Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Different ways of taking income

General discussions about equity high-yield income strategies
88V8
Lemon Half
Posts: 5766
Joined: November 4th, 2016, 11:22 am
Has thanked: 4096 times
Been thanked: 2558 times

Re: Different ways of taking income

#417481

Postby 88V8 » June 5th, 2021, 3:00 pm

Itsallaguess wrote:Given that an adult can hold up to £50,000 in Premium Bonds, then it opens up a relatively safe option for this type of emergency funding, especially for couples, but of course there may be an element of inflation-risk sat alongside the reduced chances of the capital actually being at risk itself.

If one has the full holding one stands a better chance of achieving the average return, currently c1%.
Not a great parking place for a few thousand, but for £50,000 not too shabby compared to 'cash'.

V8

AshleyW
Lemon Pip
Posts: 55
Joined: April 23rd, 2020, 5:43 pm
Been thanked: 32 times

Re: Different ways of taking income

#417742

Postby AshleyW » June 6th, 2021, 7:55 pm

I back both horses - an income portfolio and a total return drawdown portfolio. The most satisfying from an emotional point of view is the income portfolio. No worries about choosing a safe withdrawal rate, no worries about selling during market returns, no worries about the money running out. But there are lots of buts... I use an 8 constituent Income Trust portfolio broadly in line with that analyzed on RetiremntAce. Dividend income has increased since 2007 by more than the rate of inflation but one has to accept that these are actively managed investments with all that this implies - managers change, managers underperform (Mark Barnett, Neil Woodford ...) so it cannot be a fit and forget portfolio some changes over time will be necessary so maybe Ok at the beginning of retirement but less so as one´s mental faculties decline.

Investment Trusts smooth out the dividend payments and as far as I am concerned are the only way to go for dividend income as income ETFs and funds have significant volatility in payouts. One also has to accept the volatility of a 100% equity portfolio and the consequences of essentially investing only in dividend-paying companies that tend to be more mature and in specific sectors and geographies. For these reasons, I run both income and total return portfolios in order to have a significant proportion of my investments in a balanced low volatility portfolio.

FooledFrog
Posts: 9
Joined: September 9th, 2020, 7:39 pm
Has thanked: 1 time
Been thanked: 1 time

Re: Different ways of taking income

#417976

Postby FooledFrog » June 7th, 2021, 7:40 pm

the matter was recently addressed by "pensioncraft" on youtube

https://www.youtube.com/watch?v=w_cPHn9U-Ik

1nvest
Lemon Quarter
Posts: 4323
Joined: May 31st, 2019, 7:55 pm
Has thanked: 680 times
Been thanked: 1316 times

Re: Different ways of taking income

#418510

Postby 1nvest » June 10th, 2021, 3:04 am

UnclePhilip wrote:there seems to be a continuing debate around whether it is more profitable to follow a 'total return and sell a few when needed' versus 'live off the dividends and/or yield'.

Another alternative that is more commonly employed by the very rich is to never sell. Have no regular income being produced (so no income tax) combined with not selling = no capital gains tax, and when you die the value is 'stepped up' i.e. heirs can sell the assets at a cost basis of the asset value at the time of your passing.

For income loans are taken out against the asset/portfolio value. Your executors following your passing can sell enough asset value to pay of those debts.

Consider £1M of asset/portfolio value, a inflation adjusted £20,000/year 'income' (additional loan) taken (borrowed) yearly where inflation rises at 3% and the portfolio/asset value rises at 5% (2% real) and the ongoing cost of borrowing/debt is also 5%. Comparable to a 2% SWR. Run that for 30 years (retirement years before passing) and heirs inherit a wealth near comparable to the inflation adjusted start date value after paying off the loan/debt. i.e. the asset value rises from the £1M start date value to £4.1M after 30 years, loan to asset value risen to 46% (£1.9M of debt including compounded interest) and the inflation index rises from 1.0 to 2.47. So £4.1M value - £1.9M debt = £2.2M, which relative to a 2.47 inflation factor = 89% of the inflation adjusted start date value available. In the 30th year when the asset value = £4.1M and debt is £1.9M the inflation adjusted 'withdrawn' amount (additional amount borrowed for 'income/spending') = £49K, 1.2% of the asset value, but as £1.9M is owed/debt = 2.2% of net asset minus debt value.

