Passive income ETFs - alternative to HYP

Index tracking funds and ETFs
Plutus
Posts: 35
Joined: January 3rd, 2017, 11:24 am

Passive income ETFs - alternative to HYP

Postby Plutus » January 19th, 2017, 12:06 pm

Hello.

The HYP forum has been debating how to identify shares that can produce a rising dividend whilst avoiding single company failure, i.e. dividend cuts, capital losses.

There was a suggestion that an alternative would be to hold passive ETFs or funds but apart from UKDV (S&P UK Dividend Aristocrats) are there any 'high yield' ETFs available?

I'm sure that an income of currently c. 3.7% from the FTSE100 might be acceptable to those who require an income from shares as long as the income rises at least with inflation.

Any thoughts of how to create an income portfolio from ETFs please?

mswjr
2 Lemon pips
Posts: 137
Joined: November 4th, 2016, 12:27 pm

Re: Passive income ETFs - alternative to HYP

Postby mswjr » January 19th, 2017, 1:22 pm

Plutus wrote:Hello.
There was a suggestion that an alternative would be to hold passive ETFs or funds but apart from UKDV (S&P UK Dividend Aristocrats) are there any 'high yield' ETFs available?


Not sure whether it's an alternative, but there is iShares UK Dividend Plus (IUKD), yielding 4.77%, with 0.4% costs.

From HL website- It aims to track the FTSE UK Dividend Plus index. Exposure to 50 highest paying stocks within FTSE350 (excluding ITs).

Plutus
Posts: 35
Joined: January 3rd, 2017, 11:24 am

Re: Passive income ETFs - alternative to HYP

Postby Plutus » January 19th, 2017, 1:37 pm

mswjr wrote:...
Not sure whether it's an alternative, but there is iShares UK Dividend Plus (IUKD), yielding 4.77%, with 0.4% costs.

From HL website- It aims to track the FTSE UK Dividend Plus index. Exposure to 50 highest paying stocks within FTSE350 (excluding ITs).


Ah yes I'd forgotten about that one, thanks. If I remember there were a number of problems with its methodology at the time of the banking crisis because it was massively overweight in financials.

After I posted originally I also thought that an option would be to use passive funds/ETFs to grow an investment pot and then to dip into the capital during retirement.

Lootman
Lemon Slice
Posts: 570
Joined: November 4th, 2016, 3:58 pm

Re: Passive income ETFs - alternative to HYP

Postby Lootman » January 19th, 2017, 3:06 pm

There is a Vanguard UK income fund that is passive and cap-weighted:

http://www.morningstar.co.uk/uk/funds/s ... F000003YD1

If they come out with an ETF version I'd consider it, but personally I do not use open-ended funds.

kempiejon
2 Lemon pips
Posts: 144
Joined: November 5th, 2016, 10:30 am

Re: Passive income ETFs - alternative to HYP

Postby kempiejon » January 19th, 2017, 3:59 pm

Now there are a number of other nationality high income ETFs and indexes aren't there?

1nv35t
Lemon Slice
Posts: 258
Joined: November 4th, 2016, 8:18 pm

Re: Passive income ETFs - alternative to HYP

Postby 1nv35t » January 19th, 2017, 4:30 pm

Top slicing your own 'dividend' out of total returns opens up far wider diversification potential.

Dividends historically presented considerable risk. For instance even taking average UK stock growth since post WW2, alongside average dividends, and apply historic basic rate tax to those dividends and more recent capital gains tax ... and then discount the effects of inflation and of the order of something like 11.5% annualised total nominal gains (dividends reinvested), dilutes down to less than 0.5% annualised net real reward (after taxes and inflation). And that excludes costs (which historically typically amounted to more than 0.5%). That also assumes more ideal investor behaviour. More typically investor behaviour reduced average gains down by 2% or so due to a tendency to sell-low/buy-high.

Things were worst for higher rate taxpayers and the above also excludes periods of the likes of additional 15% unearned income taxes being applied to dividends. Pre 1980's there were little opportunities in the way of tax efficiencies such as ISA's.

Buffet clearly understands such risks and despite collecting massive amounts of tax efficient dividends doesn't pay them out but instead tax efficiently reinvests those for the benefit of shareholders alongside tax harvesting benefits. He advises that if you want a dividend then simply sell enough shares to DIY your own dividend.

Providing portfolio total gains generally rise ahead of inflation, then that would enable a 'dividend' to be extracted that rose ahead of inflation. It also opens up a far wider universe of potential holdings rather than limiting yourself to one particular type of stock such as those with above average dividend yields.

