Following on from something similar on The Compound Investor, I figured I’d start a micro portfolio for UK equities. Now, I think we are slightly behind the Americans here in terms of the zero-commission dealing revolution. We can add fractional share dealing to that as well, which is why I’m calling this whole thing micro investing.
It kind of sounds gimmicky, though I think it is quite powerful for investors on lower incomes. Just to be clear, you can already do this with funds on the larger platforms. Hargreaves Lansdown, for example, allows you to invest as little as £25 per month in open-ended funds without dealing fees. Unfortunately, that doesn’t quite extend over to equities, though regular investing attracts much cheaper commission than one-off trades. You also have to find a broker that deals in fractional shares if working with small contributions.
Enter Trading212. This a very small broker, but it is one of the first on the scene in terms of fractional share dealing in the UK. I’m usually very uneasy about these small firms, though in an absolute worst case scenario I’ve got the £85,000 FSCS protection to fall back on. Client assets should obviously be ring fenced in any case (though it would still take months to resolve in the event of broker failure). Apart from that, I’m on the hook for taxes outside of an ISA, which is something I may have to think about if the portfolio grows large enough.
The Micro Portfolio
Anyway, I have followed the same playbook here as with The Compound Investor. That means an initial $100 to kick things off (around £80 at time of writing), followed by recurring monthly investments of the same amount. I have also set another couple of hundred to go into a Halifax regular investment program. They will work with fractional shares, but the trades attract commission of £2.00 per line (plus stamp duty, of course).
I’ve got the ball rolling with a five-stock block consisting of BP, Diageo, Reckitt Benckiser, Royal Dutch Shell and Unilever. I’m not totally in love with the valuations of the consumer stalwarts right now, but they are my three go-to names in the UK. The generate very high quality earnings and should do fine in a strict buy-and-hold portfolio. The oil giants posses a better value case right now, especially Shell, which cut its dividend earlier in the quarter.
Some insights as to what that initial £80 has bought me. First and foremost, around £5.42 in trailing-twelve-month net profit. This will drop drastically over the next few quarters due to COVID-19, but eventually it will jump back. Secondly, a TTM dividend of roughly £4.50 – equivalent to a yield of circa 5.65%. This will also fall, with at least one dividend cut already mentioned above.
In terms of returns, let’s start with that last number. If absolutely nothing changed from here on out, I could reinvest that to generate mid single-digit per annum growth. Moreover, I expect some underlying growth driven by the retained earnings of those firms. Combined with regular fresh capital, this should provide something meaningful given enough time to run.