pension. Hardly anyone talks about this, almost everyone writes about preserving their capital. I am having to deplete my funds as I head toward my pension and feel somewhat uncomfortable with it – but you have to spend it sometime, don't you? Only the other day I read an article where the outcome was that you ended with over £1m in your investment pot…..aged 75! Well, honestly, what is the point of that?!

  5. Good luck with your dividend investing weenie.

    I'm afraid I still haven't got my head around whether our best strategy is to plan to keep on growing our investments and re-invest any dividends, or plan to maximise dividends and use to supplement our income. I'm hoping all will become clear when I finally know whether I'll be working or not in 6 months time (we've been told we'll get the news on VR at the end of the month).

  6. Hi Weenie,

    Keep up the good work! I started on the Dividend path a few years ago, and my first year income…. just under 20 GBP, not per month, for the entire year! This year (I track financial year rather than calendar as its easier for tax reviews), I should be receiving over 200 PCM on average, and it seems to have happened suddenly over the last couple of years. Keep up the good work, keep tucking away and before you know it you will be there and more!

  7. Hi FI UK
    Yes, not great news about the company pension but instead of just resting on my laurels, I've decided to do something about it. I look forward to my dividends growing each year.
    Thanks for your continued support.

  8. Hi M
    I'm investing in both my SIPP and ISA, so getting a bit of tax benefit now, while saving some for later! Thanks for your support!

  9. Hi ermine
    I'll be mixing in ITs among individual stocks so hopefully well get some of that lower volatility you mention.

    Agree, the thought of spending dividend income is sitting easier than the thought of selling chunks of capital, but my intention was always to spend some/most of what I'm saving. Hopefully, the dividend income means that my capital needn't shrink so much or too quickly.

  10. Hi Adnan

    To get £3k of dividend income, I reckon I will need a portfolio of around £80k-£90k. At the moment, my portfolio of dividend producing stock is around £7k so yes, a lot of investment to be done!

  11. Hi Jim
    The more I've read about people who are having to sell off capital, the more (like you) I've felt uncomfortable with it. I don't think I can get away from it totally so the dividend income will shield me somewhat so I don't have to sell too much.

    As I mentioned to ermine above, my intention had always been to use up/deplete my funds – I have no children and whilst it would be nice to leave something to my niece and nephews, I fully intend to spend what I've saved/invested.

    I hope that 75 year old with the £1m has fun spending it!

  12. Hey Huw

    Spending income does sound better than having to sell off stock. I'm going to go for a mixture of both, to see where it takes me as I still want to continue largely with my original strategy of investing in tracker funds.

    I'll review again in say 5 years time to see where I am income-wise but yes, dividends are awesome!

    Thanks for your continued support!

  13. Thanks Cerridwen.

    I can see why you're kind of in limbo at the moment, due to the uncertainty of your work situation. Fingers crossed that the news you get at the end of the month is what you want to hear and then I think it's time to crunch some more spreadsheets to work out some scenarios!

  14. Hi London Rob

    Reading about other dividend investors and hearing stories like yours give me both hope and confirmation that I'm doing the right thing here. Well done on your £200 monthly average. I shall keep plugging away and look forward to celebrating some milestones along the way! Thanks for stopping by!

  15. Hi weenie, You have a plan most people out there just don’t, so you are in a much better place than most. For me the change you made from being a spender/borrower to a careful spender and saver is remarkable. From my experience, in a bank for many years, most people just cannot change their lifestyle.

    I have always been a saver rather than a spender, my paper round at 13 allowed me to save up for my first motorcycle, even at £1 a week. I stopped working at 47 knowing that I could either wait until I was 60 to get my company pension or transfer it and draw it earlier. In the event I moved it and started drawdown at 55. I have always invested in dividend paying Investment Trusts, it is just so much less stressful when you see market crashes and you know the dividend will still keep rolling in. I have seen a few blogs recently where the initial strategy started with index trackers but over time some of the investment moved to dividend paying shares and a mix of these two strategies will serve you well.

    Keep going and good luck.

    • Hi Timbo

      There are still some aspects of my lifestyle that I won’t change, but I think I’ve changed enough for it to make an impact on my savings and investments.

      Sounds like you’re in a great place as you kept to your plan from early on and were able to drawn down from 55 – nice one!

      Yes, I think having dividends from investment trusts and shares in my portfolio will soften the blow from seeing roller-coaster type activity of the stock market and be an incentive for me to continue with my plan. A mix of the strategies seems to make sense in terms of diversification.

      Thanks for the kind words and for stopping by.

  16. Great write-up Weenie!
    This post points to the importance of not only having a plan but also tweak and update it as your personal circumstances change.

    As you say, dividend investing is really great.I like how you set certain goals like paying your TV licence using your dividend income as this gives you purpose and the motivation to keep going and eventually be financially free!

    • Thanks MG.

      Yes, the main thing is the plan and that it is flexible.

      As I’m only really still at the start of my investing journey, I don’t want to make too many radical changes, hence I’m sticking with my main strategy of investing in index trackers.

      Even with these, I will at some point need to review my allocations and adjust as necessary.

      Yes, I’m hoping that my dividend income will cover more bills this year!

      Thanks for stopping by!

      • Hi Weenie,
        Just putting money into it each month via SIPP and ISA should ensure that your dividend income goes up. Just keep at it… and time and patience shold do the rest!

        My very first dividend ever was £0.03 for a single share of VANGUARD FUNDS PLC UK GOVT BOND UCITS ETF and the year (2012/2013) ended with a total of £17.95 = £1.49 pcm.
        My dividend income in the ISA for 2015/2016 is forecast to be between £575 – £600 = £47 – £60 pcm.

        As for goals / benchmarks: I have read quite a few articles and posts from people saying that they track certain indices – for me the only benchmark worth looking at are my living costs / expenses. I do re-invest all dividends at the moment but I do expect / hope to use them in the future.

        Regards, Pinch

        • Hi Pinch

          Great work on growing your own dividends! You are absolutely right, just putting money away every month in SIPP/ISA is the key. Not very exciting so yes, patience is required!

          I don’t benchmark against indices, although my portfolio is unitized (via the process described by Monevator), just so I can see if my portfolio is growing not just by me chucking money at it! I do re-invest all my dividends so hopefully, this will just create the snowball effect.

  17. I went for the strategy of a basket of ETF trackers. They pay quarterly dividends, passive trackers and I get to set my own allocations and have reinvestment of dividends and rebalancing to play with. Is this dividend investing? I reckon the dividend from trackers will not be as reliable as IT specialising in Dividend income. I like to keep things simple though.

    • Hi Fireplanter
      I’d say what you’re doing is dividend investing, although the strategy generally describes people buying individual dividend paying stocks and reinvesting the dividends, they’re not a lot different, just that yours are trackers.

      A large portion of my portfolio is in ETFs now but I’m looking to build up my basket of ITs, just for diversification. My portfolio’s getting more and more complicated but after a few years, I’ll look into simplifying it.

  18. Yes, it’s really important for you to get your portfolio simplified. Budgeting yields great flexibility if you really try. Putting money away every month in SIPP/ISA doesn’t need a great effort; it’s actually about identifying certain expenses that can be evaded and the marginal savings reinvested.

    • It’s been over a year since I made this post and funnily enough, I’m in the middle of drafting an update! I’m starting the simplification process already anyway. Thanks for stopping by, SB.

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