Bogle suggests buying a diverse range of 50 stocks, and holding as-is thereafter. Similar in many respects to HYP. If you're accumulating perhaps allow dividends to accumulate each year and once/year add a new stock to that set with those collective dividends. Very low cost once initially established. I'd suggest equal initial weightings to each stock, as that will find its own cap weighting over time (typically a few stocks will do exceptionally well, others might totally fail or decline a lot, the average stock in the set underperforms the broader portfolio average (tendency for the average to be higher than the median)). Whilst that might start with a lower dividend yield than had you opted to focus purely on high yield stocks, the capital value will tend to grow faster than that of a portfolio of high yield stocks. A tendency towards lower initial income (dividends), but faster growth of income over time.

Passive however is not good. More ideally you should tax harvest yearly as otherwise taxes erode rewards, potentially significantly.

Plutus
Posts: 35
Joined: January 3rd, 2017, 11:24 am

Re: Passive income ETFs - alternative to HYP

Postby Plutus » January 19th, 2017, 6:02 pm

kempiejon wrote:Now there are a number of other nationality high income ETFs and indexes aren't there?


Yes, perhaps I was being lazy before and should have ran a screener ...

https://www.justetf.com/uk/find-etf.htm ... y=Dividend

E.g. VHYL - Vanguard FTSE All-World High Dividend Yield, but the yield according to Hargreaves Lansdown is 3.25%

http://www.hl.co.uk/shares/shares-searc ... gh-div-yld

Plutus
Posts: 35
Joined: January 3rd, 2017, 11:24 am

Re: Passive income ETFs - alternative to HYP

Postby Plutus » January 19th, 2017, 6:06 pm

1nv35t wrote:Top slicing your own 'dividend' out of total returns opens up far wider diversification potential.

...
Bogle suggests buying a diverse range of 50 stocks, and holding as-is thereafter. Similar in many respects to HYP. If you're accumulating perhaps allow dividends to accumulate each year and once/year add a new stock to that set with those collective dividends. Very low cost once initially established. I'd suggest equal initial weightings to each stock, as that will find its own cap weighting over time (typically a few stocks will do exceptionally well, others might totally fail or decline a lot, the average stock in the set underperforms the broader portfolio average (tendency for the average to be higher than the median)). Whilst that might start with a lower dividend yield than had you opted to focus purely on high yield stocks, the capital value will tend to grow faster than that of a portfolio of high yield stocks. A tendency towards lower initial income (dividends), but faster growth of income over time.

....


That's interesting stuff, thank you. I have a HYPesque portfolio of about 20 stocks but I'm losing faith to be honest and I'm reluctant to add more funds at the moment as I'm uncomfortable with large capital losses and dividend cuts. Pearson is the latest example and I've been stung by BHP Billiton, Centrica, supermarkets etc. that have been deemed worthy income stocks to hold forever.

GeoffF100
Lemon Pip
Posts: 79
Joined: November 14th, 2016, 7:33 pm

Re: Passive income ETFs - alternative to HYP

Postby GeoffF100 » January 19th, 2017, 8:28 pm

I do not believe that the high yield trackers make much sense. The costs (and often the fees) are higher, diversification is lower, and there is not reason whatsoever to believe that the risk adjusted return will be better. I believe that simple market weighted trackers are a better bet. You can withdraw as much income as you dare by realising capital. Shares are, however, a risky way of providing an income. There are several examples of both capital and dividends falling to less than a half in real terms and taking twenty years or more to recover, particularly in the US where reliable records go back a long way.

hiriskpaul
2 Lemon pips
Posts: 108
Joined: November 4th, 2016, 1:04 pm

Re: Passive income ETFs - alternative to HYP

Postby hiriskpaul » January 20th, 2017, 12:36 am

I agree with GeoffF100. Equity income has been a reasonable to excellent retirement strategy for the last 35 years and a lot of people seem to have concluded from this that it cannot go wrong. There have been periods over the last 35 years where the dividends paid out by the market has decreased, e.g. in real terms the dividends paid out by the UK stock market were 20% lower in 2010 than in 2008, but the recovery from there has been swift. Going further back things look less rosy. In real terms the dividend income dropped in most years from 1965 to 1976. At that point the income was 59% below where it was in 1965. Capital values were down slightly less in real terms at only -53%.

From 1977 onward, dividend payouts started to rise again, with some set backs, but it was not until 1987 that the real value of paid dividends exceeded those of 1965.

