Wizard wrote:Clariman wrote:Moderator Message:
The Moderation team have discussed the HYS&S board purpose and guidelines, and have unanimously agreed some small changes. Thanks for your patience. Clariman
Details here
viewtopic.php?f=31&t=8652&p=98965
Thank you for the link to the updated guidelines. Sorry if I am being dumb, but can you clarify what you mean by "natural yield"? Is there more to that than the dividend or is "natural yield" the same as dividend yield?
Occasionally, a company returns capital by a "B share scheme", in which B shares are split off from the ordinary shares, and then the B shares are compulsorily redeemed. The redemption payment is technically a capital distribution rather than a dividend, and the shareholder doesn't need to take any active steps to receive it, so I would think it contributes to "natural yield" but not technically to "dividend yield". It is effectively equivalent for the investor to a dividend for all purposes other than tax (*) - usually a special dividend because it's one-off (**). For the company, there are other differences to do with company law and company taxation.
Carrying that principle to the extreme, cash takeover proceeds would also seem to be part of the "natural yield". They in particular, but also big "B share schemes" and big special dividends, can make the "natural yield" much higher than planned for... I assume that HYS&S guidance saying "
use the natural yield arising from higher-yielding equities to generate an income" does not preclude reinvesting the surplus if the generated income turns out to be more than is needed! Rather, it precludes strategies that seek out shares with high natural yields with no particular intention to actually receive those yields. (E.g. a Value strategy ideally wants a good capital gain to be realised as soon as possible - so holding on to the shares long enough to receive dividends from them is a welcome bonus, but not what it's really aiming for.)
Incidentally, the phrase "total return strategy" that still appears in the guidance is
still undefined, and nonsense as far as I am concerned: a "total return" is something that
every strategy has, not a type of strategy. Rather than trying to come up with a definition, I think the second paragraph of the guidance would be better without it, e.g. "
It is recognized that a higher yield can be a proxy for value characteristics, and that selecting higher-yielding equities on that basis can contribute capital gains to the returns of a strategy. It is emphasised that value strategies and other strategies that use high yields in that way are NOT the remit of this board, which is intended for discussions of higher-yielding equities for the purposes of generating an income through such equities' natural yield."
(*) Note that there used to be "B share schemes" and "B/C share schemes" that were more complicated and did involve an active step from the shareholder, in that they gave the shareholder a choice of tax treatments, between treating the returned cash as a dividend or as a capital distribution. Those schemes have fallen into disuse since a change in tax law was enacted some years ago to scupper them: the change says that if a shareholder is given a choice between receiving a payment as a dividend or a capital distribution, it is to be treated as a dividend for tax purposes regardless of the investor's choice. But it doesn't affect cases where the shareholder is given no such choice, such as the "B share schemes" that are still occasionally used.
(**) There are companies like
Rolls-Royce that issue fixed-value redeemable shares as a substitute for ordinary dividends, i.e. ones that are normally (though not currently!) expected to be repeated each year. In Rolls-Royce's case, redeeming them is optional for the shareholder, not compulsorily done by the company, and so they're a particularly tricky case for being technically part of the "natural yield" of the company. I suspect though that such pedantry would be met with a "
don't rules-lawyer, they closely mimic dividends and so are part of the natural yield for HYS&S purposes" type of response!
Gengulphus