As the moment of SIPP drawdown approaches, I have been looking at shares, investment trusts and exchange traded funds (ETFs) that pay a quarterly dividend. The original motivation for this research was to smooth income flows in order to only withdraw dividend income while leaving the capital untouched – the idea being that I never need to sell a share in my portfolio unless a) the investment thesis fails or b) I identify a better alternative.

The net result is that I have come up with a shortlist of fifteen – six of which I already own and another nine that I would be comfortable holding in the context of a diversified portfolio (I am unlikely to own all of them). Potentially, this collection of shares would make a neat stand-alone portfolio for someone seeking secure (average dividend cover is 1.32), smooth income flow (5.31% annual yield which is comfortably above 1.25% per quarter – i.e. £1250+ per quarter, per £100,000 invested) and low volatility (average volatility is only 1.6 out of 5). It is also well diversified by size, geography, currency and sector.

The one failing of this group as a stand-alone portfolio is a lack of growth. I think there would be sufficient growth (capital and dividend) to keep ahead of inflation but my expectation would not be for much more than that. From my perspective, these quarterly dividend payers are great but within the context of a wider portfolio that has higher growth prospects. But for the purposes of this article, I shall refer to the 15 as “the portfolio” or “QDIV”.

Without further ado, allow me to present the QDIV portfolio along with some commentary on each of the constituents. I hope readers find it interesting and possibly useful as an input to your own research (absolutely no advice is ever intended in any of my ramblings).

Company EPIC Size Sector Yield Dividend Cover Volatility
Royal Dutch Shell RDSB Large Energy 5.78% 1.57 2
GlaxoSmithKline GSK Large Health 5.05% 1.42 1
Greencoat UK Wind UKW Mid Infrastructure 5.03% 1.34 1
Renewables Infrastructure Group TRIG Mid Infrastructure 5.26% 1.53 1
Games Workshop GAW Mid Consumer 2.78% 1.48 3
Primary Health Properties PHP Mid Property 4.10% 1
Paypoint PAY Mid Consumer 7.73% 0.83 2
Henderson Far East Income HFEL Small Investment Trust 6.21% n/a 1
Aberdeen Diversified Income ADIG Small Investment Trust 5.97% n/a 1
Duke Royalty DUKE Small Financial 7.24% 1.07 1
Jarvis Securities JIM Small Financial 5.51% 1.34 2
iShares Euro Dividend IDVY Mid ETF 4.23% n/a 2
iShares UK Dividend IUKD Mid ETF 6.84% n/a 2
iShares UK Property IUKP Mid ETF 3.36% n/a 2
Global Dividend Aristocrats GBDV Small ETF 4.56% n/a 2
5.31% 1.32 1.6
Average Yield Average Dividend Cover Average Volatility

Large Caps – RDSB, GSK and IUKD

The UK large cap index can be largely be divided into 2 categories; the dross (structurally broken and/or cyclically exposed companies) that mainly pay a high dividend (i.e. they are cheap for a reason) alongside a handful of higher quality companies that are more expensive and therefore have lower yields. Of the quarterly payers on the UK large cap index, there are only two that I am prepared to own directly; RDSB and GSK. The iShares ETF (IUKD) is focused on the top dividend payers in the FTSE 350 and is weighted towards the larger caps and therefore, provides exposure to the “value and income” parts of that index while mitigating risk (e.g. Vodafone’s recent dividend cut) via diversification (there are 50 holdings in the ETF and it currently yields 6.84%).

Infrastructure – UKW and TRIG

Renewable infrastructure is perhaps a little narrow as a sector to have two constituents (if I had to choose one, it would be TRIG for the increased diversification). This said, renewable energy has a long-term future and I like the idea of generating a long-term and growing income stream from it.

