The Accidental Stock Picks in Our Index Fund Portfolio

Suzie and I have a strange little anomaly in our mainly index tracker portfolios. This came to mind when I got a reminder to vote in the AGM of one of them. Our little anomaly is owning real shares in two separate businesses. We can’t seem to let go of them although I always think of breaking up. One is in the UK banking sector and the other is an asset management business. The banking shares have posted an impressive 53% capital gain on a rolling year basis with a 2.3% dividend and the investment company has had a more average 6% gain but an excellent near 8% dividend yield.

Our holdings are Barclays plc (BARC), the banking giant, and abrdn plc (ABDN), the asset manager. Like many investors, we’ve held onto these shares, perhaps longer than strictly rational, definitely the case with Aberdeen, allowing sentiment and inertia to play their part. But beyond that attachment, there are some lessons to be learned from their contrasting performances.

Let’s start with Barclays, acquired through stock options Suzie exercised, the star performer of our duo. That 53% capital gain over the past year isn’t just luck; it’s a sector riding a favourable wave. Banks thrive on economic stability and, crucially, higher interest rates. Efforts to curb inflation have given banks a wider margin between what they pay on deposits and what they earn on loans. This, combined with strong financial reporting and investor confidence in the sector, has propelled Barclays’ share price upwards.

The 2.3% dividend yield acts as a nice bonus. It’s not a sky-high income, but it’s a solid return for simply holding the shares. The underlying strength suggested by the capital gain also points to a healthy outlook for future dividends. It’s easy to see why we’re reluctant to part with this one – why sell a winner?

Then there’s Aberdeen, my asset management holding, first acquired in 2006 for absolutely zero cost with additional shares acquired by a dividend reinvestment plan. Its 6% gain looks somewhat lacking in comparison to Barclays. Asset managers often face headwinds: market volatility can shrink the value of assets they manage, and there’s constant pressure on fees from cheaper passive investment options like Vanguard, my main holding. Sort of like shooting myself in the foot!

However, Aberdeen excels with its excellent 8% dividend yield. If I was an income-focused investor, that’s incredibly attractive. It’s like a steady stream of cash directly into your pocket, which definitely softens the blow of less impressive capital growth. The dilemma here is whether such a high yield is sustainable. A very high yield can sometimes be a red flag if a company’s share price has fallen significantly, making the dividend payout appear large.

Our out of character holdings highlight a common investor’s conundrum. Do you hold onto a high-growth stock that’s still showing momentum, or do you favour a high-yielding one that provides consistent income? There’s no single right answer but I like the gains and I like the yield!

Both companies represent different sides of the financial sector, which means we have a small amount of our holdings tied up there. While Barclays offers impressive growth, Aberdeen provides a compelling income stream. So totally by accident and with absolutely no strategy we’ve ended up with one growth and one dividend stock.

This is what I would tell anyone who asks about them, but deep down, I just like the idea of owning a few real company shares. And I’m keeping them just because I want to. In an ideal analytical world we should have a written statement of what metrics would apply to trigger a sale. But in our slightly flawed human world forgetting about them until the next AGM reminder is the likely outcome. Slightly irrational, but that’s the psychology of money in operation once again I guess.