Does HYP require natural yield in draw-down?

[Gilgongo]

This may be a silly question since I've been building a HYP for the past 15 years to help me when I retire (I have some funds, bonds and cash too of course), but:

Given a typical 15-30 share HYP (suitably diversified), if you don't use natural yield in the de-accumulation phase (ie draw down), how do you decide which shares to sell down per year/quarter whatever?

Or does the HYP approach basically force you to use its natural yield?

[Dod101]

I live off my dividends so I have never had to try to answer your question. If I did have to though, I would take my least attractive share and sell some of it I suppose. I, in any case, rank my shares by what I suppose I would call 'desirability'. Starting off with the few that I am likely to retain in perpetuity, I then rank the others and will eventually get to one or two that I would not mind losing. It is up to you how you make that judgement. In my case, it might be performance but not necessarily. It might be that I have gone off the management, the industry is not looking so good or any number of other factors. This has nothing to do with the balance of the portfolio, because that is an ongoing 'maintenance' issue; it is desirability that I am trying to judge.

Dod

[kempiejon]

This may be a silly question since I've been building a HYP for the past 15 years to help me when I retire (I have some funds, bonds and cash too of course), but:

Given a typical 15-30 share HYP (suitably diversified), if you don't use natural yield in the de-accumulation phase (ie draw down), how do you decide which shares to sell down per year/quarter whatever?

Or does the HYP approach basically force you to use its natural yield?

Not everyone has the luxury of being able to afford the natural yield and would intend to leave a smaller pot on expiration than commencement of taking income. I'd probably sell the lower yielders or the slowest growers of yield first - preserving more natural yield. Anything outwith an ISA or SIPP I'd bank capital gains too.

[Gilgongo]

OK thanks - I thought as much!

I ask mainly as I'm trying to work out what formula to use for draw down across my entire portfolio, of which my HYP is a part. So perhaps the best approach might be to treat the HYP as simply a dividend-producing machine, and occasionally respond to stuff like corporate actions or obvious trouble with any of the constituent shares as and when they arise.

Then if I had to sell down the capital, I'd look at selling those which had the reverse of typical buying candidates (ie cutters/non-rising yield and/or low cover, high debt etc.)

Otherwise, would the alternative be to simply sell them all in retirement and buy a passive accumulating tracker and just sell units from that?

[Dod101]

OK thanks - I thought as much!

I ask mainly as I'm trying to work out what formula to use for draw down across my entire portfolio, of which my HYP is a part. So perhaps the best approach might be to treat the HYP as simply a dividend-producing machine, and occasionally respond to stuff like corporate actions or obvious trouble with any of the constituent shares as and when they arise.

Then if I had to sell down the capital, I'd look at selling those which had the reverse of typical buying candidates (ie cutters/non-rising yield and/or low cover, high debt etc.)

Otherwise, would the alternative be to simply sell them all in retirement and buy a passive accumulating tracker and just sell units from that?

I cannot answer your specific question but I think you are absolutely right in your earlier comments. There are no secrets I am afraid.

Dod

[Dod101]

Not everyone has the luxury of being able to afford the natural yield and would intend to leave a smaller pot on expiration than commencement of taking income. I'd probably sell the lower yielders or the slowest growers of yield first - preserving more natural yield. Anything outwith an ISA or SIPP I'd bank capital gains too.

If only we knew when we were going to expire! I would love to leave a smaller pot on my expiration than commencement as well, but although a number of my friends have already expired, I have quite a number who are still living 20 years older than me and even more heading that way. As it is, the thing is that as the stockmarket on the whole has risen over the years, I am now better off capitalwise than I have ever been but so what? It is the yield that gives me my income, not capital gains which are by their nature are one off. The beauty about dividends is that they tend to recur.

Dod

[tjh290633]

The solution might be to rank your share by yield. Then establish a level of yield which would allow you to live off the income generated. Now sell off all shares below that level and reinvest, either across the remaining shares, or in a collective investment with the desired yield.

This should provide more income than is actually required, and so the excess income can be reinvested to provide some more future proofing of the portfolio.

TJH

[Arborbridge]

Not everyone has the luxury of being able to afford the natural yield and would intend to leave a smaller pot on expiration than commencement of taking income. I'd probably sell the lower yielders or the slowest growers of yield first - preserving more natural yield. Anything outwith an ISA or SIPP I'd bank capital gains too.

If only we knew when we were going to expire! I would love to leave a smaller pot on my expiration than commencement as well, but although a number of my friends have already expired, I have quite a number who are still living 20 years older than me and even more heading that way. As it is, the thing is that as the stockmarket on the whole has risen over the years, I am now better off capitalwise than I have ever been but so what? It is the yield that gives me my income, not capital gains which are by their nature are one off. The beauty about dividends is that they tend to recur.

Dod

My aim is to live on less than the natural yield and see the capital pot grow. I haven't figured in the need to reduce to zero on the day I die, in fact quite the opposite. I intend that my SIPP will be willed to my children and the bigger it is, the better.

Arb.