The investment adage to “cut your losers and let your winners run” is rarely a sound basis on which to make decisions about your portfolio. Just because a stock has risen in price it does not follow that further gains are more likely. Similarly, a falling stock can easily recover if operating conditions improve or if the company has a sound strategy.
As a result, this column’s continued upbeat view on the prospects for two of the top performers in our Income Portfolio is not based on their recent share price performance. In fact Sirius Real Estate and Murray International Trust’s respective gains of 60pc and 32pc since their addition to our portfolio in November 2019 and April 2020 are somewhat irrelevant to our decision-making process.
Rather, both holdings continue to offer strong income growth potential and relatively low levels of risk during a period of significant economic and geopolitical uncertainty.
Sirius Real Estate, for example, recently released an upbeat trading statement for its latest financial year. The company, which owns business and industrial parks, generated 6.4pc like-for-like growth in its rental income in its core market of Germany and collected more than 98pc of the rents due.
Significantly, it entered the British market via the acquisition of flexible workspace business Bizspace in November. The acquisition, at a price that equates to a net yield of 7.1pc, provides the foundation for a wider range of acquisition opportunities outside Germany. It also diversifies the company’s income sources during an uncertain period for the European economy.
Already its like-for-like rental growth in Britain has reached 7.5pc since the buyout. Acquisitions have been a key contributor to the company’s recent growth. Following an inaugural issue of bonds last year, the company’s financial position, which includes an unrestricted cash balance of £106m, suggests it has the means to make further purchases.
In terms of dividends, the company raised its payout to shareholders by 6.4pc in the 2021 financial year. It then increased its half-year payment by 12.1pc in the 2022 financial year. Since its latest annual dividend was covered 1.5 times by profits, its payouts remain affordable.
Clearly, Sirius Real Estate’s dividend yield has fallen since our initial recommendation thanks to its rising share price. Then the yield was 3.8pc; today it is a less appealing 2.7pc. However, its dividend growth potential in an era of high inflation means it continues to merit a place in our Income Portfolio. Hold.
Similarly, Murray International has a long record of dividend growth: it has raised its shareholder payouts for 17 consecutive years. In the 10 years to 2021, its dividends increased at a compound annual growth rate of 4pc. Over the same period, inflation as measured by the retail prices index has averaged 3.3pc.
Undoubtedly, the highest inflation rate in 30 years is likely to make the task of delivering dividend growth in real terms far more challenging in the coming months. But the trust’s wide range of stocks and bonds, when combined with its 4.4pc dividend yield, makes it an attractive long-term income opportunity.
In Questor’s view, the company’s recent share price performance bodes well for its future returns. It has gained in popularity over recent months and has outperformed the FTSE 100 index by 6 percentage points since the start of the year as its “value” tilt and focus on companies with sound balance sheets has appealed to increasingly risk-averse investors.
With further interest rate rises likely over the medium term, it would be unsurprising for this trend to persist as investors become more realistic about the market value of companies whose promise lies more in their high growth potential over the longer term.
Trading at a modest discount to net asset value of 2pc, Murray International continues to offer a worthwhile risk/reward opportunity for income seekers.
However, as with Sirius Real Estate, we will seek to manage expectations regarding returns over the coming months. After all, the strong gains recorded by both holdings since our original recommendations are unlikely to be repeated in perpetuity – even though that old investment saying may suggest otherwise. Hold.
Questor says: hold
Tickers: SRE, MYI
Share prices at close: 118.6p, £12.44