Passive sell vs HYP income

[NearlyThere]

I read with interest IanTHughes informative post on PYAD HYP 2019_04 DRAWDOWN here : viewtopic.php?f=15&t=33976

It got me thinking about HYP income versus a passive drawdown strategy... Using my very basic math skills I tried to compare the same 3 year period using VWRL and drawing down 4% pa of the start value (increasing with CPI). One trade each year. I also assumed a 1% dividend on VWRL.

It seems to outperform HYP. Is it more risky? I would have thought it less so.

I also ran the numbers for VWRL back to 2013 and it did very well. Starting with £250k in 2013, I calculated todays value would be over £450k with more than £90k taken as income. (assuming my Math is not way off beam)

I realise it's been a very good decade looking backwards, but is this a reasonable strategy to persue now?

NearlyThere

[JohnW]

I suspect that short periods, and the results from any period being very start/end date dependent, make that comparison of limited value. But drawing down with dividends or by selling shouldn’t have a material effect on the outcome, since dividends taken out reduce the value of the stock, while selling the stock reduces how much your stock is worth. It’s chalk and cheese.
The differences seem to me to lie in convenience, simplicity if you’re beyond making sell choices, cost if brokerage is a cost, and how diversified either approach is. The high yield route is inherently less diversified since it seeks to exclude some stocks; if you think diversification is the only free lunch, and choosing high yield stocks is stock picking that needs some skill, then it is the lesser choice, but in the end I doubt the differences in outcome would be much.

[Newroad]

Hi JohnW.

I suspect the differences have (and will continue to be) significant.

There are many reasons: one major one is VWRL vs HYP is world vs home country (typically UK in the context we are considering) - this will typically lead to considerable divergence.

Regards, Newroad

[Alaric]

but in the end I doubt the differences in outcome would be much.

Provided capital and income are treated as being valued at equal weight then it's going to be down as to whether the shares selected in a high yield strategy under perform or out perform those contained in a global index such as VRWL. If there's only one holding, partly sold once a year, dealing costs are minimal and decisions only of timing.

[JohnW]

Yes, sorry. I was thinking of hyp in the generic sense, not some particular UK specific approach; that would clearly be a horse of a different colour, and not such a pretty colour.
I’m sure I’ve seen someone plot a Vanguard US or global high yield fund against an all-comers index fund and shown there wasn’t much difference in outcomes.

[xxd09]

It’s a personal choice which at the end of the day might end up much the same
I find that retiree’s that psychologically prefer an income stream that mimics their former working salary often prefer a dividend driven retirement set up
The dividends mount up and are withdrawn as required often monthly and shares/funds ie capital is not touched
Works well with large portfolios because dividends can vary
A all share portfolio is usually the preference of the investor in this case
I find myself that the differences are semantic because obviously if dividends are withdrawn then capital growth going to be less
I use total return-let dividends get reinvested automatically-ie fund is in Accumulation units and then withdraw a lump sum as required by selling a number of units
In this case investor usually prefers funds as their investment vehicle
On a practical note I take a lump sum once every year after April 5th -to top up my 2years living expenses cash fund
This is a very simple procedure-important as you get older!
If you are drawing from a SIPP it makes the tax computation very simple-just one transaction to account for
That’s it
xxd09

[Adamski]

One other consideration is tax if you've got any unsheltered. As with a drawdown strategy you got a 12.3k capital gains allowance. But with dividends strategy, unsheletered you got only 2k dividends allowance.

This last year uk markets have outperformed but a single country approach inherently more risky, when something like brexit happens. Or more recently ukraine hit Russia obviously but also central and Eastern europe markets.

[Hariseldon58]

I invested with a bias to Equity Income from 1990 onwards until the GFC and you seemed to have your cake and eat it, ie good income and good capital growth, that policy seemed to break down for me around 2007. Since then a total return approach has worked for me, VWRL with its bias to the USA has done very well.

The US market had poor returns for 2000-2009 but over pretty much any other period has done well, High Dividends is associated with Value, but in general factor returns have been poor over recent years, they may well come back strongly but factor returns are very well known and we have so much more information that is widely known than we did in the past… Anyone remember Company Refs on a CD ?

My personal choice is largely passive investing on a total return basis, with yearly harvesting of income, guided by Alternate Prime Harvesting and Guyton rules going forward, I am conducting a major 15 year reset to my drawdown/investing plans after FIRE in 2007 when I was 49, in light of the past 15 years and present market conditions. I may well post details when completed it would be a long post though !!!

