moorfield HYP update 2016

General discussions about equity high-yield income strategies
moorfield
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moorfield HYP update 2016

Postby moorfield » January 1st, 2017, 4:44 pm

Hello All

I am posting my own HYP update here due to its inclusion of preference share and VCT holdings which accepted are a little unpyadic for the other board. I will be brief and to the point as possible for the weary eyes ploughing through all these end of year updates!

Happy New Year 2017
M


Objective (Building Phase)

I am aiming to grow my pension (SIPP) income by +7.2% per annum for the next 15 years through reinvestment of dividends.
(+7.2% was a semi-arbitrary choice inspired by the rule of 72: ie. to double the income each decade.)

This table records actual vs. target income per accumulation unit. The "target date" column (added this year) records when the projected income for the year, usually following a top up, exceeds the target ie. without needing further top ups and assuming that dividends remaining to be announced are not cut from the previous year's level.



(The large 2010-11 increase is due to two factors: I was buying preference shares heavily at sub par prices and topping up monthly throughout the year before I settled on the routine of stopping after a "target date" is reached.)

The guesstimated present value of my pension (SIPP) income 15 years forward adjusting for inflation is £44000 per annum, although I expect my overall income from amalgamated ISAs and VCTs (also reinvesting dividends, see below) to be higher than this.


Portfolio

This table shows the end of year position of my whole portfolio - ie. an amalgamated view of 1 SIPP, 2 ISAs, and VCT certificates - with capital and income splits. VCT yields are deliberately marked N/A because their dividends tend to be irregular.



With regard to diversification and top ups, I adopt some broad rules:
No more than 20 holdings (a nod to Warren Buffett's Punch Card philosophy).
No more than 10% capital or income allocated to one share, sector or subsector. (No top ups of RDSB.)
No more than 20% capital or income allocated to one industry.
No tinkering unless actual vs. target (SIPP) income falls short.


Notable Events

July:
The "target date" was reached, since then no further (SIPP) top ups have been needed or unexpected dividend cuts announced.

October:
The Informa (INF) rights issue was taken up in full using surplus cash, to fund the takeover of a competitor.

YeeWo
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Re: moorfield HYP update 2016

Postby YeeWo » January 1st, 2017, 5:03 pm

moorfield wrote:No more than 20 holdings (a nod to Warren Buffett's Punch Card philosophy).
No more than 10% capital or income allocated to one share, sector or subsector. (No top ups of RDSB.)

I agree with the above sentiments although holding both BP & Shell I've breached the sector criteria with Oil.
How long have you held the StanChart bonds?
Where and how do you hold this portfolio? Which provider and what sort of charges are levied?
Thanks and Good Luck for 2017!

OZYU
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Re: moorfield HYP update 2016

Postby OZYU » January 1st, 2017, 8:03 pm

A very interesting OP, nice to have targets to aim at.

However, when using accumulation units, the divis per acc units tend to gallop quicker than reality because divis are rolled into the unit value as they arrive for the pot builder, so there is an element of double counting.

For example, in 2016, my divis per income unit have increased by 7.11%, whereas the divis per acc units have increased by 13.08%.( As an aside, the actual income itself has increased by 19.28%, because of course the number of units has increased with new funds too as I transferred a small cash ISA into my ISA.)

It is the divis per income unit which tell you how underlying divis are progressing.

But not to worry, no need to switch to income units at all, there is a relationship between the two. The ratio of the two methods is 5.57% (1.1308/1.0711-1) in my case, very close to the stating yield calculated from divis per income units divided by income unit value at year start, in my case this gives 5.55%. This very near relationship has been solid in my own records for decades, I compute it as a cross check.

Since you to not use income units, divide by the stating yield calculated from acc units, it will give you a close approximation too of the divis per Income unit growth. (Short of that a broad ballpark estimate can be found by just dividing by the starting portfolio yield itself, although this won't usually be as close).

This does not detract in any way from what you are doing, but is just to give you further background.

Have a brilliant 2017 and reach your target in June!

