Dividend Yield on FTSE 100

[tjh290633]

Can I point out that the FTSE350HY and FTSE350LY indices started on the same day with the same value. If you compare HIX and LIX you will see that they diverged, HIX drawing ahead. The TR versions diverged more, due to the effect of dividends. Currently HIX TR is 7089 and LIX TR is 4993.

More recently there has been convergence and reversal of positions, due to normal market effects, but the outperformance of the higher yield index in terms of total return is incontrovertible proof.

Now can we stop this spat?

TJH

[Alaric]

Your approach to 'highlighting the risks' would, I'd suggest, be very much improved if you can point out the portfolio-level failures that taking such an investment approach has delivered, and yet we're still waiting for you to point out a single example of that, and that is whilst being regularly presented with examples where people are quite happy with the performance of such a strategy at portfolio level....

There have been contributors to these boards who have abandoned their attempts to run a HYP when their stock selections the method steered them into, such as Carillion, turned out to be failures.

Those only looking for income to spend can make it work, since they can be indifferent to capital gain or loss. It baffles me though, why, when using the dividend income for reinvestment, it isn't a concern if the value of the portfolio the reinvestment is being added has declined.

In my mind if you invest in shares which command higher dividend yields than the market averages and the shares do at least as well as market averages in capital terms, then the method of stock picking is showing superior returns to the average. Can it be as simple as sorting by yield?

I'm not convinced by the concept of a "sustainable" dividend either. Directors can "sustain" a dividend for years provided the Company has reserves of retained earnings or even just sufficient borrowing powers.

[Lootman]

Can I point out that the FTSE350HY and FTSE350LY indices started on the same day with the same value. If you compare HIX and LIX you will see that they diverged, HIX drawing ahead. The TR versions diverged more, due to the effect of dividends. Currently HIX TR is 7089 and LIX TR is 4993.

More recently there has been convergence and reversal of positions, due to normal market effects, but the outperformance of the higher yield index in terms of total return is incontrovertible proof.

It is certainly incontrovertible proof that, for that time period, for UK large and mid caps, HY beat LY.

It is not incontrovertible proof that that is some kind of systemic, structural truth that will always apply. And the fact that you see a reversion to the mean might be indicative of that. The question then is whether that reversion will stop short of parity, reach parity and then stop, or swing below parity?

I would not claim that HY beats LY as some kind of timeless rule. HY means higher risk which means the possibility of out-sized returns if things move in your favour along with under-sized returns if the market decides to punish risk rather than reward it. It seems here that some peoples' HYP's have out-performed (e.g yours, HYP1, Ian's) and probably for different reasons. But there also can be little doubt that others have had bad luck with HYP, perhaps selecting too many like Carillion - we've certainly seen some spectacular failures in recent years, including banks, retail and support services.

Personally I feel more comfortable with a more globally diversified approach, and with a focus on dividends that are well-covered and growing, rather than on any particular level of dividend yield.

[IanTHughes]

Personally I feel more comfortable with a more globally diversified approach, and with a focus on dividends that are well-covered and growing, rather than on any particular level of dividend yield.

Just like my HYP strategy in fact.

Of course in my case the Globalisation is restricted to that offered by the international earnings of some of my HYP constituents but I am definitely in agreement with you about dividends that look able to grow! And with regard to not simply relying on "any particular level of dividend yield", well that is part and parcel of the HYP Strategy, as I am sure you already know.


Ian

[Lootman]

Personally I feel more comfortable with a more globally diversified approach, and with a focus on dividends that are well-covered and growing, rather than on any particular level of dividend yield.

Just like my HYP strategy in fact.

Of course in my case the Globalisation is restricted to that offered by the international earnings of some of my HYP constituents but I am definitely in agreement with you about dividends that look able to grow! And with regard to not simply relying on "any particular level of dividend yield", well that is part and parcel of the HYP Strategy, as I am sure you already know.

There are a couple of ways in which a truly global strategy is different from the globalisation that is achieved by investing in UK businesses with a global footprint:

1) There are some important global sectors that do not have largecap representation in the UK. Examples might be IT, biotech, autos, steel, chemicals, heavy industry/manufacturing etc.

2) The UK, like all countries, may suffer single-country risks such as tax risk, regulatory risk and (topically) nationalisation risk.

The other distinction I'd make is on growing dividends versus high yield. A dividend that is low but is growing strongly is attractive to me, but presumably not so much to you. In the longer term it might be interesting to compare the total income received by each.

[Bubblesofearth]

What is an intriguing thought is that if it were possible to step into a time machine, and create HYPs each year for the last fifty years or so and today know the outcome, I am almost certain that a pattern of mean reversion would be shown.