A link below if you want to explore asset class returns.

https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&TotalBond1=40&CorpBond2=12.5&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&TIPS2=12.5&annualOperation=0&TotalStockMarket1=60&initialAmount=10000&EmergingMarket2=12.5&endYear=2014&mode=2&inflationAdjusted=true&SmallCapValue2=12.5&annualAdjustment=0&startYear=1972&Gold2=12.5&rebalanceType=1&TwoYearTBills2=12.5&annualPercentage=0.0&LongTermBond2=12.5&TBills2=12.5

[Dod101]

It’s a personal choice which at the end of the day might end up much the same
I find that retiree’s that psychologically prefer an income stream that mimics their former working salary often prefer a dividend driven retirement set up
The dividends mount up and are withdrawn as required often monthly and shares/funds ie capital is not touched
Works well with large portfolios because dividends can vary
A all share portfolio is usually the preference of the investor in this case
I find myself that the differences are semantic because obviously if dividends are withdrawn then capital growth going to be less
I use total return-let dividends get reinvested automatically-ie fund is in Accumulation units and then withdraw a lump sum as required by selling a number of units
In this case investor usually prefers funds as their investment vehicle
On a practical note I take a lump sum once every year after April 5th -to top up my 2years living expenses cash fund
This is a very simple procedure-important as you get older!
If you are drawing from a SIPP it makes the tax computation very simple-just one transaction to account for
That’s it
xxd09

I live off my investments and find that the 'living off dividends' approach has worked best for me. I have a concern that I might be drawing my annual lump sum from a sale just at the wrong moment (like the spring of 2020 or 2008) As it is my dividends just kept rolling in (or not for a short time during 2020) Presumably you also need to decide how and when you are going to reinvest the dividends, or do you just leave them to build up and become part of the withdrawal lump sum? If so then you are partly living off dividends anyway. I no longer go about chasing yield because I guess i am fortunate enough not to have to so my portfolio has a few out and out growth shares but most are middle of the road growth and income, although they nearly all have more of one than the other.

Dod

[tjh290633]

I read with interest IanTHughes informative post on PYAD HYP 2019_04 DRAWDOWN here : viewtopic.php?f=15&t=33976

It got me thinking about HYP income versus a passive drawdown strategy... Using my very basic math skills I tried to compare the same 3 year period using VWRL and drawing down 4% pa of the start value (increasing with CPI). One trade each year. I also assumed a 1% dividend on VWRL.

It seems to outperform HYP. Is it more risky? I would have thought it less so.

I also ran the numbers for VWRL back to 2013 and it did very well. Starting with £250k in 2013, I calculated todays value would be over £450k with more than £90k taken as income. (assuming my Math is not way off beam)

I realise it's been a very good decade looking backwards, but is this a reasonable strategy to persue now?

NearlyThere

You didn't go far back enough in time. If you look at the long term chart of the FTSE350HY and LY indices, using the TR versions, you will see that the HY index pulled well ahead of the LY index until a few years ago, when the LY index started to do better than the HY index, but never caught it up. Google "World Markets at a glance" to get the latest FT PDF.

The HY-TR index is 8015.19 and the LY-TR index is 5522.51, both as at the close last night. They both started on the same day at the same value. The non-TR versions show a different behaviour, because of the effect of capital growth only, but the dividend income makes all the difference.

TJH

[BullDog]

I read with interest IanTHughes informative post on PYAD HYP 2019_04 DRAWDOWN here : viewtopic.php?f=15&t=33976

It got me thinking about HYP income versus a passive drawdown strategy... Using my very basic math skills I tried to compare the same 3 year period using VWRL and drawing down 4% pa of the start value (increasing with CPI). One trade each year. I also assumed a 1% dividend on VWRL.

It seems to outperform HYP. Is it more risky? I would have thought it less so.

I also ran the numbers for VWRL back to 2013 and it did very well. Starting with £250k in 2013, I calculated todays value would be over £450k with more than £90k taken as income. (assuming my Math is not way off beam)

I realise it's been a very good decade looking backwards, but is this a reasonable strategy to persue now?

NearlyThere

You didn't go far back enough in time. If you look at the long term chart of the FTSE350HY and LY indices, using the TR versions, you will see that the HY index pulled well ahead of the LY index until a few years ago, when the LY index started to do better than the HY index, but never caught it up. Google "World Markets at a glance" to get the latest FT PDF.

The HY-TR index is 8015.19 and the LY-TR index is 5522.51, both as at the close last night. They both started on the same day at the same value. The non-TR versions show a different behaviour, because of the effect of capital growth only, but the dividend income makes all the difference.

