Dennis Belton was made redundant a couple of years ago at the age of 58. At the time he says he was hoping to find work in the oil industry, where he worked for most of his career.
But after taking a part-time position he then retired a couple of years later when Covid-19 hit. Luckily, he had a couple of final salary pensions, and had been a member of BP’s scheme for 16 years.
Since then, Dennis has also contributed to a defined contribution scheme, which was with FujiFilm, the company he was working for when he was made redundant. He says the challenge has been to invest these funds so they provide an income for him over the next few years, bridging the period between his initial retirement and state pension age (in this case 66).
“When I was made redundant I used part of the money I received to top up my DC pension. I have since transferred this to a Sipp and have invested in a number of shares,” he says.
It’s been a steep learning curve. With a final salary pension he says he didn’t have to worry about where his money was invested. To date though, he has made a decent return on his original investment.
“When I received my redundancy payout I used some of the money to buy a flat. Since then I have transferred my DC pension from the company scheme into a Sipp with AJ Bell,” he says.
“I have taken 25% as a tax-free lump sum and have used this to largely pay off my mortgage. This has helped reduce my outgoings, which has made it a lot easier to cover day to day bills with my final salary pensions.
“I’ve also invested the remaining funds in a few shares, which hopefully will continue to produce a good income, which will help support me over the next few years.”
Dennis, who lives with his wife in Watford, says that at the moment his money is in three FTSE-100 shares: British American Tobacco (BATS), Imperial Brands (IMB) and Aviva (AV.) Dennis estimates these three shares generate dividends of around £2,000 a year for him.
Both tobacco companies – British American Tobacco and Imperial Brands – have delivered excellent returns for investors over the past few years, although the five year picture is more chequered.
Both firms have benefited from the growth of the e-cigarette market, which according to Morningstar analysts have helped create the most significant change in the industry since the 1960s.
Morningstar adds that it seems likely conventional tobacco will remain the driving force of the industry profit pool for at least the next decade, but the industry is on the cusp of seismic shift to next-generation products. With consumers more aware of the health risks, and potentially less brand-loyal, it remains to be seen which manufacturers will win out, however.
British American Tobacco has a four star rating from Morningstar, reflecting that fact its share price is currently trading below its “fair value” estimate. It is known as a reliable dividend-payer and its shares are currently yielding 6.23%.
It has also seen its share price rise over the past nine months, after experiencing a bumpy ride in the immediate wake of the lockdowns. Dennis points out that he used the Covid-19 fall as an opportunity to top up his holding in this stock.
According to Morningstar data, investors have seen total returns of 31.38% over the past year, and 12.04% over the past three years. However, investors who held the share for five years are sitting on an overall loss of -3.85%.
Imperial Brands is another tobacco manufacturer with global reach that currently operates in 160 countries.
It has delivered good returns for investors over the past year, with total returns of 19.66%, according to Morningstar, although returns are only 3.93% over three years. Shares currently yield an exceptionally high 7.8%, making it an attractive option for income hunters, like Dennis.
Insurance company Aviva is another decent dividend payer, and is currently yielding 7.18%. That said, its share price has been more volatile in recent years, which has impacted overall returns.
Investors have seen total returns of just 2.38% over three years, and are sitting on losses over both one and five years.
The company recently offered a share buyback scheme, as a means of returning value to shareholders. Dennis says he took part in this, which further boosted the income he receives.
Morningstar analysts say: “As a good middle-of-the-road insurer, Aviva has had its fair share of problems over the years. It says these issues have includes leveage, turnober and its sprawling business portfolio.”
Morningstar adds that part of the problem has been previous leadership teams have focused on growth and innovation rather than strong capital management and discipline, although the current chief executive Amanda Blanc is now trying to address these issues by divesting non-core assets and focusing on Aviva’s main UK, Ireland and Canada businesses.
Topping Up, Tapping Out
Dennis says his money is entirely in these three shares. However, he has dabbled in a few other growth options previously. Initially he says he invested in a couple of AIM shares, such the pharmaceutical company Ixico (IXI) and Howden Joinery (HWDN). He has also had holdings in other FTSE-companies, including Shell PLC (SHEL), and Next (NXT).
Dennis says he decided to cash in his Ixico shares when the price doubled. “I thought I had made a reasonable amount on this, so took my profits. It turned out to be a good move as the share price has since fallen back,” he says.
“If I make a 100% return I’ll look to sell, but I also don’t hold on for too long if share prices start to fall. Of course, if the whole market is down, as happened after Covid-19, and more recently, this is different. I have tried to use these opportunities to top up existing holdings.”