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Income strategy for accumulation

General discussions about equity high-yield income strategies
Alaric
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Income strategy for accumulation

#459021

Postby Alaric » November 18th, 2021, 9:59 am

Arborbridge wrote:HYP is an income provider, that's all. If you want to build a pot, go for ideas around high growth: not HYP.


It's odd though that some or many of the more vociferous defenders of the HYP strategy are in fact pot builders, as evidenced by the frequent discussions of top ups. Surely their benchmark should be size of pot whether driven by accumulated and reinvested dividends or by growth. They can also be indifferent to dividend cuts and cancellations where someone relying on dividends for living expenses would not be,

88V8
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Re: Income strategy for accumulation

#459027

Postby 88V8 » November 18th, 2021, 10:21 am

Alaric wrote:
Arborbridge wrote:HYP is an income provider, that's all. If you want to build a pot, go for ideas around high growth: not HYP.

It's odd though that some or many of the more vociferous defenders of the HYP strategy are in fact pot builders, as evidenced by the frequent discussions of top ups. Surely their benchmark should be size of pot whether driven by accumulated and reinvested dividends or by growth. They can also be indifferent to dividend cuts and cancellations where someone relying on dividends for living expenses would not be,

Speaking for myself, the pot building is a by-product of reinvesting surplus income.
TJH as a well-documented example, builds his pot and improves the overall yield through top-slicing and reinvestment. Again though, I suspect it's a by-product.

I wouldn't say HYPers on the whole are indifferent to temporary divi cuts, but it's part of the rough and tumble. Those whose income is near the knuckle would be concerned of course, and one is supposed to have a pot - notional or real - to cover divi dips.
Permanent cuts tend to lead to the offending share being tossed overboard.

As regard the pot size, I never had a target. It just happened.
It's of interest, if at all, as I begin to contemplate the chunk ultimately liable to be stolen by the govt unless I leave it to charity rather than relatives, but on the other hand I shall not be here to know about it.

V8

xeny
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Re: Income strategy for accumulation

#459028

Postby xeny » November 18th, 2021, 10:26 am

88V8 wrote:It's of interest, if at all, as I begin to contemplate the chunk ultimately liable to be stolen by the govt unless I leave it to charity rather than relatives, but on the other hand I shall not be here to know about it.



I'm somewhat philosophical about tax, but isn't a potential benefit of HYP likely to be that it is easier to make clear "gifts from income" which helps with this problem?

Dod101
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Re: Income strategy for accumulation

#459035

Postby Dod101 » November 18th, 2021, 10:43 am

88V8 wrote:
Alaric wrote:
As regard the pot size, I never had a target. It just happened.
It's of interest, if at all, as I begin to contemplate the chunk ultimately liable to be stolen by the govt unless I leave it to charity rather than relatives, but on the other hand I shall not be here to know about it.

V8


I am one as anyone who reads my posts will know, who lives entirely off his dividends of which I currently have a surplus. I therefore pick up on V8's point as it is relevant for me and others in the same position no doubt. I do not normally top up at least not as a default, because that is just adding to my capital and ultimately to the IHT bill on my estate at some point. I am a long way passed the 'building' stage although I am not yet at the displenishing sale stage! My surplus tends to go to grandchildren or charity.

As to the early stage builders, I have often thought that they would be far better investing in out and out growth shares because what they need is a pot big enough so that when they need an income, it will generate sufficient for them to live off. Some seem to invest in low growth, so called 'value' shares, such as many will hold in a HYP, for the sake of 'proving' to themselves that the concept will work. Seems to me to be totally misguided because the classic HYP 'works' in that it will provide the required income as has been shown again and again.

Dod

1nvest
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Re: Income strategy for accumulation

#459057

Postby 1nvest » November 18th, 2021, 11:34 am

Dod101 wrote:
88V8 wrote:
Alaric wrote:
As regard the pot size, I never had a target. It just happened.
It's of interest, if at all, as I begin to contemplate the chunk ultimately liable to be stolen by the govt unless I leave it to charity rather than relatives, but on the other hand I shall not be here to know about it.