A more layman's approach might be to take out/expand mortgage loans/debt as the source of income. If home value is £500K and stock portfolio value is £500K then £20K of income is like a 4% SWR relative to just the stock value. And rather than arranging that yearly you might clump perhaps 4 or 5 years of spending at a time.

dundas666
2 Lemon pips
Posts: 176
Joined: December 27th, 2019, 2:53 pm
Has thanked: 165 times
Been thanked: 99 times

Re: Different ways of taking income

#419910

Postby dundas666 » June 16th, 2021, 11:30 am

UnclePhilip wrote:For someone of retirement age looking to take some income from equity investments, there seems to be a continuing debate around whether it is more profitable to follow a 'total return and sell a few when needed' versus 'live off the dividends and/or yield'.....
Uncle


Hi Uncle, I had been thinking along the same lines as you (but from an Investment Trust point of view): top-slicing growth ITs vs income ITs. Or some combination of both.

An interesting recent development I noticed which might be of interest is that there are a number of ITs that have changed dividend policy so that they pay a % of NAV and so in effect do the 'total return and sell a few when needed' for you. There's a few JPMorgan ones that do 4% of NAV (JAGI, JGGI, JSGI & JCGI) and there's also EAT at 6%, IBT at 4% and BBH at 3.5%.

Regards,
d6

Gilgongo
Lemon Slice
Posts: 415
Joined: November 5th, 2016, 6:51 pm
Has thanked: 154 times
Been thanked: 127 times

Re: Different ways of taking income

#420678

Postby Gilgongo » June 19th, 2021, 8:17 am

UnclePhilip wrote:Oh dear, perhaps it was naive of me to expect a link or two, or a thought or two, on my question, rather than what has actually followed.


Sorry about that. Here's a researched point of view on the natural yield method, from somebody who wrote a book on drawdown strategies ("Beyond the 4% Rule" which has been reccommended on these boards in fact):

https://finalytiq.co.uk/natural-yield-t ... -strategy/

Itsallaguess
Lemon Half
Posts: 9129
Joined: November 4th, 2016, 1:16 pm
Has thanked: 4140 times
Been thanked: 10023 times

Re: Different ways of taking income

#420696

Postby Itsallaguess » June 19th, 2021, 10:14 am

Gilgongo wrote:
UnclePhilip wrote:
Oh dear, perhaps it was naive of me to expect a link or two, or a thought or two, on my question, rather than what has actually followed.


Sorry about that. Here's a researched point of view on the natural yield method, from somebody who wrote a book on drawdown strategies ("Beyond the 4% Rule" which has been reccommended on these boards in fact):

https://finalytiq.co.uk/natural-yield-t ... -strategy/


I stopped reading when I got to these two main points of his arguments -


  • Dividend and bond yields fluctuate significantly over time. This means that a retiree’s income will change significantly from year to year. This creates an unacceptable level of volatility in their income and makes budgeting nearly impossible.
  • Even if yield appear stable in percentage terms, the income received in £ terms will still be calculated in relation to the outstanding capital, which invariably fluctuates over the retirement period.


Once an income investment or portfolio has been bought, the individual or overall yields are much less important than the levels of dividends actually being delivered from that point...

If he's failing to grasp that basic idea, then I would be concerned about the validity of the rest of his arguments....

He also doesn't take any account of income-smoothing options, either in relation to potential holdings such as income-related Investment Trusts, which are likely to operate a level of 'Dividend Cover' to compensate some of the inevitable fluctuations in underlying dividend income, or if that option isn't utilised by a potential income-investor, then there are a number of options available to help deliver personal income-smoothing facilities instead...

He's started with the idea that income-investing is 'bonkers', and worked back from there to find data to fit his argument. There are a few user-comments underneath the article that explain why that's an erroneous approach to take, some of which highlight the above points as well...

Cheers,

Itsallaguess

scrumpyjack
Lemon Quarter
Posts: 4809
Joined: November 4th, 2016, 10:15 am
Has thanked: 605 times
Been thanked: 2673 times

Re: Different ways of taking income

#420702

Postby scrumpyjack » June 19th, 2021, 10:38 am



The comments by Hobie and Eugene at the bottom of the article are far more sensible than the article. The article itself is not at all good IMO.

