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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello. I'm Kyle Caldwell, and this is On The Money, a weekly look how to get the best out of your savings and investments. So in this episode, we're gonna be running through three hypothetical portfolios that we assembled to provide food for force for investors that are looking to generate an income. These portfolios, which aims to generate £10,000 of income each year, they're purely for editorial purposes, and they aim to offer ideas and inspiration as part of the wider research. Do bear in mind, they're not financial advice, which we do not provide at Interactive Investor.
Kyle Caldwell:Well, hopefully, they are useful in terms of getting people thinking about what they need to bear in mind when building their own income portfolios. So joining me today is Lee Wilds, head of equity strategy at Interactive Investor. Lee oversees the hypothetical share portfolio. So Lee, to start off with, could you add a bit more detail to my brief explanation as to why we put together these portfolios once a year?
Lee Wild:Well, the aim of the shares portfolio is to identify the 10 stocks that are already solid dividend players and which are very likely to continue paying generous dividends over the next twelve months. So if you are an income investor and particularly one that plans to use the income, from the portfolio to cover living expenses, then, you want companies that are reliable, and you don't want uncertainty over the payout. So, of course, you can never be a % sure, of course, but, you can do a lot to manage the risk. That's not to say I haven't included speculative stocks here in the past, but they were only ever a small percentage of the overall portfolio.
Kyle Caldwell:And before we drill into the portfolios, Lee, I think it's important to get across I mean, you just mentioned about some of the speculative stocks they form, a very small percentage of the overall share portfolio. I think supports get across. We're we're not going all out for income. We're also wanting to strike an appropriate balance of delivering both capital growth and income over the medium term. And for me, the medium term is taking a five year view.
Lee Wild:Well, my priority the first priority is achieving the the £10,000 of income and second is to generate some capital gain, if only to cover inflation. So, I know investors, yes, should take a five year view. I would with my personal investments, most of them anyway. But my share portfolio is reassessed annually, for these purposes, and it's the, the 10 k of income, in that calendar year that I I'm really wanting. So it's not to say these aren't good stocks for the next five years.
Lee Wild:They pretty much are. But, prices move, valuations and yields change, so do some of the constituents.
Kyle Caldwell:And also before we get to the portfolios, I just want to make a few points. So firstly, there are, of course, various ways to arrange investments to pay an income at retirement. A common approach is to focus primarily on income generating assets. However, given that the average life expectancies are in are in the mid eighties, a portfolio at retirement arguably also needs exposure to growth producing assets in order to strike an appropriate balance. Now when it comes to equity income funds, the good news for investors is that the the vast majority tries to strike that balance between delivering a certain level of income and also capital growth.
Kyle Caldwell:However, it's also important to bear in mind that some income funds target a high level of income, which can come at the expense of capital growth. And as ever, it's a case of looking under the bonnet, understanding the approach that's being taken, also understand how the income is being generated, and then take a view on whether you think how the income is being generated is sustainable or not going forward. However, the other side of the coin is that there is a potential downside if you opt for the convenience of taking a regular income from income producing investments. That's because those who buy funds that focus more on capital growth could benefit from higher overall returns. Now if you adopt this approach, then you'd need to, like, manually pay yourself the income from the total returns from the funds.
Kyle Caldwell:Now, arguably, this is more of a hassle than simply taken, say, the natural yield from an income fund. But I can see why some investors would adopt this approach. Ultimately, for me, it depends on your preference. However, what I would say is that I think mix and match in between growth and income makes the most sense as this will help reduce risk, and it will hopefully give you portfolio balance and diversification. Any further thoughts on that, Lee, to add?
Lee Wild:Well, Karl, the way I build the equity portfolio hasn't really changed very much in the past ten years, and the key for me is diversification. So spreading your investments across sectors and sometimes risk levels, I think, is a, obviously, a good way to increase the odds of achieving your income target. So I think when I first started the portfolio, I was too focused on on higher yields. Now I like to have the best income plays across a range of sectors. Sometimes I'll drop a sector for one year if I think there are better income opportunities elsewhere, but I don't wanna be too overweight one particular area of the market.
Lee Wild:So, I mean, luckily, at the moment, we're blessed with some very high yielding blue chips for me to choose from.