V8

I am one as anyone who reads my posts will know, who lives entirely off his dividends of which I currently have a surplus. I therefore pick up on V8's point as it is relevant for me and others in the same position no doubt. I do not normally top up at least not as a default, because that is just adding to my capital and ultimately to the IHT bill on my estate at some point. I am a long way passed the 'building' stage although I am not yet at the displenishing sale stage! My surplus tends to go to grandchildren or charity.

As to the early stage builders, I have often thought that they would be far better investing in out and out growth shares because what they need is a pot big enough so that when they need an income, it will generate sufficient for them to live off. Some seem to invest in low growth, so called 'value' shares, such as many will hold in a HYP, for the sake of 'proving' to themselves that the concept will work. Seems to me to be totally misguided because the classic HYP 'works' in that it will provide the required income as has been shown again and again.

Dod

But not always. Read Barclays Equity Gilt study data for inflation adjusted index (price) and income index (dividends) values for 1900 to 1920 for instance and both collapsed around 70%. Unless your required income was very low (you had great wealth) then there are cases where both income and capital value from stocks alone might have declined to critically low levels/failed.

The more ideal for some may be a regular inflation adjusted income with reasonable odds of their money outliving them. SWR style income provision specifically targets the probabilities of that.

Dod101
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Re: Income strategy for accumulation

#459064

Postby Dod101 » November 18th, 2021, 12:05 pm

1nvest wrote:
Dod101 wrote:
88V8 wrote:

I am one as anyone who reads my posts will know, who lives entirely off his dividends of which I currently have a surplus. I therefore pick up on V8's point as it is relevant for me and others in the same position no doubt. I do not normally top up at least not as a default, because that is just adding to my capital and ultimately to the IHT bill on my estate at some point. I am a long way passed the 'building' stage although I am not yet at the displenishing sale stage! My surplus tends to go to grandchildren or charity.

As to the early stage builders, I have often thought that they would be far better investing in out and out growth shares because what they need is a pot big enough so that when they need an income, it will generate sufficient for them to live off. Some seem to invest in low growth, so called 'value' shares, such as many will hold in a HYP, for the sake of 'proving' to themselves that the concept will work. Seems to me to be totally misguided because the classic HYP 'works' in that it will provide the required income as has been shown again and again.

Dod

But not always. Read Barclays Equity Gilt study data for inflation adjusted index (price) and income index (dividends) values for 1900 to 1920 for instance and both collapsed around 70%. Unless your required income was very low (you had great wealth) then there are cases where both income and capital value from stocks alone might have declined to critically low levels/failed.

The more ideal for some may be a regular inflation adjusted income with reasonable odds of their money outliving them. SWR style income provision specifically targets the probabilities of that.


OK Agreed but times have I think changed since the early 1900s. Not to say it could not happen again of course. I do not in fact indulge in a HYP because I think it flawed as a concept primarily because it encourages the low growth value investing I referred to. I hold a good mixture , probably erring on the higher growth end of things and do not chase yield. Your final comment is much nearer to my practice.

Dod

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Re: Income strategy for accumulation

#459079

Postby dealtn » November 18th, 2021, 1:14 pm

88V8 wrote:
Alaric wrote:
Arborbridge wrote:HYP is an income provider, that's all. If you want to build a pot, go for ideas around high growth: not HYP.

It's odd though that some or many of the more vociferous defenders of the HYP strategy are in fact pot builders, as evidenced by the frequent discussions of top ups. Surely their benchmark should be size of pot whether driven by accumulated and reinvested dividends or by growth. They can also be indifferent to dividend cuts and cancellations where someone relying on dividends for living expenses would not be,

Speaking for myself, the pot building is a by-product of reinvesting surplus income.
TJH as a well-documented example, builds his pot and improves the overall yield through top-slicing and reinvestment. Again though, I suspect it's a by-product.



it seems odd, to me at least though, that such HYPers, that have "surplus income" limit their potential investments to a small niche of UK based High Income shares in that case.

Having a strategy with a portfolio selected across a broader, more diversified, set of shares that deliver a better proxy for required income, would do the job in a much better way.