Going for a higher running yield than the market will increase risks and costs. In other words if/when dividend payouts go into reverse you are more likely to face larger percentage drops in income than that of the market as a whole if you go for a higher portfolio yield. However, the flip side is that going for higher risks like this can also work in your favour, provided the benefits are not lost through higher costs. Higher yielding equities tend to have lower p/b and lower p/b stocks have historically outperformed the market as a whole. Increasing risks in this way (low p/b) has historically been compensated by better returns.

Whether historical tendencies continue to apply is pure guesswork, but the fact that every man and his dog knows about them may in itself arbitrage them away.

masmon
Posts: 5
Joined: November 5th, 2016, 10:51 am

Re: Passive income ETFs - alternative to HYP

Postby masmon » January 20th, 2017, 6:35 am

If you are building an income portfolio then much better to go with a selection of investment trusts rather than some of the current ETFs available in the U.K.

OhNoNotimAgain
Posts: 20
Joined: November 4th, 2016, 11:51 am

Re: Passive income ETFs - alternative to HYP

Postby OhNoNotimAgain » January 20th, 2017, 8:56 am

Don't just look at ETFs, there are OEICs as well.

Rob

Plutus
Posts: 35
Joined: January 3rd, 2017, 11:24 am

Re: Passive income ETFs - alternative to HYP

Postby Plutus » January 20th, 2017, 9:45 am

Many thanks for the responses. I'm currently weighing up the many options as I don't want to make any big mistakes regarding future investments.

So far I've received a lot of help and opinions from about 4 different boards on this site and I'm very grateful to everyone.

hiriskpaul
2 Lemon pips
Posts: 108
Joined: November 4th, 2016, 1:04 pm

Re: Passive income ETFs - alternative to HYP

Postby hiriskpaul » January 20th, 2017, 11:38 am

UKDV is not specifically a high yield fund, they do not target yield. Instead they target stocks with a 10 or more years history of maintaining or increasing dividends. There are no guarantees that this will result in a higher yield than the market, but it probably will as they will obviously not be buying anything that does not pay a dividend.

The problem I envisage with this strategy is that, by their nature, candidate companies will be recognised by the market as reliable dividend payers and as such will likely be priced at a premium. You can see evidence of this in the p/b ratio of the fund, which is reported as 66% higher than that of the market - this is not a value portfolio. iShares IUKD targets a high yield and has a lower p/b than the market, so is closer to being a value portfolio. With a value portfolio you are buying stocks that have lower p/b than the market and (ideally) selling them when the p/b is above that of the market. This is a buy low, sell high strategy. UKDV appears to me to be the opposite. For example, Pearson is listed in the top 10. Clearly Pearson will stop qualifying as a "Dividend Aristocrat", so will be sold and probably sold at a loss, to be replaced with something else that meets the 10y rising dividend filter and likely to be priced at a premium to the market. Is this a strategy you want to buy into?

Perhaps Dividend Aristocrats will deliver in the long term, but it strikes me as being a very similar strategy to the failed strategy followed by most retail investors, who buy funds with a good performance track record and sell them a few years after they turn bad. This behaviour results in retail investors achieving worst outcomes than the funds they invest it.

Plutus
Posts: 35
Joined: January 3rd, 2017, 11:24 am

Re: Passive income ETFs - alternative to HYP

Postby Plutus » January 20th, 2017, 1:18 pm

hiriskpaul wrote:....

The problem I envisage with this strategy is that, by their nature, candidate companies will be recognised by the market as reliable dividend payers and as such will likely be priced at a premium. You can see evidence of this in the p/b ratio of the fund, which is reported as 66% higher than that of the market - this is not a value portfolio. iShares IUKD targets a high yield and has a lower p/b than the market, so is closer to being a value portfolio. With a value portfolio you are buying stocks that have lower p/b than the market and (ideally) selling them when the p/b is above that of the market. This is a buy low, sell high strategy. UKDV appears to me to be the opposite. For example, Pearson is listed in the top 10. Clearly Pearson will stop qualifying as a "Dividend Aristocrat", so will be sold and probably sold at a loss, to be replaced with something else that meets the 10y rising dividend filter and likely to be priced at a premium to the market. Is this a strategy you want to buy into?



That is very comprehensive and interesting, thanks for posting it all.

You have referenced the Vanguard value etf VVAL on occasion that would cover the low p/b strategy and it's something else for me to consider.

