The Lemon Fool

Both Rio and BHP have a stated policy of paying a certain % of profit as dividend because they recognise they are in a cyclical industry. So they have no commitment to continue to pay that dividend in future through the cycle. Similarly Persimmon's dividend is described as a 'Capital Return Plan' plan with no commitment that that amount is thought to be sustainable in the longer term. I think one should bear in mind the difference between dividends such as those and ones from companies trying to have a steady sustainable gently increasing dividend. Chalk and Cheese IMO.

Surely one needs to go beyond the single number of the yield. My question would be, 'what is driving the yield?'

In the case of IMB and BAT it is the falling share price - even after a dividend cut the IMB yield is very high. A high yield created by a big capital loss is not a great recommendation for an income stock IMHO, now if you are looking for value and a potential capital recovery maybe, but not for discussion here. Now maybe some will say they do not agree with the market's punishment of the share price and therefore see a chance to buy a good income cheaply, but that really is running the risk of coming across another Carillion.

RIO and BHP with a percentage of profit policy and a cyclical business are understood.

The real nugget would be a share with a generous yield where that yield is has been created by a fast rising dividend, but where the pace of share price increases have not kept pace with that increasing dividend. That directs me towards Admiral and Legal & General as maybe the best options here.

Wizard wrote:The real nugget would be a share with a generous yield where that yield is has been created by a fast rising dividend, but where the pace of share price increases have not kept pace with that increasing dividend. That directs me towards Admiral and Legal & General as maybe the best options here.

Funnily enough, and for the reasons you state pretty much, those two are my largest holdings, in capital value terms, as I showed in my IDP's HYP as of 22 Sep 21 post here; viewtopic.php?f=15&t=31295 .

Ian.

Arborbridge wrote:

ElectronicFur wrote:That is the question for me too, and I should really be top-slicing the likes of RIO. But the problem I have at these high yields is that if I top-slice, there is nothing else I could buy instead with an equivalent yield. So I've held off top-slicing to avoid a drop in overall income.

If you are slicing because you feel a yield is "silly", isn't the desire to invest in a lower (less silly) yield? Therefore go for a yield you feel is within the framework you have in mind. I can't see why you would want an equivalent yield in that circumstance.

Arb.

No because I don't decide to slice because the yield is silly. I decide to slice because the portfolio capital or income concentration limits have been breached. With the RIO example both have risen a lot since my purchase in 2015 and I also bought BHP so that sector is now over the capital limit.

But as I live off my HYP income I don't favour a drop in overall income...

ElectronicFur wrote:

Arborbridge wrote:

ElectronicFur wrote:That is the question for me too, and I should really be top-slicing the likes of RIO. But the problem I have at these high yields is that if I top-slice, there is nothing else I could buy instead with an equivalent yield. So I've held off top-slicing to avoid a drop in overall income.

If you are slicing because you feel a yield is "silly", isn't the desire to invest in a lower (less silly) yield? Therefore go for a yield you feel is within the framework you have in mind. I can't see why you would want an equivalent yield in that circumstance.

Arb.

No because I don't decide to slice because the yield is silly. I decide to slice because the portfolio capital or income concentration limits have been breached. With the RIO example both have risen a lot since my purchase in 2015 and I also bought BHP so that sector is now over the capital limit.

But as I live off my HYP income I don't favour a drop in overall income...

There is usually a cost attached to risk mitigation, but a bit investor needs to make a call as to what an acceptable price is for any particular mitigating action.

ElectronicFur wrote:
No because I don't decide to slice because the yield is silly. I decide to slice because the portfolio capital or income concentration limits have been breached. With the RIO example both have risen a lot since my purchase in 2015 and I also bought BHP so that sector is now over the capital limit.

But as I live off my HYP income I don't favour a drop in overall income...

With RIO, with a little effort one could discount the special elements and focus only on the core dividend. True, it's possible when the cycle turns that RIO doesn't just drop the specials but cuts the core dividend too. I tend to record dividends and specials seperately, and when looking at income (unitised) only use the dividend figure (ADM is the exception as their 'specials' have become regular). I realise if living off the income the only way to look at RIO is the specials are some icing on the cake for now and won't last - there's nothing to replace the income though at that high (gross) yield. There's the rub.

