ISA 2018/2019 – Strategy, Saving The Full Amount and The End Game


It’s the 6th of April which means only one thing, the beginning of the new tax year. This makes me excited as it means that I now get another £20,000 to add to my stocks and shares ISA. And if you are not excited about this it’s because you do not fully understand the concept and the great benefits that an ISA possesses.

If you are someone like me who wants to achieve financial freedom at a relatively young age, an ISA is the way to go. In essence, an ISA is a legalised tax heaven for the average person like you and me. You are able to earn dividends and capital gains absolutely tax free. And best of all is that unlike a pension, you are able to withdraw money from your ISA without any tax charges at any time – whereas in a pension you can only withdraw money after you reach 55 years if age and any withdrawals are taxed at your marginal rate. No wonder I am so excited about the new tax year and the new ISA allowance that comes with it.

The End Game / The Goal

When I first started investing in ISAs, I outlined my investing strategy as can be seen here. The main aim of my portfolio is to provide me with an attractive level of income today whilst at the same time the portfolio needs to provide a good level of long-term dividend growth as possible. Companies that grow their dividends usually see their shares rise too, over the long-term. In this way a rising income can also turn into long-term growth.

Three years on since I started documenting my investment journey, my portfolio has so far thrown off dividends worth £4290. Whilst I could have taken these dividends and spent them as I please, I decide to reinvest them in order to get even more dividends going forward. I will continue to re-invest dividends in this manner until a time when my dividend income will cover all my living expenses after which I will draw on my dividends for income.

Along with the dividends received equalling 7.5% of my portfolio, my portfolio has also benefited from capital appreciation as the shares I own have risen in price. The combination of income received and capital gains has delivered my portfolio a decent return. Having said this, I think it would be dangerous to think the market will provide the same returns over the next 3 years that it has over the last 3. As crazy as this is going to sound , I hope that it doesn’t. Since I am not selling shares to lock in capital gains, I don’t need prices to keep heading higher while at the same time lowering yields – when share prices rise you automatically get less dividends than if you bought the shares at cheaper prices. As my objective is to to grow my passive income over time, higher stock prices will make my task more difficult. Don’t get me wrong, I don’t mind the capital gains showing up 30 or 40 years from now, but as I am still in the asset accumulation stage of my life when compounding is the most beneficial piece of criteria, I want the share count and income to grow at a faster rate, not the share prices

Reaching financial freedom via dividend growth investing can be a slow process. It’s frustrating at times if you allow it to be, especially when others are talking about the moves they are making, it seems like everyone but you is moving ahead. Some things you just need to let go and simply focus on doing the best you can with what you have. Time is your ally not your foe. Time is a foe for a lot of older people, they don’t have enough of it, so be thankful. You will have more years to work with than they have and almost every older folk wishes they could change place with you. Don’t let that go, embrace it and work with it. Show some patience and simply stick with your plan.



Strategy

My strategy is to buy into quality dividend paying companies at a reasonable price. There are a number of metrics I look at in order to identify these companies. If I were looking for something else then I’d probably look at other metrics.

Firstly, and most importantly, I want profitable companies – I don’t invest in anything loss making. Obviously, I miss out on some wonder stocks at an early stage, but the chances of finding them are tiny and more importantly I miss out on a lot of rubbish. Many first time investors want to shoot for the stars and want to find those companies that can double their money over night. That is not the game for me. I invest in established companies companies that have a long history of being profitable. I have been burnt before with Accrol Papers and have seen others lose much more with GTAT in order to chase a quick gain. I have learnt that it is far more prudent to buy into blue chip companies that are already established and profitable.

It is important for investors to identify and assess quality metrics such as Return on Capital, Return on Equity and Operating Margin (or ROCE). Ideally I want a minimum 10% on all of these – companies with these sorts of figures have some kind of competitive advantage, which should allow them to continue to make similar figures. If you’re a long term holder this is where your research pays off, to figure out whether their moat is temporary or permanent.

Buying into quality companies should not be underestimated. As Charlie Munger, the business partner of Warren Buffet, once put it “over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive-looking price, you’ll end up with a fine result.”

Another important metric to look at is Free Cash Flow (FCF) and I compare this with operating cashflow, and scan back across the years. Cashflow, unlike earnings, is hard to fiddle with and good companies throw off cash. FCF can vary for many reasons but it should be positive and, on average, a decent percentage of operating cashflow. Another way of putting that is that I dislike companies with large capital expenditures – it suggests they have to spend a lot to stand still. All things being equal you want a company that can make money without spending much. A good example of this is Fidessa PLC – go and look at the company’s historical annual reports to see just how much free cash flow the company has thrown off and how this has rewarded shareholders over the years.

Next, I look at gearing – debt is always interesting. A company with net cash is safer, but potentially isn’t investing or returning as much as it could. However, I don’t want massive amounts of debt, so I generally want gearing to be well below 50%. There are exceptions that I have made as I have bought shares in Shire and Imperial Brands but I believe these two businesses to be of high quality and thus there debt loads are manageable.