1nvest
Lemon Quarter
Posts: 4323
Joined: May 31st, 2019, 7:55 pm
Has thanked: 680 times
Been thanked: 1316 times

Re: Different ways of taking income

#420776

Postby 1nvest » June 19th, 2021, 5:15 pm

Itsallaguess wrote:I stopped reading when I got to these two main points of his arguments -

  • Dividend and bond yields fluctuate significantly over time. This means that a retiree’s income will change significantly from year to year. This creates an unacceptable level of volatility in their income
    ..
Once an income investment or portfolio has been bought, the individual or overall yields are much less important than the levels of dividends actually being delivered from that point...

If he's failing to grasp that basic idea, then I would be concerned about the validity of the rest of his arguments....

I suspect he meant real dividend/income values. For instance Barclays Equity Gilt study data shows historic UK stock real dividend values having dropped to 14% of former levels. If 86% of inflation adjusted dividend income vanishes and that was your sole source of income/spending ... type argument.

Taking income from total return is no different to just spending dividends alone. Take the same capital value of dividends paid from total returns ... same outcome. A difference exists in that if a firm retains dividends that might otherwise have been paid then its bottom line capital value is higher than if the dividend had been paid. Firms that pay dividends lower their base capital, DIY dividends taken out of total returns by selling some shares have other investors paying the dividend/cash in exchange for those shares, and where that exchange might occur at 2 times or more of the the firms book value. Or where the firm might buy back its own shares rather than paying out a dividend perhaps at times when the share price was below book-value.

Yet another risk factor with dividends is that regular payment streams are more prone to taxation policy changes. If dividends are paid, taxed, and the net proceeds reinvested then that round trip could be relatively expensive, typically more so when inflation and yields were relatively high as the conditions inducing such high inflation/yields likely also has the state purse under pressure and a need to increase taxes.

Investment trusts and dividend smoothing is little different to DIY dividends, withdrawals out of total return, but at often relatively high management fees/costs. Broadly you'd be better holding a low cost tax efficient major stock index and drawing your own smoothed income out of total returns to equal/better effect as that can be fine tuned to exactly how much and when you might need that income/spending.

Either way the article doesn't address such risk as a decade of -5% annualised type total return situations when income is also being drawn on top, both dividend and DIY dividend out of total return are at equal risk in such situation. One option to potentially reduce such risk is to stock/bond asset allocate and spend some bonds in years when stocks do poorly combined with using some bonds to add more stock shares, spend from stocks when stocks do well along with topping up bonds. For example 50/50 stock/bond initial allocation, repeated years of -5% real stock total returns for a decade, spend 2.5 of bonds each year to provide income and move another 2.5 of bonds over to stock each year ... zero bonds remaining after a decade, 100% all stock, where you cost averaged into stocks across a time when stocks were generally down/cheaper. Similar to accumulators if you add more shares over times when prices were down then that tends to more broadly do OK/well. Such bad decades are relatively infrequent and when they have occurred typically the next decade has more than compensated, rewarded enough to both recoup former inflation adjusted values and more in addition to covering income. In contrast spending dividends that collapsed and had to be covered by selling some shares to service spending needs can draw down capital value to levels where too little remains such that even if great gains follow relative to actual capital such great gains are insignificant.

1nvest
Lemon Quarter
Posts: 4323
Joined: May 31st, 2019, 7:55 pm
Has thanked: 680 times
Been thanked: 1316 times

Re: Different ways of taking income

#421024

Postby 1nvest » June 20th, 2021, 9:57 pm

Itsallaguess wrote:In my view, the whole 'Total Return vs Dividend Income' phrase is a complete red-herring, set up by TR proponents with a view to winning 'an argument' that no-one on the opposite side actually wants to have...

What argument? Whoops, make that retrospective as its a pointless argument. Dividends are just part of total returns. Some firms devalue via the return some of its capital to shareholders - which the investor might re-invest in the same/other stocks, or spend; Other firms might use that capital to instead buy back shares which increases the value of remaining shares; Some investors like firms paying dividends to the common/collective agreed amounts and times; Others might prefer no dividends and selling some share to the amounts and times they personally prefer. All broadly washes but where subjectively some methods might be the more cost/tax efficient or more appropriate to each individual investor.