Kyle Caldwell:So let's now move on to the portfolios. Solis, start off with could you talk us through how your share portfolio fares in 2024?
Lee Wild:Gladly. It turned out to be a great year. In fact, achieved the yield of 6.2% equivalent to £10,084 of income. So the hundred and 63,000 it cost to put the portfolio together, that increased to almost a hundred and 67,000. So that's a return of 2.4%.
Lee Wild:So biggest contributor was Lloyds Banking Group. That chipped in nearly £1,400, which is a little more than I expected at the beginning of the portfolio. Share price is up 45%. That gave us a £9,000 profit and made it the star performer in the 2024 portfolio. Imperial Brands was also responsible for over a thousand pounds of income.
Lee Wild:That was up 43%, in terms of share price. So, that was equivalent to a capital gain of £5,600. Difficult in terms of capital returns, but the the profit from Lloyd's and Imperial offset losses elsewhere.
Kyle Caldwell:So as the 2024 portfolio, let's now move to your choices lead for 2025. And before Lee runs through them, just wanna flag to our listeners that we'll put links to editorial articles that outline each portfolio in the episode description. So do check those links out. In those editorial articles, there'll be a table that shows the portfolio weightings and the respective yields. So Lee, what changes have you made for 2025?
Lee Wild:Well, there are only three changes, and none are particularly radical, I don't think. Imperial Brands, as I've said, was a star performer of the 2024 portfolio. The share price surge does mean the prospective yield, has shrunk to a comparatively modest six percent, though. So, felt I could do better elsewhere. If I'm looking to stay within the, tobacco sector where where yields are historically stronger, you have to look at BAT.
Lee Wild:That yields 7.4%, and and trades on a similarly modest valuation to Imperial, so the extra income's valuable there. So BAT got the nod this time. Morgan Advanced Materials. I mean, I use it for the first time in '24. Had a good debut, but generated the year we are hopeful.
Lee Wild:So ended the year with only a modest capital loss. So, yeah, good year. But the 4.4%, income on offer is not really attractive enough to book a place in what I think is really a competitive portfolio for '25. So I've gone back to a sector that I haven't included since, 2022, and that's the oil sector. So BP I chose, that's valued on a par with Shell.
Lee Wild:BP is expected to generate a yield of about 5.9% this year versus, just 4.4% at, Shell. So, yeah, BP gets the nod there. Hardest decision I had to make was really among the the banks. And, I guess the what's happened since I picked the portfolio has has proved that out, really. Lloyds Bank, repaid the faith.
Lee Wild:I put in it last year, up 45% in share price terms, yielded almost, 7%, assigned 12% of the portfolio to, to Lloyds last year, so that that proved to be a good move. And there aren't many in The UK bank sector that can really compete with it on or couldn't last year, at least, on on yield. So it would have been easy to keep it in. But, yeah, this difficult decision from an income perspective. Only two choices really, Lloyds or HSBC.
Lee Wild:Lloyds was predicted to yield after the the big gains share price gains from last year was predicted to five and a half percent, HSBC, six point one percent. So, with the motor finance litigation overhanging Lloyd's, I thought, well, let let's let's give, a go for the superior yield, and pick HSBC. Obviously, Lloyds has done very well since, in terms of share price terms. But, obviously, you have to make decisions based on the, on the facts you have at the time. So we're so happy with the portfolio for '25.
Kyle Caldwell:So you've run through the ins and the outs. Could you briefly run through the other seven companies that have retained their places in the portfolio?
Lee Wild:Yep. Well, it costs a hundred and £52,000 to put the basket of 10 shares together. If everything goes to plan, there'll be a 6.8% yield, and that will get us over £10,000 of income. I've built in a little bit of contingency to cover, risk this year given some high yield as of of load the cost of the, of the portfolio. So my income pick from the Farmers GSK yields 4.7%.
Lee Wild:Stock's trading at the bottom of its long term range of roughly between 13 to £18, and it, makes it one to own in in this portfolio. Obviously, AstraZeneca is the only other option in the in The UK pharma sector, and Astra yields, very little. So, it's it's GSK or nothing, I'm afraid. National Grid, has promised to grow the payout in line with annual CPI inflation, plus housing costs, so CPIH. So the forecast yields, about 4.7% still.