TJH

VWRL is an all world investment. I don't understand why you cite the FTSE350 indices for comparison?

On the other hand, comparing a high yield portfolio of UK large cap stocks to VWRL is also a bit odd?

[dealtn]

I have a concern that I might be drawing my annual lump sum from a sale just at the wrong moment (like the spring of 2020 or 2008)

But a sale is the same as a dividend paid by the company - cash is fungible - so cash paid out by the company as a dividend at "the wrong moment" is just the same.

[Dod101]

I have a concern that I might be drawing my annual lump sum from a sale just at the wrong moment (like the spring of 2020 or 2008)

But a sale is the same as a dividend paid by the company - cash is fungible - so cash paid out by the company as a dividend at "the wrong moment" is just the same.

It is not at all the same. A dividend paid to me is hard spendable cash which arrives at my bank with no cost to me and the amount will arrive no matter the state of the market. If I am a forced seller when a share price might be say 20% below its average for the last three months (it happens!) then I have to sell 25% more shares for the same realisation. I know what you are saying about cash being fungible but I would rather have the dividend then rely on selling at a time that I may judge to be not ideal.

Dod

[dealtn]

I have a concern that I might be drawing my annual lump sum from a sale just at the wrong moment (like the spring of 2020 or 2008)

But a sale is the same as a dividend paid by the company - cash is fungible - so cash paid out by the company as a dividend at "the wrong moment" is just the same.

It is not at all the same. A dividend paid to me is hard spendable cash which arrives at my bank with no cost to me and the amount will arrive no matter the state of the market. If I am a forced seller when a share price might be say 20% below its average for the last three months (it happens!) then I have to sell 25% more shares for the same realisation. I know what you are saying about cash being fungible but I would rather have the dividend then rely on selling at a time that I may judge to be not ideal.

Dod

Any 2 identical investments, bar the company's dividend policy, will provide identical value outcomes to their owners.

Any 2 owners with different cash requirements have that same value and can manufacture their desired cash position. That could be an owner that "needs" a high cash position who sells more of the stock. It could be a low cash requirer who buys back stock with the "too much cash" paid as an unrequired dividend. it could be anything in between. It is true of all stocks be they non-dividend, low-dividend, or high-dividend payers.

The share price at that "wrong moment" would be the same for all holders. All cash is fungible and doesn't matter whether it sits in the company or outside having been paid as a dividend.

If the stock has fallen such that it is "20% below its average price for the last three months" then any dividend paid out by it drops the share price by a larger percentage than if it was at the "average price of the last 3 months". Conversely for a recipient that doesn't require (all of) that dividend he will be buying it back at a much better price! Similarly, but opposite, if prices are 20% higher than the average.

The same logic works if a company doesn't pay a dividend, or doesn't pay enough of a dividend in cash, such that the owner who "needs" cash has to sell some of the stock. And again if the share price at the time is 20% higher than the average price.

You are really looking at the wrong thing by thinking you are an income investor but have bought a non-income paying stock and are "forced" to sell at an inopportune time. That simply isn't the case. You are, and always are, at any moment in time able to manufacture any amount of "income" or "cash" that is required in your portfolio by buying, or selling at market prices. Cash is fungible.

The only considerations for the investor are the frictional costs of trading and matters such as taxation.

I guess this conversation could be had dozens of times and still wouldn't be accepted by some but it is the cornerstone of any qualification or study in financial instruments.

[chris]

Any 2 owners with different cash requirements have that same value and can manufacture their desired cash position. That could be an owner that "needs" a high cash position who sells more of the stock. It could be a low cash requirer who buys back stock with the "too much cash" paid as an unrequired dividend. it could be anything in between. It is true of all stocks be they non-dividend, low-dividend, or high-dividend payers.

Hopefully the 'cornerstone of the study of financial instruments' includes fundamentals such as how the market values shares. There are two main elements to this. The market values growth potential in companies and it also values the ability of companies to produce and maintain an ongoing dividend / income for the investor.

The types of companies in each of those categories is very different. Those with high growth potential are those companies who need capital to either develop new products into a market that is growing or that needs new technology, or they need capital to buy other companies in order to obtain a higher market share and to get 'super profits' from their position in that market. Because of their capital requirements, they are less likely to pay higher dividends as they believe that their investment strategy will give higher returns to their shareholders than returning cash to them.