One metric most people skip over but I for one place high importance on is the number of shares in issue and how this number has fluctuated over the years. As a shareholder, the worst thing is to get diluted year over year – you don’t want to see the share count rising as this means that you own a smaller share of the company and thus have the rights to a lesser share of the profits. Equally if the shares in issue are reducing then that implies a buyback – and that needs to be looked at carefully, because most companies exercise buybacks in the interest of the management and exiting shareholders, not in favour of current shareholders. Next PLC is a good example of buybacks being done right.

Once I find quality companies, I only buy their shares when they are trading at reasonable levels. I don’t want to overpay for shares so I first look at P/E and P/FCF. Other people prefer PEG or P/S, but generally the aim to figure out whether a share is expensive or not. I don’t want to pay stupid multiples, but have to also realise that it is important to sometimes pay up for certain businesses just as I recently did with RWS Holdings PLC.

Once I buy stocks, I intend to hold them for the long term. My strategy is to milk the dividends these stocks produce and re-invest those dividends. I think of dividends as fuel for my portfolio. Whilst dividends can produce an income today, they are also a useful cash flow tool that can be used and should be used for investment purposes. I can use the dividends of £160 a month I receive in a addition to the new cash I will invest as part of this ISA year to grow my portfolio faster. In essence, I will have investable cash of £22,000 in the next tax year as opposed tot he standard £20,000.

The market can take away portfolio value but the market isn’t going to take away the cash flow the portfolio generates every month from dividends. I’m the only one that can do that by selling off shares. Sell off shares and you cut out a cash flow generating asset.

I couldn’t care less what the market’s returns are or have been, I don’t invest in the market and my yields are greater than what a passive FTSE 100 index fund can produce, so I’ll take the higher dividend income and move on thank you very much. You may not agree with the concept and that’s fine, but I believe you achieve true financial freedom when your assets paid you more income to sit at home than your job pays you to show up to work. And the goal of my investment journey is to achieve financial freedom.

Whilst the above is my strategy, it is important to realise that investing and risk is always a personal thing, and people should develop their own processes and tolerances based upon their stage of life, assets and ability to accept risk. Following other people thoughtlessly is a one way ticket to some very bad investing experiences, because we’re all different.

Even though I document most of my share purchases in the my journey section of this blog, there are some high quality share purchases I make which are kept hidden. This is because I sell a stocks list and it would be unfair to people who bought the list to disclose companies on that list.To buy the stock list, contact me via the contact form on this website or email me on moneygroweruk@hotmail.com




How I Manage To Save The Full Annual Allowance Each Year

The single most popular question I get from readers is: “How can you afford to save the full ISA allowance every year?”

The emails that normally come with these questions are often pessimistic in nature as people can’t actually believe that the average person can save the full ISA allowance. Statements like — “Well I can’t afford to save at all because I have student loans to pay….” and “You must make a lot of money to be able to save the full ISA allowance ” to my personal favourite question “Do your parents help contribute to your ISA allowance?”

No, I am not rich. No, I don’t have rich parents. And no, I don’t have a high paying job.

For the past three years, I have invested my full ISA allocation of £15,250, £15,250 and £20,000. Before your start thinking that I earn a triple digit salary, I dont. Over the past three years, I have earned £30,000, £30,000 and £45,0000 all before taxes. The first two years I earned the average UK wage so I think most people can save at least £15,250 in an ISA as I have proved it’s possible.

The number one reason I am able to invest the full ISA allowance each year is because savings for me is a priority. I have learnt the tax advantages an ISA provides for an average Joe like me and this gives me motivation for me to save more. And if you truly knew the advantages an ISA provides in terms of the tax benefits I am sure you will save more.

Everyone has priorities in their life. Whether it is travel, that big TV or that new car or that awesome bag or shoes they saw. People consciously or subconsciously prioritise what they want more of in their lives. If you want have more money, you need to make saving and investing your number one priority. If you want to escape the rat race, you need to make savings an investing your number one priority. And if saving and investing is your priority, trust me you will find ways to earn and save more money. You will become creative with your finances. If you are bitten by the financial freedom bug, there is no return. If you know the power of passive income, you’ll want to obtain as much of it as apossible.

For example, I don’t have cable TV or a car as I know that at this point in my life I don’t really need them and the extra money I save can go in my investing accounts. I also sacrifice certain nights out with friends in order to save on costs. Like today is a Friday and I am indoors typing this article. That doesn’t mean I live like a hermit. Life would be too boring if you focus on costs. I still go out and socialise with friends but unlike most of my friends I don’t go out every weekend. Life is about trade-offs so you can either live it up big today and blow all your money or you can put a savings plan in place to ensure that 10 – 15 years from now you won’t have to work another day in your life. 

If you want to find out your priorities, ask yourself what did you spend your last £200 on? If it was two or three weekends of nonsense throwaway forget the work week behaviour, you need to change your priorities. You need to turn your life into something worth living. And that is what investing can do for you. It can buy you your freedom from the rat race. It can get you financial freedom.

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