Lee Wild:That's competitive in the sector. I wanted to maintain exposure to UK insurers, as I have done since the very first portfolio in that I, oversaw in 02/2015. So I'm gonna stick with LNG this year, as I have done every year since 2021. It's been a steady contributor, and it's tipped to yield at over 9%, in the year ahead. Aviva, again, has done really well, and, it seems odd to say seven yeah.
Lee Wild:Forward yield is 7% isn't good enough, but it's, doesn't compare with LNG at the moment. So, LNG gets the nod. M and G shares, they've been great for me for years in this portfolio. So, it'd be foolish to get rid of them. People fit again, for years have doubted that they'll, maintain the dividend, and they have.
Lee Wild:So, I've got to every faith in in management. The, the yield of over 10% is a no brainer for me. Mining sector, last year's picks still looks like the ones who own Rio Tinto. Sector leading yield of 7.1% and possibility of of capital upside. We'll see how the year goes, but miners have done okay recently.
Lee Wild:Sainsbury's did a job for me last year, generated solid annual income. Yields five and a half percent at the moment, more than Tesco, much more than Tesco. So, wanted to include Sainsbury's there as well. And then there's Taylor Wimpey. So it's a highest yielding house builder.
Lee Wild:Still plenty of recovery potential, I think. Sector's done, it's off the lows at least, but, could do with a better economic outlook and lower rates. Looks like we you were having to wait longer than we'd we'd like for for for lower borrowing costs, but, I'm sure they will come. So the share price, I think, factors in quite a lot of bad news already. Labour, new Labour governments developed a plan to boost the number of homes, we build each year to 300,000.
Lee Wild:So over the life of the government, so looks like a hugely ambitious target. I'm not sure too many people think they'll they'll do it, but, the sentiment's there. So that that's gotta be a positive yield for Taylor Wimpey of over 8% and recovery potential guaranteed a place in this year's portfolio.
Kyle Caldwell:As you mentioned, Lee, the yield of the portfolio is 6.8%. Now for the two portfolios I've put together, the overall yields are a fair bit lower. So therefore, you would need a higher hypothetical amount. So for their funds portfolio, the yield's 4.26%. So you'd need 235,000 to try and generate £10,000 of income.
Kyle Caldwell:Whereas for the investment trust portfolio, the yield is 5.26%. That means you'd need a hundred and 90 thousand to try and generate £10,000 of income. With funds, I I do find it particularly challenging to build a portfolio with big yield without potentially compromising on capital growth. Whereas with investment trust, I do find it easier to generate a yield of over 5%, be content with the prospect for both capital growth and income over the medium term. So in terms of 2024 performance, pleased to say that for the for the fund portfolio, the income target was achieved with £10,152 worth of income generated.
Kyle Caldwell:The overall total return, which of course includes dividends we invested, was 10%. Now for the investment trust portfolio, annoyingly, the 2024 lineup fell slightly short of the target. So 9,921 of income was generated. However, I feel the reason why it didn't hit the target was completely out of my hands. So balanced commercial property delisted in mid November after being taken over by US private assets firm, Starwood.
Kyle Caldwell:So it generated less income than expected due to the fact that it was taken over. However, it has a very strong year in terms of share price total returns. So it was up just under 40% until it's delisting in 2024. So in theory, some of those gains could have been used to make up for that shortfall. And in terms of overall total returns for the investment trust portfolio, it retains 9.4% in 2024.
Lee Wild:Look, Carl, I think you're unlucky, with that for me just short of the 10,000 income target, for the trust portfolio. I mean, delistings are something that can happen with investing and can't be predicted. You weren't to know. As you already mentioned, investors could have taken some profits from balanced commercial properties overall returns in '24 ahead of the delisting. That, more than makes up for the, slight shortfall in incoming.
Lee Wild:So, Carlo, moving on to the 2025 portfolios, given the delisting, you had a hole to fill for for the trust portfolio. Do you replace balanced commercial property with another property investment trust?