Those that are in the high yield category are those who have a solid and reliable product base and are generally in fairly solid markets. Yes, those markets can have peaks and troughs but over the long-term, they have a fairly reliable sales and income stream. Because of this characteristic, the market's only concern is the ability of the company to pay dividends at the same or higher rates into the future. The companies pay dividends to their shareholders because there is little to use the excess cash for in their market that would give the shareholders a higher return or more value than returning this cash to them. Development of their existing products to retain market share can be done within their cash resources whilst still paying high dividends.

My contention is that cash is not fungible in these 2 circumstances and that in general, if someone is looking to crystallise large amounts of cash at some point in the future, he would be poorly advised to invest in high yield companies. Whilst there may be some on this board who are reinvesting dividends, this is not because they have some alternative investment goal, all are trying to build up enough funds to ensure that the end result is that they can retain their investments and live off the continued and hopefully increasing dividends that these companies produce. I have heard it said on here that high yield investing is a contrarian investment - it is nothing of the sort, it is concentrating on the valuation of a company based on its ability to produce an income. We buy shares at the price we do, not because we think that the companies have 'too much cash as an unrequired dividend', we buy them because we are looking to buy that continuous dividend. Paying for less growth and more return is not the same as buying for growth and then selling and therefore cash from high yield shares is not fungible because, although the shares will obviously drop when a share goes ex-dividend, it doesn't then continue at this level and drop again after the next dividend. There is an expectation of that share having the same return in the future so the price increases again to the point where it was before the dividend was paid. If it stopped paying dividends and there was no prospect of future dividends and it was not on a growth path, then the value of that share would fall dramatically. So the fact that the company has paid a dividend is the cornerstone of its value in the market and cannot therefore be described as 'paying an unrequired dividend with too much cash'.

Your alternative investor who is looking to sell assets to get an income should be buying growth shares to maximise his share valuation before he sells and therefore your suggestion that the two investors with different cash requirements buying the same sort of high yield share is a fallacious one, or if not, the one who sells to realise income has been badly advised to buy this stock. Therefore your 2 different investors are unlikely to be adopting the same strategy which undermines your argument, because you have not taken into account the way a financial instrument is valued by the market.

Therefore the badly advised investor, buying high yield shares, can very easily be affected by an event which impacts the value of that company's share that may be an issue for the sector as a whole, if the market believes that this event could have an impact on the future dividends of that share. The market tends to react in a short-term way, the investor tends to look beyond the short-term to the long-term ability of that company to produce income. Therefore the person needing a short-term realisation of their investment may well be invested at such a time and needing to realise income quickly.

[tjh290633]

VWRL is an all world investment. I don't understand why you cite the FTSE350 indices for comparison?

On the other hand, comparing a high yield portfolio of UK large cap stocks to VWRL is also a bit odd?

Because I choose to, in order to illustrate the difference between value and growth shares.

A lot of people are wedded to Vanguard's offerings. I am not.

TJH

[DrFfybes]

You didn't go far back enough in time. If you look at the long term chart of the FTSE350HY and LY indices, using the TR versions, you will see that the HY index pulled well ahead of the LY index until a few years ago, when the LY index started to do better than the HY index, but never caught it up. Google "World Markets at a glance" to get the latest FT PDF.

The HY-TR index is 8015.19 and the LY-TR index is 5522.51, both as at the close last night. They both started on the same day at the same value. The non-TR versions show a different behaviour, because of the effect of capital growth only, but the dividend income makes all the difference.

TJH

Remarkably interesting resource, I need a bigger screen.

Are all these rebased the same? If so the FTSE350 beats the HY on TR, suggesting that the HY approach doesn't win on that market. The 250 index appears to trounce most things?

Paul

[Itsallaguess]

The primary issue I've often got with these types of discussions is that they often feel so entrenched and 'binary' that they simply dismiss the fact that there's a massive amount of 'middle ground' on the growth-or-income spectrum that, from an investment perspective makes much more sense to me personally, but where investors may not feel able to pitch themselves for fear of being assumed to be in the 'wrong camp'...

Having been a 'HIGH yield' income-investor for many years in the past, I would firmly agree with anyone who might look to suggest that this is an area of the market that carries a level of investment risk, and certainly at single-share level, that is unlikely to be rewarded over the long term. No arguments from me there - I've got the scars to prove it, and I've changed my income-investment approach since acquiring them...

But the primary issue I've got is that having learnt that lesson, I've still chosen to stick with income-investment, but have broadened out my sectoral and geographical scope and lowered my yield-expectations to actively reduce some of that 'HIGH yield' risk, and I've been very happy with the results of that shift in approach for many years now...