Ozyu

moorfield
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Re: moorfield HYP update 2016

Postby moorfield » January 2nd, 2017, 2:01 pm

OZYU wrote:It is the divis per income unit which tell you how underlying divis are progressing.


Thanks Ozyu. I'm not too worried about that debate during building phase. What's more important is that I have a reasonable target to aim for that I can measure against, and can put a guesstimate on my future pension (SIPP) income. The £44000 number isn't perfect but is good enough to tell me already that my SIPP will most probably hit the LTA, so I am now concentrating contributions into ISAs and (when opportunities arise) VCTs. And I'm far too lazy to separate out the second table into different pots as, ultimately, I plan to live off the whole lot in retirement.

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Re: moorfield HYP update 2016

Postby JohnnyCyclops » January 8th, 2017, 9:15 pm

moorfield wrote:Hello All

I am posting my own HYP update here due to its inclusion of preference share and VCT holdings which accepted are a little unpyadic for the other board. I will be brief and to the point as possible for the weary eyes ploughing through all these end of year updates!

Happy New Year 2017
M


Objective (Building Phase)

I am aiming to grow my pension (SIPP) income by +7.2% per annum for the next 15 years through reinvestment of dividends.
(+7.2% was a semi-arbitrary choice inspired by the rule of 72: ie. to double the income each decade.)

This table records actual vs. target income per accumulation unit. The "target date" column (added this year) records when the projected income for the year, usually following a top up, exceeds the target ie. without needing further top ups and assuming that dividends remaining to be announced are not cut from the previous year's level.


Moorfield, many thanks for posting. I was curious about two things.

In the building phase (either new top-up monies, or reinvesting dividends) this will increase income in absolute terms. I.e. on a straightline basis, and all things being equal, adding or reinvesting 7.2% of the holding value should generate 7.2% increased income.

Using a unitisation method should get to the underlying growth in the income (dividends, and whatever Prefs throw off as an equivalent). In an ACCUMULATION unit method, the number of units only alters when new monies are added, or funds withdrawn. Dividends reinvested should have no effect on the number of units, but will increase the value of each unit.

When calculating income per unit, it's a case of dividing total annual income by the number of units held. Now, if no new monies are being added, then the number of units remains static. I'm therefore inferring that your annual income increases materially each year. For the stocks (not prefs) given, while 2016 had some FX help for those declaring in USD but paying in GBP (post-referendum), I'm not seeing how you get to 9.2% annual income growth.

Turning to my second point. Prefs, I think pay a fixed sum (coupon?) each year and so won't ever increase and therefore cannot contribute to any annual income increase. All the increase in the unit income must be coming from the ordinary stocks or the VCTs (but I thought VC was all about capital growth, not income - but it's not an area I know much about).

I wondered if you could help me understand a little better how you achieved the income growth each year. The point being, if it's done through adding new monies that's fine, but it does mean you won't sustain income growth at that pace ad-infinitum unless you continue to add new capital.

JC

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Re: moorfield HYP update 2016

Postby moorfield » January 9th, 2017, 2:47 pm

JC

Very briefly I am just taking a measurement of (SIPP) income / accumulation units once a year (and checking that I am still heading vaguely towards the lighthouse in whatever the wind/tide conditions are). I'm afraid I've become far too lazy and time poor to be pfaffing around with income unit recalculations monthly/quarterly/annually/whatever. The growth number comes from dividends on existing and newly purchased shares during the year. I am not currently investing new monies into the SIPP part of my portfolio on which the unit number is based (although I expect to transfer an employer's pension in future at which point I will recalculate and ideally would want to see (SIPP) income increase in proportion). This answer probably doesn't do your thoughtful question justice - although in coming weeks (or next year's review) I'll attempt to do some income splits of VCTs/Ords/Prefs.