Arborbridge
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Re: Income strategy for accumulation

#459084

Postby Arborbridge » November 18th, 2021, 1:51 pm

Alaric wrote:
Arborbridge wrote:HYP is an income provider, that's all. If you want to build a pot, go for ideas around high growth: not HYP.


It's odd though that some or many of the more vociferous defenders of the HYP strategy are in fact pot builders, as evidenced by the frequent discussions of top ups. Surely their benchmark should be size of pot whether driven by accumulated and reinvested dividends or by growth. They can also be indifferent to dividend cuts and cancellations where someone relying on dividends for living expenses would not be,


Point of order, m'lud. Topping up is not evidence for a HYPer being a pot builder. I dismiss that completely.
Topping up has several possible functions unrelated to pot building, as I expect you know. It's a mechanism for keeping a balanced portfolio, and also re-investment of the safety margin content (undrawn income, which is part of the safety system). I top up, and it has nothing to do with pot building - I am living on my income now, not building a pot.

Arb.

88V8
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Re: Income strategy for accumulation

#459126

Postby 88V8 » November 18th, 2021, 5:21 pm

dealtn wrote:it seems odd, to me at least though, that such HYPers, that have "surplus income" limit their potential investments to a small niche of UK based High Income shares in that case.
Having a strategy with a portfolio selected across a broader, more diversified, set of shares that deliver a better proxy for required income, would do the job in a much better way.

Perhaps. For me on higher rate tax, there is merit in using one's CGT allowance - which I do - and even merit in going into CGT having regard to the lower tax.
So it might be a means of wringing the nth degree of money out of the portfolio, if one needed to do that.

But then we're back to the relative reliability of divis/coupons vs the unpredictability of capital gains.

Perhaps you should start a demo HYPish, then in 21 years we could admire or pick holes in it.

V8

tjh290633
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Re: Income strategy for accumulation

#459206

Postby tjh290633 » November 19th, 2021, 10:06 am

xeny wrote:
88V8 wrote:It's of interest, if at all, as I begin to contemplate the chunk ultimately liable to be stolen by the govt unless I leave it to charity rather than relatives, but on the other hand I shall not be here to know about it.



I'm somewhat philosophical about tax, but isn't a potential benefit of HYP likely to be that it is easier to make clear "gifts from income" which helps with this problem?

It is certainly a consideration. My approach is to use Direct Debits to make monthly gifts to my grandchildren. Then there is no question of whether they come from income or not. HYP income provides a further buffer if needed.

I am happy spending money on house improvements or holidays, for example, knowing that 40% of that is not going to end up in the government's hands.

TJH

xeny
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Re: Income strategy for accumulation

#459276

Postby xeny » November 19th, 2021, 1:14 pm

tjh290633 wrote:holidays, for example, knowing that 40% of that is not going to end up in the government's hands.


:lol: My Mum and I have enjoyed some incredible trips with a small travel firm. We knew the operator/owners well enough we could joke with them that they were at a 40% discount.

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Re: Income strategy for accumulation

#459311

Postby dealtn » November 19th, 2021, 3:11 pm

88V8 wrote:
dealtn wrote:it seems odd, to me at least though, that such HYPers, that have "surplus income" limit their potential investments to a small niche of UK based High Income shares in that case.
Having a strategy with a portfolio selected across a broader, more diversified, set of shares that deliver a better proxy for required income, would do the job in a much better way.

Perhaps. For me on higher rate tax, there is merit in using one's CGT allowance - which I do - and even merit in going into CGT having regard to the lower tax.
So it might be a means of wringing the nth degree of money out of the portfolio, if one needed to do that.

But then we're back to the relative reliability of divis/coupons vs the unpredictability of capital gains.

Perhaps you should start a demo HYPish, then in 21 years we could admire or pick holes in it.

V8


I think you are missing my point.

One of the claimed benefits of this approach is its simplicity. I don't disagree. But many, and particularly with respect to reinvestment, are making this more complicated when a simple standalone approach could be adopted that delivered the required income (not surplus income that requires additional reinvestment) with a lower yield. Furthermore allowing lower yield, sufficient to deliver the required, and not surplus, income allows for greater diversification away from a relatively small niche of high yielding, large, UK listed equities.