Kyle Caldwell:I didn't fill the property voidly, but I did give it a lot of thought. One of the main contenders to replace balanced commercial property was TR property. So when I'm putting together these portfolios, I'm looking at Interactive Investors super 60 list, which is a range of funds that are endorsed by our fund analysts in conjunction with Morningstar, the data firm. However, I am cautious on the outlook for property as an asset class. You know, I feel there's a lot of rhetoric at the moment about economic growth being sluggish, and a lot of full managers are talking about inflation potentially surprising on the upside.
Kyle Caldwell:So this could result in there being fewer interest rate cuts than expected this year, heading into 2025. The Bank of England, in the case of the four interest rate cuts will be on the cards, so I'd sooner wait until next year to see whether those interest rate cuts materialize, which is why I didn't replace like for like property exposure. Now as well as waving goodbye to balance commercial property, I also removed JP Morgan Claver House. So this is a UK equity income investment trust. It's been a real steady Eddie over the years.
Kyle Caldwell:It's a consistent dividend payer. It's one of the Association of Investment Companies' dividend heroes having consistently increased its dividend for decades. However, in 2024, there was a manager change. So it's long standing for manager of twelve years, William Meaden. He's departed.
Kyle Caldwell:I felt this departure was quite unexpected. And in my opinion, I felt the succession planning could have been smoother. So due to that, I decided to remove JP Morgan Claver House. And in its place, I chose Dunedin Income Growth. So this is managed by Rebecca McLean and Ben Ritchie, and it's managed by Aberdeen.
Kyle Caldwell:I've interviewed the four managers before. I like the approach as a sustainable investment approach. It can hold up to 25% in overseas stocks. So I feel that the approach gives the portfolio something different. So following those changes, the 2025 portfolio results in maybe a nine investment trusts down from 10 last year.
Kyle Caldwell:I'm just gonna very briefly run through the other choices, but something I just wanna get across is when I'm looking for candidates for the portfolios, as mentioned, I'm looking to see which funds our analysts like that are in the super 60 list. But I'm also taking a view on the investment approach, strategy and whether the full manager has been in place for a long time and whether there has been a repeatable track record of performance and whether over the long term income has been delivered and consistently generated. So the other choices, so for UK equity income that comprises 45 of the portfolio, there's 15% in City of London Investment Trust, ten percent in Merchants Trust, ten percent in Dunedin Income Growth, and 10% in diverse income investment trust. Then for global overseas income, I selected JPMorgan global growth and income. I gave that 20% weighting.
Kyle Caldwell:I also chose Henderson International Income. I gave that 10% weighting, and I do feel that that gives the portfolio something different as its investment approach and style is sufficiently different from JPMorgan global growth and income. I allocated 5% to Utilico emerging markets. For bond exposure, I selected 24 income, which is a 10% weighting. And for specialist, I picked Greencoat UK wind, which is popular among interactive investor customers.
Kyle Caldwell:It aims to increase its dividend in line with RPI inflation. And since it was launched over a decade ago, it has achieved this every single
Lee Wild:year. Carla, I know you put a lot of thought into these portfolios. So do you feel for you when it was announced just a few days after they were were published at two of the trusts that you picked up potentially gonna merge in a couple of months' time?
Kyle Caldwell:Yeah. And it was unfortunate timing, Lee. It would have been better if, that answer was made before I published the article as I then would have potentially made a change. So if given the green light by shareholders, Henderson International Income's assets, which are around 390,000,000, they'll be rolled into JPMorgan Global Growth and Income. And if given the green light, the current form managers and investment objective and dividend policy of JPMorgan Global Growth and Income, it'll remain the same.
Kyle Caldwell:As I mentioned, I do feel like they are sufficiently different from one another in terms of investment style and approach. So I was a little bit surprised by this proposed combination, but I also, at the same time, feel it makes sense. I feel like there will be increased consolidation within the investment trust industry because wealth managers increasingly only invest in investment trust that have a sufficient size. And I heard some commentators now say that it is around the 500,000,000 mark. So I I do feel like with investment trusts, the big trust will likely get bigger in the years to come, and there will be more mergers.
Kyle Caldwell:Another thing that's happened, Lee, is that the long standing full manager of Greencoat UK wins, Stephen Lilly. He's departing next month. Again, this was unexpected. And as I've mentioned, I do like C4 managers have long tenures, and this is one of the reasons why I picked it. So I'll keep that in mind next year when I review the portfolio and review how it's performed.
