On the 20th of June I published the first of two articles on attractive income shares and ETFs for investors. One article focused on opportunities for high growth and one on high yields. I’m a proponent of investors creating a portfolio with a mix of both because it is more likely to align with the goal of generating passive income in the first place.

Many non-retired income investors would benefit from a focus on the future income streams that can be generated. Growing income faster than inflation is the pathway to financial independence as the purchasing power of a portfolio increases over time. Retirees also need to focus on growth. Retirement may last decades and growth is needed to sustain - and ideally increase – living standards.

The two articles were a response to the bleak picture I painted in a previous article at the state of traditional income plays in our local market. And things continue to look bleak. According to Janus Henderson the ASX continues to see dividends drop while other markets have seen dividend growth. The following chart shows the percentage change in overall dividend payments in Australia, the US and globally by year. 

Dividend growth

Pointing out problems is one thing. I wanted to offer a solution. That was the spirit behind my original articles and progress checks on how my suggestions are faring. I published the first update a quarter after my original article and this update comes roughly six months after making the picks. I am very much a long-term income investor and not much time has passed but the results so far have been strong. 

My original premise

I had two long-term goals for the shares and ETFs I included on my list. For the more growth orientated bucket I wanted to achieve average income growth of 10% per year. For the higher yielding shares I was targeted average income growth of 8% annually.

In both cases this income growth comes from a combination of dividend reinvestment and dividend growth. In providing this update I used the following assumptions to calculate the results:

  1. Equal weighted portfolio: I assumed that each of the 13 picks received an equal allocation of $10,000. For the US holdings I used the exchange rate on the 20th of June which makes a $10,000 local investment into $6,654 US. I am going to assume no rebalancing so the equal weighted portfolio is only a day one exercise and the weights will fluctuate over time.
  2. Dividend reinvestment: I am assuming that dividends are reinvested at the closing price on the day of the dividend payment. This may vary slightly from how a broker processes any automatic reinvestments or how an investor might manually reinvest dividends. In all but the most extreme situations the price will not vary significantly under these scenarios from my approach.
  3. Income on 20th of June: This represents the dividends and distributions in the preceding 12 months on the 20th of June multiplied by the number of shares held on the 20th of June.
  4. Income on the 21s of January: This represents the dividends in the proceeding 12 months on the 21st of January multiplied by the number of shares held on the 21st of January.

In the following chart you can see the results of this exercise. 

Dividend update

How are things going?

Things are going well. Although I must again point out this is an extremely short time-period. An increase in total income of 6.70% in constant currency terms after six months is a strong start. Accounting for the weakening Aussie dollar since June 20th income is up 9.72% in local currency terms.

Currency matters and there will always be fluctuations. However, since this is a long-term portfolio I’m more interested in what is happening in constant currency terms. I included companies that I thought would grow their dividends. The constant currency view answers this question.

We can break the performance of individual holdings into three categories:

  • Income levels fell: Aurizon and American Tower showed a drop in income. In both cases there has been a slight drop in dividends that have offset increases in the share count from dividend reinvestment. I'm not worried about either holdings as dividend increases are expected in 2025. 
  • Income levels increased: The remaining 10 picks had increases in income. This is good news. In some cases the increasee in income has been substantial which shows the power of compounding when dividend reinvestment is combined with increases in dividends. 

My thesis for each of the picks hasn’t changed so please revisit the original articles to understand my thinking. If there are major develops with any of the picks I will provide updates on my view of the holding in the quarterly review. But so far, so good.

On the surface this is a great start. If the 6.70% increase in income is extrapolated over a year it more than exceeds my target. However, it is important to remember the timing and frequency of when dividends are declared and when they are paid. Especially for the companies and ETF that declare and pay dividends bi-annually which include MVW, SOL, DEO, AZJ, CSL, TCL and CEN. This makes any extrapolation impossible. Regardless, I’m pleased with the start.

How did the portfolio perform?

I’m an income investor. But that doesn’t mean I don’t want my portfolio to increase in value. I don’t think those goals are mutually exclusive. In fact I believe that shares with growing dividends will outperform the market which I expailned in my article why I’m an income investor. To grow dividends means growing earnings. Something the market tends to reward over the long-term.

The following chart shows the performance of each share in the portfolio. In Aussie dollar terms the return since the 20th of June was 14.82%. This was just about even with the performance of the ASX 200 but significantly trailed the Aussie dollar return of the S&P 500.  Do I care? Not really. The time frame is way too short to draw any sort of conclusion.

Return

Final thoughts

To solve any problem requires a focus on the actual problem. Too many investors decide they want income and go out and buy the highest yielding shares. I’m focused on generating passive investor because I want to become financially independent. My hope for this portfolio is that over time I can demonstrate the power of income growth. And I do really hope it demonstrates that since I own every one of the picks other than Washington Soul Patterson.

If you have any questions please email me at [email protected]

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