It isn't a constructive point about wringing extra money/growth/total return out of the portfolio. At no point have I introduced the concept of Capital Gain. or its relative unpredictability versus that of dividends. Perhaps you need to reread the OP and the Title (and the Board we are on) and your initial post. Your claim was your pot building was as a result of surplus income received. That can be resolved relatively easily by adopting an alternative approach.

I can't see the point in starting a demo portfolio. I am not trying to convince others of any particular strategy. I can easily construct and backtest many alternatives, including HYP ones if that's useful though. Many of which will underperform HYP1 if that's important to you. I can't see how that helps anyone that understands Survivor or Confirmation Bias though.

88V8
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Re: Income strategy for accumulation

#459505

Postby 88V8 » November 20th, 2021, 10:21 am

dealtn wrote:I think you are missing my point.
Perhaps you need to reread the OP and the Title (and the Board we are on) and your initial post. Your claim was your pot building was as a result of surplus income received.

Errm, it isn't a claim. That's how it is. A by-product.
However, I have taken on board the point you've made elsewhere that excess income triggers unnecessary tax events.
I haven't actually done anything about it, but I have taken it on board.

And you're right, if I re-read the OP what strikes me is the eccentric decision to criticise an income strategy because it may happen to produce some capital growth.
But I think my initial response to that aspect of the OP can stand.

Now if it had been a criticism of the fact that some dividend generators have eaten one's capital... BATS, CSN, HFEL... that would be entirely valid, but that wasn't the point being made, and anyway nothing's perfect all the time.

V8

Arborbridge
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Re: Income strategy for accumulation

#460106

Postby Arborbridge » November 22nd, 2021, 1:46 pm

dealtn wrote:
One of the claimed benefits of this approach is its simplicity. I don't disagree. But many, and particularly with respect to reinvestment, are making this more complicated when a simple standalone approach could be adopted that delivered the required income (not surplus income that requires additional reinvestment) with a lower yield. Furthermore allowing lower yield, sufficient to deliver the required, and not surplus, income allows for greater diversification away from a relatively small niche of high yielding, large, UK listed equities.



that's a worthy point to make. I hadn't "verballised it" to myself, but it is something I have done without making much of a thing about it. For example, by having some lower yielding ITs. I've also written occasionally, that when one's income is sufficient, then adding a slightly lower yield choice still adds income at (probably) lower risk, and may be no bad thing.

However, the fact remains that for some of us, unless our pension pot provides a certain income, it won't be enough to live on, and some of us prefer that to be produced by the yield.

Arb.

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Re: Income strategy for accumulation

#460126

Postby Alaric » November 22nd, 2021, 3:56 pm

88V8 wrote:And you're right, if I re-read the OP what strikes me is the eccentric decision to criticise an income strategy because it may happen to produce some capital growth.


That's not really what I'm saying. I'm pointing out the apparent eccentricity for a pot builder (someone NOT taking any income) of ranking potential dividends above potential capital growth in their share selection when the effect on their aggregate wealth is the same.

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Re: Income strategy for accumulation

#460272

Postby Charlottesquare » November 23rd, 2021, 10:48 am

Alaric wrote:
88V8 wrote:And you're right, if I re-read the OP what strikes me is the eccentric decision to criticise an income strategy because it may happen to produce some capital growth.


That's not really what I'm saying. I'm pointing out the apparent eccentricity for a pot builder (someone NOT taking any income) of ranking potential dividends above potential capital growth in their share selection when the effect on their aggregate wealth is the same.


They may not have the same impact on aggregate wealth. The one plus point about dividends is they may permit the portfolio holder to routinely adjust their wealth allocation across the investments (without possibly needing to make sales), now this can be a positive or a minus, whilst it may reduce imbalance and increase diversification it may also reduce performance by not backing winners as strongly were the winning entity's results not to be distributed.

I personally forget about individual holding yields, I buy some with high yields, some with no yields, but overall try to target circa 3.5% across the portfolio (which is not very high and certainly does not qualify as High Yield or as an income strategy but does permit me to slot things like SMT, Polar, Berkshire into my portfolio.)