Alaric
Lemon Half
Posts: 6031
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1398 times

Re: Different ways of taking income

#421039

Postby Alaric » June 21st, 2021, 12:21 am

1nvest wrote: Dividends are just part of total returns.


Total return consists of share price movement and dividend income. The argument presented is that return by way of dividend income is to be preferred to return by way of share price growth. There's a point to that where the return is to be withdrawn and spent, but the same argument is used where the intent is to reinvest dividends, thus returning to a fully invested position.

1nvest
Lemon Quarter
Posts: 4323
Joined: May 31st, 2019, 7:55 pm
Has thanked: 680 times
Been thanked: 1316 times

Re: Different ways of taking income

#421051

Postby 1nvest » June 21st, 2021, 1:53 am

Alaric wrote:
1nvest wrote: Dividends are just part of total returns.

Total return consists of share price movement and dividend income. The argument presented is that return by way of dividend income is to be preferred to return by way of share price growth. There's a point to that where the return is to be withdrawn and spent, but the same argument is used where the intent is to reinvest dividends, thus returning to a fully invested position.

I like accumulation (auto dividend reinvested) holdings and within my ii account as part of the £10/month fee I get a free trade that I can use to sell some shares to generate a DIY "dividend" each month with T+3 delay before being transferable into my regular bank account. Comparable to a regular wage, where typically late into a month its 'pay day soon' - so login and place the sell trade, and a few days later login again to do the bank transfer to my debit card account, and then usually a few days later, end of month, pay my council tax, credit card bill ...etc. If for whatever reason I need additional money then in pre-awareness of that I can just up the 'wage' that month, or use my credit card, or failing that it costs £8 to make another sell trade with the cash available after a few days.

Dividends wouldn't be to the amounts/times I want and are variable ...etc.

Some worry about selling shares low, after declines, however more often shares are making new highs, so that's like selling high. Broadly washes. Monthly sales/wages also somewhat smooths that out. I don't worry about that, just treat it like a bank account with 3 days notice required for withdrawals.

I did used to use the likes of Calamos Convertible and High Income Fund
(CHY) (US stock) that paid 10% dividend yield type benefits via monthly regular dividends which was quite nice, but then rules changed etc. where foreign funds capital gains transitioned over to being considered as income (non UK reporting registered). Back then my TD Waterhouse/Direct account as it was back then before migrating over to being ii had no monthly fees, but you paid for each trade.

Itsallaguess
Lemon Half
Posts: 9129
Joined: November 4th, 2016, 1:16 pm
Has thanked: 4140 times
Been thanked: 10023 times

Re: Different ways of taking income

#421056

Postby Itsallaguess » June 21st, 2021, 6:51 am

1nvest wrote:
Itsallaguess wrote:
In my view, the whole 'Total Return vs Dividend Income' phrase is a complete red-herring, set up by TR proponents with a view to winning 'an argument' that no-one on the opposite side actually wants to have...


What argument?


The OP said this in his opening post -

there seems to be a continuing debate around whether it is more profitable to follow a 'total return and sell a few when needed' versus 'live off the dividends and/or yield'.

I asked both him and Alaric, who's also repeated the same statement many times over the years, to please provide A SINGLE LINK to any income-investor on these boards who has EVER suggested that income-investing is 'more profitable' or 'better' (from a TR perspective..) as an investment strategy...

Neither have been able to do so....

It's the Keyser Söze of investment discussions......raised so often by those wishing to perpetuate a myth so that they can then rail against it, that it's almost now got a life of it's own, and anyone who might read such statements without questioning them might well start to believe that it's true....

But just like Keyser Söze, no-one actually knows what they mean when they say it.....as soon as anyone shines a torch onto the statement, and asks where these income-investors actually are who say that 'it's more profitable' to use an income-strategy than a TR approach, everyone just stands there, looking at each other....

They stand there, thinking 'Well it must be true, because everyone always talks about it.....'

But just like the myth of Keyser Söze, they really don't have anything at all to back the fairy-tale up....

So is it a myth, or is it a lie?