Lee Wild:K. Yeah. Well, with the with the fund portfolio for 2025, we also noticed you've reduced the number of holdings, so things down from 12 to 10. So which ones did you remove, and and did you introduce any
Kyle Caldwell:new ones? So I just removed two. I didn't introduce any new ones. So I readjusted the waitings for the existing holdings. So the two I've removed are Janus Henderson UK responsible income and FTF ClearBridge global infrastructure income.
Kyle Caldwell:So the main reason why I removed the Janus Henderson funds is because at the time I reviewed the portfolio, it add ons performed the average UK equity income fund over one, three, and five years. So as a result of that, I decided to slim down the number of UK equity income funds to those that I have higher conviction in. Now with the infrastructure funds, this was a tactical decision to take advantage of the attractive yields that you can now achieve on bonds and also the potential price returns for bonds given the prices should appreciate when interest rates are cut. So I took the view the I'd sooner seek out greater bond exposure, particularly given the fact that you can obtain yields of around four and a half percent to 5% on the lowest risk areas of the bond market, such as gilts and money market funds. I think given the fact that interest rates are where they are, this now means there's less incentive to invest in some alternative income assets such as infrastructure.
Kyle Caldwell:So as mentioned, I didn't introduce any new holdings. The other ones are picked. So allocated 25% to UKXI income. I chose Artemis income, Man GLG income, and I also picked Vanguard's FTSE UK equity income funds, which is a passive fund. I also picked for global overseas income.
Kyle Caldwell:I chose Fidelity Global Dividends. This has a quite a low yield, but I've picked this for both income and capital growth. And then high yields and options that I picked were Vanguard's, FTSE, or Wales High Dividend Yield ETF, which as the name suggests is this a passive fund. And I also picked Guinness Asian equity income. And then for the rest of the portfolio, 50%.
Kyle Caldwell:I picked Artemis monthly distribution. I gave that 20% weighting. This is a balanced fund. It holds 60% in shares, 40% in bonds. And then the remaining 30% was split across free bond funds, which are Jupiter strategic bonds, Royal London global bond opportunities, and Royal London short term money market funds.
Lee Wild:The the portfolios are different in terms of asset allocation. So you've selected more bond exposure for the fund portfolio versus the investment trust portfolio. What's the reason?
Kyle Caldwell:Yeah. That's a good point, Lee. So it's mainly because with investment trust, there's not many bonds focused investment trusts. So as the fact that there was slim pickings, they didn't wanna feel compromised picking between such a small number. However, it will be interesting to see how both portfolios perform against each other in 2025 as they are quite different in terms of asset allocation.
Kyle Caldwell:And it will be interesting to see if bonds as well as hopefully deliver that good level of income that they also do produce, hopefully, an attractive overall total return in 2025. And I think as well for investment trusts, it'll be interesting to see whether the sector as a whole has a better year and whether or not discounts start to decline. Investment trust discounts have been stubbornly wide for a couple of years now, and the average investment trust discount is in the mid teens. Now one of the investment trusts are picked, Greencoat UK wins. It has a big discount.
Kyle Caldwell:It's over 20%. And if that discount does reduce, then that will improve the share price total return. Of course, it could widen further and proves to be a headwind. And, of course, time will tell on that. And time will also tell in terms of how all three high classical portfolios have fared by the time that we do review them, Lee, which will be late January twenty twenty six.
Kyle Caldwell:So Lee will have to have you back on the podcast this time next year to discuss how they performed and see how you've changed your lineup and how I've changed my lineup for 2026.
Lee Wild:Look forward to it.
Kyle Caldwell:Yeah. Well, thanks to Lee, and thank you for listening to this episode of On the Money. If you enjoyed it, please follow the show in your podcast app and do tell a friend about it. And if you get a chance, leave us a review or a rating in your podcast app too. You can join the conversation, ask questions, tell us what you'd like us to talk about via email on 0tm@ii.co.uk.
Kyle Caldwell:And And in the meantime, you can find more information and practical pointers on how to get the most out of your investments on the interactive investor website, ii.co.uk. And I'll see you next week.