After not really knowing what I was doing on the stockmarket for a few years (with predictably random results), I finally managed to construct a system to invest money. I have long been a fan of value investing, so I decided to use my own, simple version of this time-tested strategy. Rather than just looking at current yield or p/e ratios, I started looking at consistent and increasing dividend payers, and began whittling down a list about once every 4-6 weeks. I decided to concentrate on the FTSE 350, since data is easy to come by and I don't want to put everything into very small companies, unless they have a longish history. I am not interested in the latest fad, but I want to invest in more necessary, albeit sometimes boring, companies whose products and services we need e.g. utilities (water, gas, electricity, telecoms), engineering, construction, food, etc. Using free tools on investing websites, I got plenty of information. You could try iii.co.uk, morningstar.co.uk, digitallook.com, google finance, yahoo finance, and many more.
My method:
- Sort your companies by p/e, then delete anything above 15
- Delete any that cut or held their dividends in the last 7 years
- Delete any that have a dividend cover of less than 1.5
- Delete any that don't pay a dividend
- Sort the list by yield and assign a rank
- Sort by price and assign a rank
- Buy the best combination of yield and price
Of course, there are many tweaks you could do to make it 'safer' such as look at how the companies' debt ratios and make sure they're not wallowing in the red, or only look at dividend cover of 2+, expand to p/e/ of 20, or look at the free cash flow, etc.
One tweak I did make was to try to buy enough shares to get me at least one free share when they pay out the dividends. Since we usually have interim and then final dividends in the UK, I tried to make sure that I based it on the estimated interim dividend, and then got a bit more for safety in case the price went up. This means that I should be able to get at least one free share out of the dividends the company pays, then I set my portfolio to reinvest the dividends automatically (sometimes called DRIP). Unfortunately, I do not know of a way to get fractional shares i.e. when you reinvest your dividends and they can't buy a full share, so you get a fraction of one. If you know of a UK broker that allows this in a SIPP or NISA and allows cheap regular investments e.g. £2 or so, let me know!
This method is pretty much a boring, fairly safe, and easy way to invest. In the current UK market, it is easy to pick up shares in companies with low prices (not necessarily dirt cheap, but low in £ price). This just makes it a bit easier to start accruing free shares which, psychologically at least, is important to me as it means I am increasing.
Example:
- The ABC company costs £100 per share and pays 5% dividends. I have £200 to invest, so I can afford 2 shares.
- When they pay out their dividends, it is usually split between an interim and a final dividend. This is something like 30:70 or 40:60, but check it as some companies are different.
- Let's say ABC pays out 40:60 so the interim dividend is £2 and the final dividend is £3.
- You bought 2 shares, so you get £4. That's hardly enough to buy another share at £100 is it?!
So the £4 just sits in your NISA or SIPP or whatever investment account you have (possibly not even accruing interest).
That is why I try to go for the companies with lower £ prices, as £200 invested into one with a share price of only £3 means you can have 66 shares. At a 5% dividend, you will get 15p for each share. 66*15p is £9.90, and at a 40:60 payout schedule that means you will get £3.96 for the interim dividend, and £5.94 for the final. So, you will be able get one free share from your £3.96 (hopefully the share price will not have gone up so much that it costs more than £3.96, but that is unlikely).
Of course, you can always buy the pricier ones and keep the money in your account until you can buy some more, you could buy say £200 each month, but if you don't have much to invest in the first place, then the psychological and emotional benefits of getting free shares from low prices help. Well, they help me anyway!
That's an interesting viewpoint; I've not looked at dividends that way before.
ReplyDeleteDo companies in the UK offer share purchase programs where you can buy shares directly from them? At least here in the US, those programs allow re-investing of dividends into partial shares and some have no commission fees so that's one way to turn dividends into (partial) shares.
For me though, money is fungible (one of my favorite words) so I look at it like this:
I budget $100 a month (say) for investing from my checking account.
In month 1 I purchase $100 worth of shares
In month 2 I purchase another $100 and I receive $5 from a dividend payment which I transfer into my checking account.
In month 3 I purchase shares for $105 (the planned $100 plus last month's dividends) in whatever company I chose.
This way I'm not restricted by finding a $5 a share company, and I'm still re-investing the dividends back into shares.
But certainly there's a lot of psychology and mental accounting in investing, so you should use any system that helps you the most!
Best wishes!
-DL
I've not found a way to get partial shares yet, although I suspect there might be one. But I essentially do what you have said here, whenever I have dividends that were not reinvested, I just add that money into the next purchase I make. My mutual funds do allow partial shares, so they take care of themselves. I have got several shares that don't generate enough to buy a whole new share, but I'm adding to them as and when I can, so eventually they will be large enough. Thankfully, my dealing charge is only £1.50 (less than US $3), whereas I am aiming to buy around £175+ per trade
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