88V8
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Re: Income strategy for accumulation

#460614

Postby 88V8 » November 24th, 2021, 5:00 pm

Alaric wrote:
88V8 wrote:And you're right, if I re-read the OP what strikes me is the eccentric decision to criticise an income strategy because it may happen to produce some capital growth.


That's not really what I'm saying. I'm pointing out the apparent eccentricity for a pot builder (someone NOT taking any income) of ranking potential dividends above potential capital growth in their share selection when the effect on their aggregate wealth is the same.

Ahh, that's different.
Building the pot pre-retirement.
I agree that HYP is probably not the best way.

Imv, if one is going to adopt HYP as the income source when one retires, one should switch into the divi shares/bonds a couple of years ahead of retirement, so that one can become accustomed to the management process and the lumpiness of the income.

But to build up the pot, perhaps Growth shares or ITs would be better. I say 'perhaps' because divis are reasonably certain, but growth crucially depends on where one starts in the cycle, and one will not know that until afterward.

V8

BT63
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Re: Income strategy for accumulation

#460669

Postby BT63 » November 24th, 2021, 7:26 pm

Alaric wrote:......I'm pointing out the apparent eccentricity for a pot builder (someone NOT taking any income) of ranking potential dividends above potential capital growth in their share selection when the effect on their aggregate wealth is the same.


Many years ago, it was more often than not the case that a selection of high-yield shares (with a few simple filters*) outperformed their index for both capital and income.
These days it seems to be more random.

*
It has been a while, but filters might be something along the lines of starting with the FTSE 100, rank by yield, eliminate any with an abnormal yield due to a special dividend etc, eliminate the very highest-yielding companies, then choose one company per sector from what remains until you have satisfied yourself that you have a diverse enough range of shares.
In the past, it was typically the very highest yielding shares which turned into yield traps or worse.

Right now, a quick, half-hearted glance at the FTSE 100 looks like it would produce a list something like this:
Aviva
BAE Systems
Vodafone
BP
Glaxo
SSE
UU
Unilever
Land Securities
Sainsbury's
Johnson Matthey

Disclaimers:
I haven't studied the FTSE's high-yielders much for many years and only took a quick look at the FTSE 100 so the list has been sloppily created and probably isn't 100% true to the method I described.
I have large holdings in Glaxo, SSE, Sainsbury's. I also hold (and very much like) Imperial which were eliminated from the method I described due to being among the very highest yielders.

Alaric
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Re: Income strategy for accumulation

#460700

Postby Alaric » November 24th, 2021, 9:50 pm

BT63 wrote:In the past, it was typically the very highest yielding shares which turned into yield traps or worse.


In 2020 the COVID crisis gave Companies, who really couldn't afford their dividends, an opportunity to cancel, suspend or cut them. Everyone was doing it so individual companies didn't stand out. That reduced the running yields where the share price had reflected a lack of confidence in the Company and its ability to maintain dividends. So perhaps there are now fewer dogs towards the top of the yield list.

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Re: Income strategy for accumulation

#460873

Postby 88V8 » November 25th, 2021, 3:12 pm

Alaric wrote:In 2020 the COVID crisis gave Companies, who really couldn't afford their dividends, an opportunity to cancel, suspend or cut them. Everyone was doing it so individual companies didn't stand out. That reduced the running yields where the share price had reflected a lack of confidence in the Company and its ability to maintain dividends. So perhaps there are now fewer dogs towards the top of the yield list.

Agreed.
Fewer, with less cover and slower rates of rise.
When Shell cut its divi it sent a shudder through the whole HYP edifice.

It's possible to construct an HYP now, but not as easy as it was even a few years ago.
Our portfolio has evolved into a mix of HYP, Fixed Interest and ITs with the latter currently receiving most of my top-ups.
All three legs of our portfolio are however better than an annuity unless one really has no interest in investment as a hobby.

In terms of accumulation, yesterday for the first time ever, I bought a low-yielding IT with a view to 'growth' and a lean towards the US.... never let it be said that I pay no heed to alternative Lemon philosophies. If it doesn't work out I shall know who to blame. :)

V8


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