Mean reversion is IMO a fallacy that leads to risky investment decisions. Over long periods of time divergence within and between asset classes is more likely the norm. The annual Barclays equity/gilt studies have shown how equities have massively outperformed cash and bonds over the long term. Siphoning money between these asset classes in a belief in mean reversion would have been a losing strategy compared to buy and hold.

Likewise within equities. It is pretty well established that the bulk of market gains derive from a relatively small sub-set of outperforming shares. A buy and hold strategy would allow this evolution to take place whilst a belief in mean reversion (between individual equities) would not only invoke transaction costs but would have likely been a comparatively poorer strategy.

From the little research I've done I believe mean reversion also fails at the Global level. Would you have wanted to siphon money away from economies that went on to be successful and into those that became basket cases?

IMO for the long-term investor diversification and then leaving well alone works within an asset class, between asset classes and Globally.

BoE

[Arborbridge]

There have been contributors to these boards who have abandoned their attempts to run a HYP when their stock selections the method steered them into, such as Carillion, turned out to be failures.

You keep singling out a particular company which went belly up - I think you previously mentioned its shareholders might have been the victims of fraud - so this is a rather unusual case from which you cannot generalise. By highlighting the very few disasters such as this, you run the risk of contributing to the numbers of people who abandon their HYPs, perhaps prematurely.

In picking out this instance once more you fail to balance the comment by ignoring the portfolio effect and the fact that this event was unusual. In my own case, although I've had a couple of disasters and near misses, my HYP continues to provide a high and growing income.

As for those who are really only interested in TR, perhaps we see more "eye to eye" because I would not suggest HYP is necessarily the best method to grow capital. Whenever I've compared the average TR of equity income funds with equity growth funds, the latter usual wins. This is a rough and ready way of showing that if one needs TR, high yield is possibly not the way to go. But if you need income in retirement - it is, assuming you do not want the caper of asset harvesting.

Arb.

[Alaric]

But if you need income in retirement - it is, assuming you do not want the caper of asset harvesting.
.

I wouldn't disagree with that. But why concentrate on dividend income if all you use it for is to reinvest?

[Lootman]

if you need income in retirement - it is, assuming you do not want the caper of asset harvesting.

Living off only dividends might be desirable but it is also a luxury. It assumes that your capital sum is large enough to be able to get away with that.

And if that sum is only large enough because you have to hold the very highest yielding shares, with the additional risks of that, then I'm not sure it's a wise move.

There is an entire class of people who can maybe afford to retire if they draw down capital as well, but do not have enough to only live off their dividends. And with a generous annual CGT-free allowance, why not "harvest" a little each year?

[Arborbridge]

if you need income in retirement - it is, assuming you do not want the caper of asset harvesting.

Living off only dividends might be desirable but it is also a luxury. It assumes that your capital sum is large enough to be able to get away with that.

And if that sum is only large enough because you have to hold the very highest yielding shares, with the additional risks of that, then I'm not sure it's a wise move.

There is an entire class of people who can maybe afford to retire if they draw down capital as well, but do not have enough to only live off their dividends. And with a generous annual CGT-free allowance, why not "harvest" a little each year?

I agree, each person must decide what to do from his/her personal circumstances. In my case CGT just does not come into the equation because everything is in a SIPP or ISAs. Many "middle earners" will also be in this position, I guess.

And, yes one could run down capital, but that seems to be an irreversible gamble and not one I would contemplate at present - perhaps never. My capital is my seed corn for future security and not something to be sold off lightly.

As for the risk of high yield - I do agree, but some of us had no choice. It's well and good being sanguine about living on a 2% yield, but when I retired, I need something of the order or 4%-5% to make it viable. Fortunately, it was viable and HYP offerred a good method for me to generate the necessary income. My capital invested has increased thanks to re-investment, so matter are a little better than when I started ten years ago - despite some bum investments and the biggest crash for a generation. I reckon my HYP has been fairly well stress tested!

Arb.

Arb.

[Arborbridge]

But if you need income in retirement - it is, assuming you do not want the caper of asset harvesting.
.

I wouldn't disagree with that. But why concentrate on dividend income if all you use it for is to reinvest?

Unbelievable

[88V8]

But if you need income in retirement - it is, assuming you do not want the caper of asset harvesting.
.

I wouldn't disagree with that. But why concentrate on dividend income if all you use it for is to reinvest?

Well one does need to keep topping up the income at least to match inflation, and we can no longer rely on rising divis to do that job.

But I agree that there is less incentive to chase dividend income once one is into HRT. One begins to feel that one may as well spend more rather than hand a large chunk to the Gubmt, especially if it's a Gubmt that one did not elect pursuing aims with which one does not agree.

