As a small cap devotee, to have recently purchased BP, Cadbury and Vodafone needs explanation.
Essentially, I operate two separate portfolios – administered by separate brokers – both benefiting from their respective tax advantages: my individual saving account (Isa) portfolio for “main market” holdings – free of income and capital gains tax – where I reinvest dividend income; and a separate one, which should really be called my “Aim” portfolio as, although it does contain some main market holdings of long-standing, virtually all purchases in recent years have been listed on the Alternative Investment Market.
I hope to benefit from the main Aim tax advantages – holdings held for more than two years are free of inheritance tax – but not too soon!
Dividends generated from this portfolio are treated as normal disposable income. The ability to take profits free of tax and dividend reinvestment usually means that most investment liquidity is within my Isa, and although I purchased quite a number of stocks when prices fell to absurdly low levels, and have gained appreciably from the strong recovery, my cautious approach still resulted in significant Isa liquidity.
As the return on this cash was near zero interest and I didn’t see many main market “small cap” bargains, I decided to park most of it in BP and Vodafone, given their 6.5 per cent dividend yields. The latter has appreciated from my 122p purchase price to the current level of around 140p.
Both these global companies give me the ability to switch instantly back into cash should I so desire – not something that I can easily do with many of my small caps – so, for me, they represent a near cash liquidity reserve coupled with an excellent tax-free return. Cadbury – which I bought at 779p immediately after the Kraft approach – also offers similar liquidity advantages, but here I am obviously aiming for a capital “turn” rather than income. So far, all is proceeding down the classic takeover line with the price having crept up to 800p – I will be amazed if I do not make a profit here provided I am patient. Major companies such as Kraft do not play games and Cadbury is a “once-in-a-lifetime” deal for it, or possibly a third-party bidder. However fond we may be of Cadbury, there is no realistic patriotic defence card to play – few of us feel the urge, I would suggest, to sing the National Anthem after eating our Crunchie! Most of Cadbury’s major shareholders are American, so is its chief executive, and most sales are overseas. Frankly, it is now just a question of price.
Turning to my Aim portfolio – I frequently challenge the misguided view that Aim stocks carry a much greater risk than main market stocks.
While this may well be true of a number of speculative start-ups, I have found many Aim stocks with established, profitable, high quality businesses that are cash rich and paying a useful dividend.
Concurrent Technologies – a favourite of a Birmingham stockbroking friend – is just such a company that I have purchased at 39p, yielding 3.5 per cent. It produces computer hardware, serving the defence and telecoms primary markets, both here and overseas. Not cheap, but with an excellent record and prospects.
John Lee is an active private investor, writing about his own investments. He may have a financial interest in any of the companies, securities and trading strategies mentioned.
