For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
The accounting year ending June 2024 has now ended and we have achieved another year of dividend growth of 3.9%. At this time of year, we look at setting the monthly payments for the Premier Miton Cautious Monthly Income Fund’s financial year and begin to think about the total amount we plan to distribute over the year.
Our starting point is the current inflation rate. Over time we look to raise the distributions by the rate of inflation. This is ultimately what we think those living on the income from a portfolio need. Clearly, as we go into later in the note, this can only be possible if we can grow the capital value of the portfolio by a similar amount. Growing the income at the expense of capital is a strategy that may work near term but is doomed to fail long term. Basically, that would be the income fund equivalent of unit encashment, giving clients’ money back in the form of income.
Hence our monthly payment, which has been, and is intended to continue to be a set amount each month, will grow by just over 2% this year. This is marginally ahead of current CPI of 2%. We check the feasibility of this against our income plan. This takes the current portfolio and calculates the future expected income from all the bonds, equities and other assets we own today.
Premier Miton Cautious Monthly Income Fund – Distributions
Source: Premier Miton, B income shares as at 30.06.2024. Fund launched: 09.06.2011.
The level of income paid by the fund may fluctuate and is not guaranteed. Past performance is not a reliable indicator of future returns.
In the case of the bonds, this is known with a high degree of certainty. The only confounding factors are maturities and currency. Maturities are a major consideration now as our portfolio is currently very short dated. Our equity income spreadsheet makes no allowance for re-investment of maturities, so will always understate what can be achieved. Similarly, while we can hedge currency risk in the bond portfolio from a total return point of view, the income from our overseas bonds will be impacted by currency strength or weakness. These considerations aside, the income from our bonds is most likely to be understated, the main risk being reinvestment risk from maturities, i.e. will we be able to replace lost income at similar yields?
In the case of equities there is greater uncertainty. We rely on analysts’ dividend forecasts from Bloomberg to feed our model. Given the large number of stocks we own, in aggregate it provides a very plausible guide to the level and pattern of income that would come from the current portfolio. However, we certainly won’t be holding the current portfolio for the entire next twelve months, as we run a genuinely active strategy, responding to the changes in market conditions rapidly. As we make each change on the Premier Miton Cautious Monthly Income Fund we will consider its impact on future income flows. We would never sell a position if we could wait a few days and collect a dividend. Similarly, if we are buying, it is simple to buy a little extra if its about to go ex-dividend as this will bring the holding back to the intended weight in any case.
A further factor comes into play with our “third way income” approach. We aim to run our equities in roughly equal weights, by liquidity bands and contribution to risk. Hence, where we hold a strongly performing position, we will be continuously trimming back to start weight. This can provide a continuous stream of capital gain to increase income from other equities or bonds. The same goes with high yielding stocks which perform well, not only will the weight become relatively high, demanding being trimmed, but the yield will be lower. Capital growth is the key to income growth.
Hence, when looking at our equity income spreadsheet it will typically be an understatement of what is likely and feasible to earn in the period. 2020 was of course a notable exception, where many companies in Europe and the UK, cut or passed their dividends and we had to work very hard to replace the lost income without damaging the total return.
There are certain natural checks and balances within an income approach. Should inflation move higher, we should expect to be reinvesting our bonds at higher yields as bond yields rise. We try not to have too much duration in a rising inflation environment, as capital losses can mean the benefit from higher yields is lost. At the same time nominal economic growth will be higher and, hence, equity dividend growth should also be higher over time. Again, holding inflation hedges in equity can help.
Taking these factors into account we will start to plan for the overall distribution in 2025 at this time. While we cannot know what level inflation will be in twelve months, we can put some sensible bounds around it. We can judge, based on the current forecast and past experience, whether our plan to grow the income in line or ahead of inflation is realistic and what actions we may need to take during the year to help enable us to do this.
David Jane
Premier Miton Macro Thematic Multi Asset Team