M

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Re: moorfield HYP update 2016

Postby JohnnyCyclops » January 9th, 2017, 10:50 pm

moorfield wrote:JC

Very briefly I am just taking a measurement of (SIPP) income / accumulation units once a year (and checking that I am still heading vaguely towards the lighthouse in whatever the wind/tide conditions are). I'm afraid I've become far too lazy and time poor to be pfaffing around with income unit recalculations monthly/quarterly/annually/whatever. The growth number comes from dividends on existing and newly purchased shares during the year. I am not currently investing new monies into the SIPP part of my portfolio on which the unit number is based (although I expect to transfer an employer's pension in future at which point I will recalculate and ideally would want to see (SIPP) income increase in proportion). This answer probably doesn't do your thoughtful question justice - although in coming weeks (or next year's review) I'll attempt to do some income splits of VCTs/Ords/Prefs.

M


Many thanks for your kind comment about my question.

At the crux, is whether 7.2% annual income growth is happening because the invested capital base is growing, or through year-on-year increases to the income being generated (dividends or their equivalent). I think you'll find Prefs won't increase Y-o-Y, and I'm not sure about VCTs income, so that leaves the Ords.

JC

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Re: moorfield HYP update 2016

Postby Wizard » January 10th, 2017, 8:56 am

Very interesting post which raises some interesting questions.

The maths on pref's like RE.B is pretty compelling unless the portfolio is required to throw off income for a very long time. For me the benefit of pref's like this are that I anticipate the income I will need in the early years I am living off dividend income to be higher than in later years, so the profile of high initial income that is not growing works. For transparency I should say I do hold RE.B.

With the limit of 20 holdings, which you are already at, you will not be buying new shares and therefore limited to Top Ups. What is your methodology for selecting Top Ups beyond avoiding over concentration? I think I am right in saying that at any point in time you would expect the yield on the pref's will be higher than on the equity - barring any sector or company specific issues. So if you base Top Ups on the available yield at any point in time, unless you hit a concentration ratio there would be a tendency to end up buying prefs over equity.

Some further insight into your Top Up mechanics would be much appreciated.

Terry.

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Re: moorfield HYP update 2016

Postby Wizard » January 10th, 2017, 9:01 am

JohnnyCyclops wrote:
moorfield wrote:JC

Very briefly I am just taking a measurement of (SIPP) income / accumulation units once a year (and checking that I am still heading vaguely towards the lighthouse in whatever the wind/tide conditions are). I'm afraid I've become far too lazy and time poor to be pfaffing around with income unit recalculations monthly/quarterly/annually/whatever. The growth number comes from dividends on existing and newly purchased shares during the year. I am not currently investing new monies into the SIPP part of my portfolio on which the unit number is based (although I expect to transfer an employer's pension in future at which point I will recalculate and ideally would want to see (SIPP) income increase in proportion). This answer probably doesn't do your thoughtful question justice - although in coming weeks (or next year's review) I'll attempt to do some income splits of VCTs/Ords/Prefs.

M


Many thanks for your kind comment about my question.

At the crux, is whether 7.2% annual income growth is happening because the invested capital base is growing, or through year-on-year increases to the income being generated (dividends or their equivalent). I think you'll find Prefs won't increase Y-o-Y, and I'm not sure about VCTs income, so that leaves the Ords.

JC


Maybe a different use of terminology, I guess most people on TLF will think of income growth as being just the growth in the existing portfolio and not include new purchases. However, in the build phase I quite like Moorfield's definition. If I am reading it correctly, if in a particular year there are dividend cuts or very small increases in the portfolio presumably it means Moorfield needs to invest more new money to achieve the objective of 7.5% growth. This seems quite a good discipline to me, funds permitting of course.

Terry.

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Re: moorfield HYP update 2016

Postby monabri » January 13th, 2017, 5:48 pm

The yield of >9% from RE.B attracted my attention so I had a look at the LSE pages. The "numbers" indicated a reducing ROCE, increasing NetGearing, Negative dividend cover, Declining revenue & profit., EPS negative..... Is this not time to take action and sell? Or is there something just around the corner?

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Re: moorfield HYP update 2016

Postby moorfield » January 13th, 2017, 9:25 pm

Wizard wrote: If I am reading it correctly, if in a particular year there are dividend cuts or very small increases in the portfolio presumably it means Moorfield needs to invest more new money to achieve the objective of 7.5% growth.