Wizard wrote:

ElectronicFur wrote:

Arborbridge wrote:
If you are slicing because you feel a yield is "silly", isn't the desire to invest in a lower (less silly) yield? Therefore go for a yield you feel is within the framework you have in mind. I can't see why you would want an equivalent yield in that circumstance.

Arb.

No because I don't decide to slice because the yield is silly. I decide to slice because the portfolio capital or income concentration limits have been breached. With the RIO example both have risen a lot since my purchase in 2015 and I also bought BHP so that sector is now over the capital limit.

But as I live off my HYP income I don't favour a drop in overall income...

There is usually a cost attached to risk mitigation, but a bit investor needs to make a call as to what an acceptable price is for any particular mitigating action.

Quite right - and when this cost occurs one should perhaps look on it as the price of "insurance".

Wizard wrote:There is usually a cost attached to risk mitigation, but a bit investor needs to make a call as to what an acceptable price is for any particular mitigating action.

I'm probably missing something obvious, but what is a "bit investor"? The only possibility I've thought of is that it's a typo for "big investor" - but that doesn't really make sense to me: small investors need to make those calls just as big investors do...

Gengulphus

JohnnyCyclops wrote:With RIO, with a little effort one could discount the special elements and focus only on the core dividend. True, it's possible when the cycle turns that RIO doesn't just drop the specials but cuts the core dividend too. I tend to record dividends and specials seperately, and when looking at income (unitised) only use the dividend figure (ADM is the exception as their 'specials' have become regular).

I understood the RIO dividend policy a little differently.

I took the abandonment of a progressive policy to mean that they are no longer making the 'regular' dividend progressive.

I interpreted the 'specials' as being paid in respect of things that the directors consider 'one offs', things like disposal of assets, etc, i.e. things that are not profit from the ongoing income on normal, ongoing operations.

I'll admit, I haven't looked in detail, but I'd find it a bit odd if they were to announce (as they have announced) that they were dropping their progressive dividend policy, but to then retain the regular dividend on a 'progressive' basis and use the specials to effect the 'non-progressive' aspect... I mean, I'd still largely consider that to be a progressive policy, which is not what I understood they announced.

onthemove wrote:I understood the RIO dividend policy a little differently.

I took the abandonment of a progressive policy to mean that they are no longer making the 'regular' dividend progressive.

I interpreted the 'specials' as being paid in respect of things that the directors consider 'one offs', things like disposal of assets, etc, i.e. things that are not profit from the ongoing income on normal, ongoing operations.

I'll admit, I haven't looked in detail, but I'd find it a bit odd if they were to announce (as they have announced) that they were dropping their progressive dividend policy, but to then retain the regular dividend on a 'progressive' basis and use the specials to effect the 'non-progressive' aspect... I mean, I'd still largely consider that to be a progressive policy, which is not what I understood they announced.

This shows the progress. https://www.dividenddata.co.uk/dividend ... y?epic=RIO.

Held in 2008 then cut in 2009. Held in 2015 then cut in 2016. Only one special back in 2005 until the recent spate since 2018. The interim and final dividends have been rising since 2016, although the 2021 interim looks like a whopper and had a further special on top. The interim represents 50% of underlying earnings. The special a further 25% to make 75% in total. This, from the half-year results...

"The Board expects total cash returns to shareholders over the longer term to be in a range of 40-60% of underlying earnings in aggregate through the cycle. Acknowledging the cyclical nature of the industry, in periods of strong earnings and cash generation, it is the Board's intention to supplement the ordinary dividends with additional returns to shareholders. We determine dividends in US dollars."

So, you're correct, it's not progressive (unless earnings are progressive - unlikely in a cyclical commodity business). But there is some rational to both basic and special dividends.

Gengulphus wrote:

Wizard wrote:There is usually a cost attached to risk mitigation, but a bit investor needs to make a call as to what an acceptable price is for any particular mitigating action.

I'm probably missing something obvious, but what is a "bit investor"? The only possibility I've thought of is that it's a typo for "big investor" - but that doesn't really make sense to me: small investors need to make those calls just as big investors do...

Gengulphus

Some sort of crazy auto correct, "a bit" was meant to be "each".