Investment Trusts – HFEL and ADIG

I am increasingly preferring ETFs over investment trusts. However, HFEL is a long-term holding in my portfolio and I am very happy with its performance as a dividend share (yielding over 6% and growing the payout year-on-year while building up distributable reserves). And of course, it provides geographic diversification and exposure to Asian markets. ADIG is a different proposition and it is debatable whether I needed to include it. Essentially, it serves to widen diversification beyond pure equity exposure (e.g. fixed income, European property, reinsurance). It currently yields 6% but against this, NAV has declined around 10% year-on-year.

Property – PHP and IUKP

PHP is real estate investment trust (REIT) that specialises in GP surgeries and health centres in the UK and Ireland. The properties are on long rents and the income streams are secure (NHS Trusts) barring a financial meltdown in the health service. It yields 4.1% compared to IUKP which only yields 3.36% but of course, this iShares ETF provides much greater diversification across a range of property assets (REITs and individual shares).

Financial – DUKE and JIM

DUKE is a core existing holding in my wider portfolio. It is a bottom up stock pick in a company that I believe can be an excellent long-term compounder with significant share price upside. While waiting for this thesis to play out, DUKE pays a 7.24% dividend. It is not without risk as it is exposed to the business performance of just a dozen smaller companies. Nonetheless, I am comfortable with the risk-reward and income flow – as ever, in the context of a diversified portfolio. As for JIM, it is a small stock broker that is largely still owned by the founding family. It is unlikely to ever set the world on fire but the family interest in maintaining a strong balance sheet and growing dividends over the longer-term make it comfortable for me to include in a diversified portfolio.

Consumer – GAW and PAY

In truth, GAW can’t really be considered an income share following the recent price rise, yielding just 2.78% on current forecasts. However, I have owned GAW from a lot lower down and it is a core holding in my wider portfolio (third in weight overall). The dividend is a little irregular (only when they have truly surplus cash) but tends to be at least quarterly with the prospect of a “bonus quarter” in a good year. PAY is a cash cow that is trying to reinvent itself as a growth story. The current dividend yield of 7.73% includes a return of capital to shareholders via a series of special dividends but even so, the long-term dividend here should be around 6% and if the company can find a way to resume growth, that would be a nice bonus.

ETFs – IDVY, IUKD, IUKP and GBDV

I am increasingly drawn towards the benefits of ETFs over actively managed investment trusts and OEICs. They are lower cost, simple, functional and ideal for tactical asset allocation. Not all ETFs are equal though – for example, does it use leverage, are the underlying shares owned, are all the shares held or is it an indicative subset?

In the case of IDVY (European income shares), IUKD (UK income shares) and IUKP (property REITs and shares), they are quite pure. No leverage is used, all the underlying shares are owned and all income returned to shareholders quarterly (note – these are not in equal instalments). However, GBDV, the global dividend aristocrat ETF based largely on dividend growth uses 100% leverage which of course, does present some additional risk.

QDIV Mini

As I was writing this article (on a rainy Saturday afternoon), a voice in my head was shouting, “Simplify. Simplify. Simplify.”

If you were to take the 4 ETFs; IDVY, IUKD, IUKP and GBDV, the 2 investment trusts; HFEL and ADIG, and added TRIG for diversified infrastructure exposure, you could achieve almost the same result with a lot less fuss – 5.20% yield (versus 5.31%), volatility identical at 1.6 and still globally diversified across multiple assets. The additional holdings in the longer version of QDIV probably provide more growth opportunities but also, they introduce single company risk. Food for thought perhaps. Much depends on what you are trying to achieve, what level of risk you are comfortable with and how much time you are able/prepared to invest in research.

I hope you have found this random piece on quarterly dividend shares interesting and perhaps useful as an input to your own research. As ever, absolutely no advice is intended by my writings. I am happy to chat about any aspect of this article on Twitter via @BrilliantLeader.

Disclosure – At the time of writing, I own shares in GSK, RDSB, HFEL, GAW, DUKE and IUKD which were all mentioned in this article.