Hello Terry, yes that's it during building phase, and the new money would come from tinkering lower yield shares and/or spare cash and recycling. That's the idea anyway, although I haven't needed to practice it yet.

monabri wrote: The "numbers" indicated a reducing ROCE, increasing NetGearing, Negative dividend cover, Declining revenue & profit., EPS negative..... Is this not time to take action and sell? Or is there something just around the corner?


monabri, I completely agree the RE.B financials look unappealing, but since these are cumulative prefs (and currently priced sub par), personally I'm happy to carry that risk. You probably noticed also the dividend on the ords are suspended - the prefs must be paid in full first! FWIW the palm oil price has rebounded firmly this year too.

Didn't someone once say be greedy when others are fearful ;-) ?

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Re: moorfield HYP update 2016

Postby moorfield » January 13th, 2017, 10:48 pm

Wizard wrote:
With the limit of 20 holdings, which you are already at, you will not be buying new shares and therefore limited to Top Ups. What is your methodology for selecting Top Ups beyond avoiding over concentration?


I use a variation of TJH's smallest holding-highest yield ranking table with a third column added to rank ords equally, above prefs and then vcts - that stops me continually topping up the latter two classes. I don't use a median whilst building instead I just top up so as not to exceed my self imposed limits (see OP) at the time. I'll make a mental note to try and give you an illustration next time I do one.

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Re: moorfield HYP update 2016

Postby kempiejon » January 14th, 2017, 9:29 am

moorfield wrote: Hello Terry, yes that's it during building phase, and the new money would come from tinkering lower yield shares and/or spare cash and recycling. That's the idea anyway, although I haven't needed to practice it yet.


Why not do those options anyway, if you're happy it'll increase and maximise your income? I note one of your rules is no tinkering which I heartily concur with but as yuo have it as an option why not consider it with some careful rules? Adding "spare" money, well I wish I had such a thing all my money is allocated and spent, surplus, spare money goes to investing. Does your plan presumably involve cutting some discretional spending in lean times to boost investing I like that plan, would it involve you adding more to your portfolio when share prices are depressed? Currently as I'm building all my dividends are re-invested that drives my yoy income hopefully ever upwards your system has an added extra with finding new money.

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Re: moorfield HYP update 2016

Postby JohnnyCyclops » January 14th, 2017, 10:42 am

Wizard wrote:Maybe a different use of terminology, I guess most people on TLF will think of income growth as being just the growth in the existing portfolio and not include new purchases. However, in the build phase I quite like Moorfield's definition. If I am reading it correctly, if in a particular year there are dividend cuts or very small increases in the portfolio presumably it means Moorfield needs to invest more new money to achieve the objective of 7.5% growth. This seems quite a good discipline to me, funds permitting of course.

Terry.


I do think terminology is important, and Moorfield has since clarified to some extent that his unitisation approach may not be fully sound. I do understand the need to grow the total income stream. We've been HYP building since 2011. We add broadly the same amount of new monies each year. So year two increased total holdings by ~100%, year three by ~50%, year four by ~33% and so on, plus the benefit of reinvested dividends. We do track by units as well, because otherwise it's hard to tell how income on a like-for-like basis will grow (income per unit).

Our first year ran to 31 March 2012, so from the end of our second year in March 2013, the changes in total income and income per unit growth are as follows. The first is important because at the point we stop adding new funds and start needing the income, then that is the total available income for us. The second is important because it will indicate how that total income may continue to grow (i.e. to at least pace inflation).

Year Ending             Income Change            Income per Unit Change
March 2013 +554.2% +212.7%
March 2014 +40.0% -2.1%
March 2015 +31.0% +3.5%
March 2016 +25.1% +1.2%

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Re: moorfield HYP update 2016

Postby Gengulphus » January 14th, 2017, 12:25 pm

Wizard wrote:Maybe a different use of terminology, I guess most people on TLF will think of income growth as being just the growth in the existing portfolio and not include new purchases. However, in the build phase I quite like Moorfield's definition. If I am reading it correctly, if in a particular year there are dividend cuts or very small increases in the portfolio presumably it means Moorfield needs to invest more new money to achieve the objective of 7.5% growth. This seems quite a good discipline to me, funds permitting of course.