1nv35t
Lemon Slice
Posts: 258
Joined: November 4th, 2016, 8:18 pm

Re: Passive income ETFs - alternative to HYP

Postby 1nv35t » January 20th, 2017, 2:13 pm

hiriskpaul wrote:Going further back things look less rosy. In real terms the dividend income dropped in most years from 1965 to 1976. At that point the income was 59% below where it was in 1965. Capital values were down slightly less in real terms at only -53%

Britain's tax regime in the 1970s was one of the most punitive in the world and triggered an exodus of entrepreneurs and highly-paid stars such as David Bowie, who went to live in Switzerland, and the Rolling Stones, who left to record in the South of France. Higher rate tax of 83% (basic rate around 40%), a 15% unearned income tax ... and in 1968 Roy Jenkins who raised retrospective taxes on income to an all-time record of 136 per cent.

The rise in UK top marginal tax rates (on investment income) from 5% in 1907 to 50% in 1919 and then to 97.5% in 1945 provided an incentive for taxpayers to re-arrange their tax affairs. Investment in companies that paid low dividends but generated high capital growth allowed returns to be converted into capital gains that were either tax-free, or taxed at a lower effective rate, or simply deferred.

Equal weight historic non dividend stock since 1926 and compare to high yield and the two compare. Value weighted and HY outperformed ND by a wide margin. In both cases ND has a much higher standard deviation in yearly gains. Accordingly ND is seen to have a poorer risk adjusted reward. Factor in historic taxes and costs however and things look totally different. Most historic reference data/measures however ignore taxes.

hiriskpaul
2 Lemon pips
Posts: 108
Joined: November 4th, 2016, 1:04 pm

Re: Passive income ETFs - alternative to HYP

Postby hiriskpaul » January 20th, 2017, 3:25 pm

In difficult times governments will seek to confiscate its citizens wealth. Even in the Land of the Free Roosevelt forced people to sell the government their gold at below market price. We live at a time of remarkably low taxes on wealth and unearned income. It may not last.

GeoffF100
Lemon Pip
Posts: 79
Joined: November 14th, 2016, 7:33 pm

Re: Passive income ETFs - alternative to HYP

Postby GeoffF100 » January 20th, 2017, 4:13 pm

Clearly Pearson will stop qualifying as a "Dividend Aristocrat", so will be sold and probably sold at a loss, to be replaced with something else that meets the 10y rising dividend filter and likely to be priced at a premium to the market.


A ten year rising dividend can have two causes. Increasing earnings per share or decreasing dividend cover. There is lots of evidence that future earnings increases are uncorrelated with past dividend increases, and a diminishing dividend cover clearly is not good. A history of rising dividends is irrelevant at best.

It is characteristic of value investing that relative to the market, the value stocks have much more losers. The out-performance comes from a few big winners. However, in hard times or with a small portfolio, you may just get losers. Value investing is risky.

I have held Pearson since 2002. They were a winner, and I took some profits. The remaining shares are still in profit, and I have received dividends too. I have not done badly out of Pearson. It may recover one day, or it may not. Nobody knows. It is luck of the draw.

TimR
Posts: 13
Joined: December 15th, 2016, 5:14 pm

Re: Passive income ETFs - alternative to HYP

Postby TimR » January 20th, 2017, 10:15 pm

GeoffF100 wrote: Shares are, however, a risky way of providing an income. There are several examples of both capital and dividends falling to less than a half in real terms and taking twenty years or more to recover, particularly in the US where reliable records go back a long way.


What passive investments would you use to provide an income instead of shares or equity ETFs ?

Are Government Bond ETFs and Corporate Bond ETF's currently viable alternatives / hedges to provide an income ?

Others have suggested IT's and OEICs to provide income but the cost of these active funds is much higher ?

GeoffF100
Lemon Pip
Posts: 79
Joined: November 14th, 2016, 7:33 pm

Re: Passive income ETFs - alternative to HYP

Postby GeoffF100 » January 21st, 2017, 8:06 am

What passive investments would you use to provide an income instead of shares or equity ETFs?


There is no good solution here, but it is not a question of either/or. Asset prices are high, interest rates are low, and inflation is set to take off. It is not a good time to save. "I would not start from here" as the Irishman said when asked for directions.

Index linked annuities are the safest way to provide an income. You do not get much for your money, but it is essential to set your expectations at a low level in the present economic climate. We ought to be able to rely on the State Pension, but I would not be surprised to live to see the State Pension (and the NHS) become means tested. A range of income sources is the best option, if you can afford it.


Return to “Passive Investing”

Who is online

Users browsing this forum: No registered users and 1 guest