V8

[Alaric]

But I agree that there is less incentive to chase dividend income once one is into HRT.

The changes in dividend tax rules have made chasing dividend income outside of ISAs and SIPPs rather less attractive as against seeking capital gains than they used to be.

[petronius]

So, if one is happy with an annual dividend yield of 4.5%, wouldn't a FTSE 100 index tracker be a reasonable choice?

[Lootman]

So, if one is happy with an annual dividend yield of 4.5%, wouldn't a FTSE 100 index tracker be a reasonable choice?

Back in the day there was a rule of thumb that if the FTSE-100 yielded more than 3% it was a buy, and less than 3%, it was a sell. And that was back when interest rates were higher.

It's astonishing to me that the FTSE-100 now yields that much, especially relative to gilts. Usually we only see that at the bottom of bear markets rather than after a ten year bull market.

So on the one hand I agree with you - why dither about buying individual HY shares when you can just buy the index, pay 0.06% a year or so with something like VUKE and go and do some gardening?

On the other hand, could it be that such generous yields are unsustainable, especially when you look at how scantily covered they are?

I've been reducing my exposure to UK Inc. for years now and still see no reason to reverse that.

[Bagger46]

The trouble about just settling for the FTSE, ie ISF or similar, is that it is so easy to build up a portfolio today with better yield and even throw in some more serious growth potential.

Here is an equal weight example(not any kind of recommendation mind, just a quick play on possibilities today), just took a few minutes to build, I would bet that on a 10 year view it would trounce the FTSE ETF, for capital, yield and divi growth:

EPIC Yield
ULVR 3.04%
LGEN 6.00%
GSK 4.66%
RDSB 6.41%
HSBA 6.80%
PHNX 6.51%
MNDI 4.20%
HFEL 6.35%
IPU 3.34%
SMT 0.61%

Average yield 4.79%

Bagger

Disc We hold all these, and many more over our three portfolios(our two ISAs and my taxed effort), which are much less UK oriented overall. My betting is rubbish mind you because I don't think I have 10 years left in this world, but seven is what I permanently hope for as I dish out dollops to the grandkids!

[Alaric]

It's astonishing to me that the FTSE-100 now yields that much, especially relative to gilts. Usually we only see that at the bottom of bear markets rather than after a ten year bull market.

The FTSE-100 is weighted by capitalisation, so the performance of the top 10 is going to have a considerable effect.

The top 11 as per the dividenddata site.

1 HSBA HSBC Holdings £116,483.19 4 6.80% HSBA
2 BP. BP £101,888.39 4 6.32% BP.
3 RDSA Royal Dutch Shell A £98,373.17 4 6.36% RDSA
4 AZN AstraZeneca £96,857.92 2 2.96% AZN
5 GSK GlaxoSmithKline £85,520.01 4 4.66% GSK
6 RDSB Royal Dutch Shell B £84,929.88 4 6.41% RDSB
7 DGE Diageo £72,959.56 2 2.20% DGE
8 BATS British American Tobacco £66,016.88 4 7.03% BATS
9 ULVR Unilever £53,321.35 4 3.04% ULVR
10 RIO Rio Tinto £52,319.17 2 6.08% RIO
11 LLOY Lloyds Banking Group £42,021.50 2 5.48% LLOY

A weighting of Companies who hold dividends or increase them modestly rather than massively.

By contrast the yield on the FTSE-250 is much lower (excluding specials 2.95% v 4.42% as of writing)

[88V8]

....the yield on the FTSE-250 is much lower (excluding specials 2.95% vs 4.42%

Now there's an interesting metric.
Even less reason to fish in the riskier 250 pool.

Now Luni always warned us against specials, they can be fickle. But overall the 100 incl specials, yields 4.95%. If one could get say 4.9% from a tracker, that would be nice.

V8

[Alaric]

If one could get say 4.9% from a tracker, that would be nice.

The Vanguard 100 Tracker is a full replicator, has low charges and potentially can profit from stock lending. So 4.9% would seem possible.

[kempiejon]

....the yield on the FTSE-250 is much lower (excluding specials 2.95% vs 4.42%

Now there's an interesting metric.
Even less reason to fish in the riskier 250 pool.

Now Luni always warned us against specials, they can be fickle. But overall the 100 incl specials, yields 4.95%. If one could get say 4.9% from a tracker, that would be nice.

V8

V8 it's those fickle specials. We could have got 4.9% from a tracker, the 100 yielded that last year inc specials, trouble is we don't know if there'll be as much in specials next year so I'm forecasting 4.5% for the FTSE100 yield for the next 12 months.