I totally agree with that "funds permitting of course" - and if it weren't for it, I would agree that it's a good discipline. But as things actually stand, I think it's a somewhat dangerous discipline, with dangers along the same sort of lines as companies face which have defined-benefit pension schemes, took contribution holidays when they were in surplus, and then found themselves in trouble when the schemes were in deficit.

Basically, the trouble is that if you hit a bad year late in the portfolio-building period, funds probably won't permit. E.g. suppose you're aiming for a HYP income of £30k, and you hit a bad year that impacts that income by 20%. Early during the portfolio-building period, when your HYP income is say only £5k, it will put you £1k behind schedule on the income - which on a very rough assumption of a 5% yield from new purchases means finding an extra £20k to inject into the portfolio - and you still have plenty of years in which to find it. But late in that period, when your HYP income is say £25k, it puts you £5k behind schedule - and you need to find an extra £100k to inject into the portfolio over comparatively few years, a much more formidable task...

I should add that I'm not saying that the idea of having an income-build-up schedule and injecting extra funds as and when needed is a bad one - just that the schedule should be designed on the basis of realistically being able to cope with bad years, not of neatly getting to the target income if all years are average.

There is of course always the possibility of encountering a worse year than your schedule can cope with - you can reduce the chance of that by planning to be able to cope with worse years, but at the cost of having to invest more into the portfolio. The worst year-on-year drop of my HYP income was between the 2008/2009 and 2009/2010 tax years, when it dropped by about a third, but I had carelessly allowed it to become somewhat overweight in financials at the time - I reckon that if I'd really been disciplined about not building up that sort of imbalance, it would probably have been around a 25% drop. So the 20% drop in the above example is a pretty bad year, but not quite as bad as I've observed it to get!

Gengulphus

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Re: moorfield HYP update 2016

Postby Wizard » January 14th, 2017, 5:21 pm

Gengulphus wrote:
Wizard wrote:Maybe a different use of terminology, I guess most people on TLF will think of income growth as being just the growth in the existing portfolio and not include new purchases. However, in the build phase I quite like Moorfield's definition. If I am reading it correctly, if in a particular year there are dividend cuts or very small increases in the portfolio presumably it means Moorfield needs to invest more new money to achieve the objective of 7.5% growth. This seems quite a good discipline to me, funds permitting of course.

...Basically, the trouble is that if you hit a bad year late in the portfolio-building period, funds probably won't permit. E.g. suppose you're aiming for a HYP income of £30k, and you hit a bad year that impacts that income by 20%. Early during the portfolio-building period, when your HYP income is say only £5k, it will put you £1k behind schedule on the income - which on a very rough assumption of a 5% yield from new purchases means finding an extra £20k to inject into the portfolio - and you still have plenty of years in which to find it. But late in that period, when your HYP income is say £25k, it puts you £5k behind schedule - and you need to find an extra £100k to inject into the portfolio over comparatively few years, a much more formidable task...


I interpreted it differently Gengulphus. In your first scenario of a £1k shortfall in a year I took it that this would mean a further £1k being added. I think you may be over complicating it.

Terry.

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Re: moorfield HYP update 2016

Postby Gengulphus » January 14th, 2017, 11:31 pm

Wizard wrote:
Gengulphus wrote:...Basically, the trouble is that if you hit a bad year late in the portfolio-building period, funds probably won't permit. E.g. suppose you're aiming for a HYP income of £30k, and you hit a bad year that impacts that income by 20%. Early during the portfolio-building period, when your HYP income is say only £5k, it will put you £1k behind schedule on the income - which on a very rough assumption of a 5% yield from new purchases means finding an extra £20k to inject into the portfolio - and you still have plenty of years in which to find it. But late in that period, when your HYP income is say £25k, it puts you £5k behind schedule - and you need to find an extra £100k to inject into the portfolio over comparatively few years, a much more formidable task...


