UK Edition
Questor: three small-cap shares to buy for surefire income
With markets rising yet further in recent days, it's encouraging to look across this portfolio and reflect that whatever happens to prices, the underlying income should remain more or less secure.
A correction would of course be disappointing - our 23 holdings, bought in stages between September and March, have posted capital gains of 8.4pc - but the focus of this portfolio is to derive income.
- Reader Service: £10 to buy & sell shares free to trade funds with Telegraph Investor.
Capital at risk.
And in that regard we're doing well: income paid to date stands at a fraction above 3pc of our original invested funds. We are on target to achieve the goal of a sustainable 5pc annual income stream.
That said, we've paid a high price for many of our holdings in the expectation that the income they generate is pretty shockproof, Brexit-proof, currency-proof and generally resilient.
Aim-listed Renew Holdings, which we bought on November 25 at 396p, posted half-year results on Tuesday and is living up to those hopes. It is among the more speculative constituents of this portfolio.
This specialist engineering business has successfully captured a number of niche sectors. Skill requirements are high, which is a helpful barrier to competition; contracts tend to be long, giving reassuring sight of future revenues, and customers are generally exceptionally large businesses or government agencies. That adds up to a compelling picture.
The core areas Renew serves tend not to rest on discretionary spending, either. One is transport infrastructure, with Network Rail a major client and projects involving both maintenance and new installations. Another is the provision of environmental services in the fields of clean and waste-water distribution, flood risk controls and nuclear waste management.
Whatever happens in the economy, there is limited room for this spending to be cut or deferred. In fact, looking ahead, Renew should benefit from substantial projects in all these areas.
For these business segments, Renew's revenues for the half year are up 6pc, profit is up 14pc and the margin has improved 9pc. The order book is up 5pc.
All of that is driving the dividend, with the interim payout up 13pc to 3p.
Renew has a further division where the outlook is less rosy. This is a specialist building operation which enlarges or maintains luxury homes and period buildings in and around the capital. Revenues here account for about 18pc of total but the margin is lower and the order book down.
The gamble here is that the factors outlined above play out and that cash is returned to shareholders. Numis has set a target price of 500p. We remain very positive.
Questor says: hold
Ticker: RNWH
Share price at close May 27: 458½p
Regional Reit: update
Regional Reit, one of the portfolio's two quoted property fund holdings, has announced a first-quarter dividend of 1.8p per share. We added this company on October 7 at 103p. In a positive update, the firm said it would pay three dividends "at approximately this level" followed by a fourth in early 2018. Last year it paid three 1.75p divis followed by 2.4p, giving a total of 7.65p and yielding at today's 106½p price over 7pc.
Questor says: hold
Ticker: RGL
Share price at close May 27: 106½p
Baronsmead VCT: update
The two venture capital holdings in this portfolio - Baronsmead and Northern VCT - offer a means for us to capture capital growth and enjoy it as tax-efficient income. Over time, roughly 90pc of dividends paid out by VCTs arise from realised profits when underlying businesses float or are sold. Dividends are tax-free (even when VCT shares are bought on the market, as here for this portfolio).
Of course attractive, investable businesses need to be found by the portfolio managers, and a combination of tougher rules and potential lack of opportunity could slow this income stream.
- Reader Service: £10 to buy & sell shares free to trade funds with Telegraph Investor.
Capital at risk.
We bought on October 21 at 83p. The company aims to pay a minimum 6.5p divi per year, and a half-year 3p payment was made in March. This was earlier than the previous half-year distributions (June) to meet rules about holding uninvested cash.
The shares now trade at 85.62p. In the half-year report published on Wednesday, the company reported a modest increase in underlying asset value to 89.8p a share.
Questor says: hold
Ticker: BVT
Share price at close May 27: 85.62p