I'm still an 'income-investor' (the hands-off strategy absolutely suits me), but I certainly wouldn't class myself as a 'HIGH yield' investor - I'm in that middle-ground that I mentioned earlier, which it almost seems that people aren't allowed to occupy. It certainly always feels like, as far as these discussion boards are concerned, if you label yourself as an 'income-investor', then you're automatically thrown into the same 'criticism bag' as investors chasing those 'HIGH (risk) yields'....

So a simple but exaggerated example of this problem then -

An 'income investor', who simply wants to live off incoming dividends rather than ever have to think about selling anything, chooses to invest £1m into Foreign & Colonial Investment Trust (FCIT). It's currently yielding around 1.5%, and he's happy that he can live off the £15,000 dividends that FCIT pays out. He's an income-investor - he doesn't ever need to sell any shares to fulfil his investment needs...

He's not a 'high yield' income investor though, is he?

Four of the current top-ten holdings in FCIT are Microsoft, Amazon, Apple, and Alphabet...

Hopefully we might agree that he's not a 'high yield' income investor - he's simply an income-investor from a personal investment-strategy point of view, but one that I hope we might agree is invested in some level of growth-related markets....

And that's to highlight the 'spectrum' that I was talking about - that spectrum is likely to have high-growth but no-income investments at one end of it, and there's likely to be low or no-growth but high-income investments at the other end of it, but there's also a simply massive spectrum of opportunity between those two extremes, where investment-strategy choices can be validly made which might clearly satisfy an individual investors personal investment requirements, but where there never seems to be any scope in accepting this fact within these 'binary', two-camp debates, and I think that's a terrible shame that inevitably leads to much of the regular and entrenched arguments we see around this subject...

Cheers,

Itsallaguess (moderate-yield, hands-off income investor exposed to some growth areas of the market...)

[Dod101]

I have a concern that I might be drawing my annual lump sum from a sale just at the wrong moment (like the spring of 2020 or 2008)

But a sale is the same as a dividend paid by the company - cash is fungible - so cash paid out by the company as a dividend at "the wrong moment" is just the same.

It is not at all the same. A dividend paid to me is hard spendable cash which arrives at my bank with no cost to me and the amount will arrive no matter the state of the market. If I am a forced seller when a share price might be say 20% below its average for the last three months (it happens!) then I have to sell 25% more shares for the same realisation. I know what you are saying about cash being fungible but I would rather have the dividend then rely on selling at a time that I may judge to be not ideal.

Dod

Any 2 identical investments, bar the company's dividend policy, will provide identical value outcomes to their owners.

Any 2 owners with different cash requirements have that same value and can manufacture their desired cash position. That could be an owner that "needs" a high cash position who sells more of the stock. It could be a low cash requirer who buys back stock with the "too much cash" paid as an unrequired dividend. it could be anything in between. It is true of all stocks be they non-dividend, low-dividend, or high-dividend payers.

The share price at that "wrong moment" would be the same for all holders. All cash is fungible and doesn't matter whether it sits in the company or outside having been paid as a dividend.

If the stock has fallen such that it is "20% below its average price for the last three months" then any dividend paid out by it drops the share price by a larger percentage than if it was at the "average price of the last 3 months". Conversely for a recipient that doesn't require (all of) that dividend he will be buying it back at a much better price! Similarly, but opposite, if prices are 20% higher than the average.

The same logic works if a company doesn't pay a dividend, or doesn't pay enough of a dividend in cash, such that the owner who "needs" cash has to sell some of the stock. And again if the share price at the time is 20% higher than the average price.

You are really looking at the wrong thing by thinking you are an income investor but have bought a non-income paying stock and are "forced" to sell at an inopportune time. That simply isn't the case. You are, and always are, at any moment in time able to manufacture any amount of "income" or "cash" that is required in your portfolio by buying, or selling at market prices. Cash is fungible.

The only considerations for the investor are the frictional costs of trading and matters such as taxation.

I guess this conversation could be had dozens of times and still wouldn't be accepted by some but it is the cornerstone of any qualification or study in financial instruments.

You really do not need to go to the trouble of writing all that out. I understand well your arguments and could have written it myself but the fact is that you will not change my view. You know as well as anyone that just because a share goes ex div does not mean that the share price automatically drops by the amount of the dividend. There is market noise all the time.

'Nuff said.

Dod

[CliffEdge]

I'd 've thought the important thing is to have a strategy.