I interpreted it differently Gengulphus. In your first scenario of a £1k shortfall in a year I took it that this would mean a further £1k being added. I think you may be over complicating it.

I don't think that's a reasonable interpretation - but accepting it for the moment, under that interpretation, hitting a bad year late in the portfolio-building period is liable to leave you severely short of income at the end of the portfolio-building period. I think you may be under complicating it!

Gengulphus

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Re: moorfield HYP update 2016

Postby Wizard » January 15th, 2017, 12:30 am

Gengulphus wrote:
Wizard wrote:
Gengulphus wrote:...Basically, the trouble is that if you hit a bad year late in the portfolio-building period, funds probably won't permit. E.g. suppose you're aiming for a HYP income of £30k, and you hit a bad year that impacts that income by 20%. Early during the portfolio-building period, when your HYP income is say only £5k, it will put you £1k behind schedule on the income - which on a very rough assumption of a 5% yield from new purchases means finding an extra £20k to inject into the portfolio - and you still have plenty of years in which to find it. But late in that period, when your HYP income is say £25k, it puts you £5k behind schedule - and you need to find an extra £100k to inject into the portfolio over comparatively few years, a much more formidable task...


I interpreted it differently Gengulphus. In your first scenario of a £1k shortfall in a year I took it that this would mean a further £1k being added. I think you may be over complicating it.

I don't think that's a reasonable interpretation - but accepting it for the moment, under that interpretation, hitting a bad year late in the portfolio-building period is liable to leave you severely short of income at the end of the portfolio-building period. I think you may be under complicating it!

Gengulphus

Why is it not a good interpretation? Moorfield has already confirmed my interpretation is what he meant when he first described it.

The growth in income in year 2 over year 1 can come from three sources:
1. Increases in dividend payouts in aggregate across the portfolio
2. Reinvestment of dividends in new shares or top-ups
3. Investment of new cash injected into the portfolio

If an initial investment results in a portfolio of £2,000 with a average yield of 5% meaning an income of £100 in year 1, the target for year 2 will be income of £107.5 (based on Moorfield's target of 7.5% annual growth). If the aggregate increase in dividends from the existing shares is 2% that gives an additional £2 of income, leaving £5.50 to achieve from other sources. If the entire £100 is reinvested at the same yield as the existing portfolio that means an extra £5 of income. So Moorfield will be £0.50 short of his target. Again assuming the average portfolio yield can be achieved that £0.50 will be generate if an additional £10 is injected into the portfolio.

For later years you just scale up the numbers. Of course as the numbers get bigger there may be questions of affordability but that is a different point, it does not make the concept any more complex!

Terry.

Edit: I have just read back up and in one of your earlier posts you mentioned pensions and contribution holidays, maybe that is the source of our disagreement. I am not suggesting that where the target of 7.5% is met and exceeded that money is pulled out or already planned injections are not made, it is a minimum target not a precise target. Rather that if 7.5% is not achieved as a minimum more than planned needs to be injected. That is why I think it good discipline it actually means in anyone year you spdo not take comfort in a belief that a shortfall will fix itself in the future, but actively address it there and then.

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Re: moorfield HYP update 2016

Postby Gengulphus » January 15th, 2017, 3:44 am

Wizard wrote:
Gengulphus wrote:
Wizard wrote:
I interpreted it differently Gengulphus. In your first scenario of a £1k shortfall in a year I took it that this would mean a further £1k being added. I think you may be over complicating it.

I don't think that's a reasonable interpretation - but accepting it for the moment, under that interpretation, hitting a bad year late in the portfolio-building period is liable to leave you severely short of income at the end of the portfolio-building period. I think you may be under complicating it!

Why is it not a good interpretation? Moorfield has already confirmed my interpretation is what he meant when he first described it.

I assume you're talking about the following?
moorfield wrote:
Wizard wrote: If I am reading it correctly, if in a particular year there are dividend cuts or very small increases in the portfolio presumably it means Moorfield needs to invest more new money to achieve the objective of 7.5% growth.