I'm happy to give anyone the benefit of the doubt, and simply ask where these people are that are 'debating' this point on the income-investing side, and when evidence can't be found, and where people can't actually find any income-investors who have ever made such statements, then I'd expect those people to accept that it's a myth, and that they've been unfortunately harbouring assumptions that aren't actually true...

What gets *really* tiresome, is where it's shown to be a myth to people who might then still go on and repeat it, and where they've been asked to provide evidence for their repeated views and never been able to do so. And yet they choose to *continue* to perpetuate the myth...

At that point, I stop giving people the benefit of the doubt, and see them as nefarious agitators, just out to cause trouble, and I think it's important to both highlight that fact, and to differentiate between those nefarious agitators and those who might simply be mistaken, and have somehow fallen for the Keyser Söze shaped myth....

Cheers,

Itsallaguess

NotSure
Lemon Slice
Posts: 916
Joined: February 5th, 2021, 4:45 pm
Has thanked: 679 times
Been thanked: 314 times

Re: Different ways of taking income

#421660

Postby NotSure » June 23rd, 2021, 5:02 pm


Dod101
The full Lemon
Posts: 16629
Joined: October 10th, 2017, 11:33 am
Has thanked: 4343 times
Been thanked: 7534 times

Re: Different ways of taking income

#421666

Postby Dod101 » June 23rd, 2021, 5:12 pm

I doubt that either approach can be proved one way or the other. Apart from anything else, it depends on what period one chooses. I like Baillie Gifford but they would say that wouldn't they? given that they are growth investors.

However, going for the highest sustainable yield is as has been amply demonstrated, going to steer the investor in the direction of companies which by definition are for whatever reason providing most of their return via dividends.Maybe in fact 100% of their returns or even as has been the case with say Glaxo and the tobaccos, more than 100% (by which I mean the dividend has been bought at the expense of any growth and in fact accompanied by a decline in the share price)

It is likely that if I say much more I will either be repeating myself or repeating what others have said.

Dod

mickeypops
2 Lemon pips
Posts: 200
Joined: November 4th, 2016, 2:10 pm
Has thanked: 129 times
Been thanked: 220 times

Re: Different ways of taking income

#432240

Postby mickeypops » August 3rd, 2021, 2:05 pm

Itsallaguess wrote:
Gilgongo wrote:
UnclePhilip wrote:
Oh dear, perhaps it was naive of me to expect a link or two, or a thought or two, on my question, rather than what has actually followed.


Sorry about that. Here's a researched point of view on the natural yield method, from somebody who wrote a book on drawdown strategies ("Beyond the 4% Rule" which has been reccommended on these boards in fact):

https://finalytiq.co.uk/natural-yield-t ... -strategy/


I stopped reading when I got to these two main points of his arguments -


  • Dividend and bond yields fluctuate significantly over time. This means that a retiree’s income will change significantly from year to year. This creates an unacceptable level of volatility in their income and makes budgeting nearly impossible.
  • Even if yield appear stable in percentage terms, the income received in £ terms will still be calculated in relation to the outstanding capital, which invariably fluctuates over the retirement period.


Once an income investment or portfolio has been bought, the individual or overall yields are much less important than the levels of dividends actually being delivered from that point...

If he's failing to grasp that basic idea, then I would be concerned about the validity of the rest of his arguments....

He also doesn't take any account of income-smoothing options, either in relation to potential holdings such as income-related Investment Trusts, which are likely to operate a level of 'Dividend Cover' to compensate some of the inevitable fluctuations in underlying dividend income, or if that option isn't utilised by a potential income-investor, then there are a number of options available to help deliver personal income-smoothing facilities instead...

He's started with the idea that income-investing is 'bonkers', and worked back from there to find data to fit his argument. There are a few user-comments underneath the article that explain why that's an erroneous approach to take, some of which highlight the above points as well...

Cheers,



Itsallaguess


I read this article a couple of years ago and quickly came to the same conclusion (picked up by some in the comments section.). He makes the schoolboy error of assuming a constant dividend yield in percentage terms, against a fluctuating share value. Utter nonsense. If he’s a professional, no wonder the industry has a bad rep.