Hello Terry, yes that's it during building phase, and the new money would come from tinkering lower yield shares and/or spare cash and recycling. That's the idea anyway, although I haven't needed to practice it yet.

If so, it boils down to what exactly the "objective of 7.5% growth" is. I took it from the statement in the OP of this topic that "I am aiming to grow my pension (SIPP) income by +7.2% per annum for the next 15 years through reinvestment of dividends. (+7.2% was a semi-arbitrary choice inspired by the rule of 72: ie. to double the income each decade.)" that that meant that there was a target income each year leading up to an adequate retirement income at the planned end of the building period - e.g. if that adequate retirement income were £20k, then the sequence would go:

£7,579
£8,123
£8,706
£9,330
£10,000
£10,718
£11,487
£12,311
£13,195
£14,142
£15,157
£16,245
£17,411
£18,661
£20,000

Suppose there's a bad year when the income ends up 20% below that year's target due to dividend cuts - e.g. in the 5th year the income turns out to be £8,000 rather than the planned £10,000. Getting back on schedule requires the income to increase to £10,718 the following year, which is an income increase of £2,718. On your interpretation, you have £8,000 of dividends plus £2,000 of new money (an injected amount equal to the income shortfall) to buy new shares: together, they might plausibly produce £500 of extra income. The remaining £2,218 needs to come from dividend increases by the existing shares, which means they need to average £2,218/£8,000 = 27.7% dividend increases - which experience says is extremely unlikely! I therefore did not consider your interpretation a reasonable one.

Wizard wrote:The growth in income in year 2 over year 1 can come from three sources:
1. Increases in dividend payouts in aggregate across the portfolio
2. Reinvestment of dividends in new shares or top-ups
3. Investment of new cash injected into the portfolio

If an initial investment results in a portfolio of £2,000 with a average yield of 5% meaning an income of £100 in year 1, the target for year 2 will be income of £107.5 (based on Moorfield's target of 7.5% annual growth). If the aggregate increase in dividends from the existing shares is 2% that gives an additional £2 of income, leaving £5.50 to achieve from other sources. If the entire £100 is reinvested at the same yield as the existing portfolio that means an extra £5 of income. So Moorfield will be £0.50 short of his target. Again assuming the average portfolio yield can be achieved that £0.50 will be generate if an additional £10 is injected into the portfolio.

Yes, but the bit I've emboldened says that you're talking about a reasonably average year, whereas I was talking about a bad year - one in which the aggregate change in dividends from existing shares is -20%. That gives a £20 shortfall, which is £22 worse than you're assuming. That leaves Moorfield not £0.50 short of target, but £22.50 short of it - and he needs to inject an additional £450 into the portfolio to generate it on the average-portfolio-yield-achievable assumption. Which is 22.5% of the £2,000 portfolio value...

Wizard wrote:For later years you just scale up the numbers. Of course as the numbers get bigger there may be questions of affordability but that is a different point, it does not make the concept any more complex!

No, that scaling up is precisely the point I was making: it adds the practical (rather than conceptual) complication that injecting an additional 22.5% of the portfolio value is unlikely to be achievable in later years.

Gengulphus

Wizard
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Re: moorfield HYP update 2016

Postby Wizard » January 15th, 2017, 9:33 am

OK Gengulphus, I could create an example with a bad late year on but where previous better than target years mean the shortfall is actually much smaller. But we are just creating hypothetical examples to support our own views. Instead I will try to get back to the original point I was trying to make.

My point was simple. If you are building an HYP over several years with a target level of growth of the income it produces if in one year the growth falls short of your target it can't be a bad thing to try and reach your target by finding some extra new funds to inject to help make up the shortfall or at least reduce the shortfall - my very first comment did say funds permitting.

You have latched on to the fact that in some cases funds may not be permitting. But I still do not understand why you think trying to add extra new funds when the HYP growth falls short of target is a bad thing. What is the alternative just accepting the shortfall? Why is that better?

Terry.


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