1nvest
Lemon Quarter
Posts: 4323
Joined: May 31st, 2019, 7:55 pm
Has thanked: 680 times
Been thanked: 1316 times

Re: Different ways of taking income

#432927

Postby 1nvest » August 6th, 2021, 3:08 pm

mickeypops wrote:I read this article a couple of years ago and quickly came to the same conclusion (picked up by some in the comments section.). He makes the schoolboy error of assuming a constant dividend yield in percentage terms, against a fluctuating share value. Utter nonsense. If he’s a professional, no wonder the industry has a bad rep.

Poorly worded, but doesn't miss the point that dividend values in inflation adjusted terms can and do decline significantly at times. Massively so in some cases such as indicated in Barclays Equity Gilt studies that show -86% declines. Obviously if solely reliant upon such dividends a reduction down to just 14% of former inflation adjusted value is a substantial haircut.

hiriskpaul
Lemon Quarter
Posts: 3852
Joined: November 4th, 2016, 1:04 pm
Has thanked: 681 times
Been thanked: 1489 times

Re: Different ways of taking income

#432983

Postby hiriskpaul » August 6th, 2021, 5:56 pm

UnclePhilip wrote:For someone of retirement age looking to take some income from equity investments, there seems to be a continuing debate around whether it is more profitable to follow a 'total return and sell a few when needed' versus 'live off the dividends and/or yield'.

At present we have global index tracking ETFs, from which we can sell off a few to top up our current account, with a couple of years worth of cash as reserve to lessen the danger of needing to sell after market drops.

However, I've been interested to read of those here who buy pooled active investments for the yield they distribute.

Has anyone done research as to the relative merits of these two approaches?

For the avoidance of doubt, I'm not interested in any hot ideological debate; rather in looking at reasonable evidence....

Uncle

Not a board I usually frequent, mostly due to "continuing debate around whether it is more profitable to follow a 'total return and sell a few when needed' versus 'live off the dividends and/or yield'" type discussions. However, if you are looking at historical evidence of whether going for higher yielding equities detracts from total return you will find a lot of theories, but scant evidence one way or the other. Take the MSCI World Dividend Tilt index for example: https://www.msci.com/documents/10199/8e ... 0b8f79caa7

This index filters the MSCI World index on quality and yield. As at the end of July it had an historic yield of 2.90% net of dividend withholding taxes, compared with 1.65% for the MSCI World Index, simply weighted by market cap. Over the last 10 years, investing in that dividend index would have cost you 1.45% per year in performance, but since launch in November 1998, the dividend index has outperformed by 0.38% per year. So there have clearly been times when high dividend yield+quality has significantly outperformed. I don't have the date, but would not mind betting the first 10 years were far better for dividend investing due to the dot-com bubble.

GoSeigen
Lemon Quarter
Posts: 4349
Joined: November 8th, 2016, 11:14 pm
Has thanked: 1590 times
Been thanked: 1579 times

Re: Different ways of taking income

#433019

Postby GoSeigen » August 6th, 2021, 9:18 pm

Itsallaguess wrote:
1nvest wrote:
Itsallaguess wrote:
In my view, the whole 'Total Return vs Dividend Income' phrase is a complete red-herring, set up by TR proponents with a view to winning 'an argument' that no-one on the opposite side actually wants to have...


What argument?


The OP said this in his opening post -

there seems to be a continuing debate around whether it is more profitable to follow a 'total return and sell a few when needed' versus 'live off the dividends and/or yield'.

I asked both him and Alaric, who's also repeated the same statement many times over the years, to please provide A SINGLE LINK to any income-investor on these boards who has EVER suggested that income-investing is 'more profitable' or 'better' (from a TR perspective..) as an investment strategy...

Neither have been able to do so....


Not a link, but a name: Rob Davies aka MunroMan, he of "90% of returns come from dividends in the long run" fame. He made this claim about as often as your antagonists -- and based on some very dodgy maths indeed.

GS

jackdaww
Lemon Quarter
Posts: 2081
Joined: November 4th, 2016, 11:53 am
Has thanked: 3203 times
Been thanked: 417 times

Re: Different ways of taking income

#433028

Postby jackdaww » August 6th, 2021, 10:07 pm

some articles very recently in the IC about this very subject i think - which i take to debunk the high yield approach .

i lost interest in the idea many years ago .

8-)


Return to “High Yield Shares & Strategies - General”

Who is online

Users browsing this forum: No registered users and 8 guests