Income Investment Trusts - are these the times they (relatively...) shine?

[Itsallaguess]

At the start of this thread, I asked this question for those seeking regular income from High Yield Investment Trusts -

"Is this the time for Investment Trust income-reserves to come into play?"

To help answer that, I thought it might be worth keeping track of a few categories of popular income-related Investment Trusts, and seeing how their full-year dividend payouts might be affected from their last reporting period to the next full one.

Given that there seems to be many UK-market single-company shares reducing or cutting their dividends at this time, with some doing so from a self-interested perspective, and with some being 'influenced' to do so by a number of UK regulatory bodies, I thought the first category of income-related Investment Trusts that would be interesting to track would be the 'UK Equity Income segment' as defined by the AIC.

I've taken a broad sample of income-Investment Trusts from the 'UK Equity Income' section of my April 2020 AIC-data thread (https://www.lemonfool.co.uk/viewtopic.php?f=31&t=22720), and have compiled some dividend information from their last set of full-year results, to help us compare the ongoing dividend announcements as we move forward through this difficult economic period...

Just as a mid-term update on this thread, we're still waiting on results from LWDB, and that's probably going to take a while to come through with the December year-end date, but I thought it might be interesting to see how things stand currently.

Much has been made of the 25% cut in the Temple Bar dividends, but apart from that single IT in this tracked list from earlier in the thread, all the others have had some sort of yearly rise from the previous full-year 2019 dividend, with a couple of very modest rises but also a few others where an acceptable up-tick in yearly dividends is probably most welcome in these very challenging times -



It's early days yet, and we'll see how things progress into next year and onwards, but as a snapshot of the Investment Trust 'UK Equity Income' sector, those dividend results look very encouraging indeed at this particular time....

Cheers,

Itsallaguess

[88V8]

Where necessary, they've used their reserves for the intended purpose of bridging the divi gap.
Good.

And thankyou to IAAG and those others who have encouraged my move into ITs.

V8

[ReformedCharacter]

I reinvest accumulated dividends and one of the advantages of ITs for me is that I have had a unbroken stream of IT dividends to reinvest while the markets have been cheaper which hasn't been the case with many of my individual shareholdings. Overall, it looks as if my dividend income is down c. 14% this year.

RC

[tikunetih]

Not to be a party pooper, but...

Presumably, these ITs shine most in the eyes of those who haven't fully internalised the accounting concept of reserves, or the fungibility of money w.r.t capital/income for that matter

Where's the appeal in someone else periodically selling some of your stocks and handing you the proceeds just so that you can go and buy stocks, suffering the round trip costs involved in such a process?

As per discussions earlier in the year on this subject, I remain convinced (not least by the marketing emphasis placed on this reserves feature by the ITs themselves - "when the ducks quack feed them"), that many, probably most, investors in these ITs don't really understand reserves accounting and as such are operating under an illusion.

Whatever floats your boat, I guess.

[nmdhqbc]

I reinvest accumulated dividends and one of the advantages of ITs for me is that I have had a unbroken stream of IT dividends to reinvest while the markets have been cheaper which hasn't been the case with many of my individual shareholdings. Overall, it looks as if my dividend income is down c. 14% this year.

RC

If the IT's had decided to not use the reserves it would have had the same effect. Instead of selling some assets at the low price to pay the dividend and then you buying more shares of the IT it would simply not have sold the assets keeping the NAV higher than it otherwise would have been. Would also have saved the stamp duty and broker fee.

I guess it's good if you wanted to reallocate to different trusts or if the trusts were at a discount when you re-invested.

[Itsallaguess]

Whatever floats your boat, I guess.

And that's the great thing really, isn't it - we're all allowed to find our own ways with these things...

For me, I'm happy with income-investing as a concept and strategy, but where I started with a more vanilla HYP approach, I was never really happy with the income and capital volatility that seemed to implicitly come with it, so I've been glad to have found that I can stick with an overall income-strategy that I do like, where a slightly lower overall yield seems to generally come with a much lower level of underlying volatility, and that's by turning to income Investment Trusts...

This thread opened with me asking the following in March of this year -

The reason I've started this thread is to consider if it's during these periods of market volatility that the 'income-reserve' aspect of income-related Investment Trusts might come into play, and provide the sort of benefit that might enable income-IT's to ride out these periods in a slightly different way to 'single-share' income-investments.

Hopefully the recent update to a table of 2019/2020 dividend data a few posts back has started to answer that question, and current indications look to be able to answer it positively at this point in time.

Of course there's a million other ways people can invest and take income, from dividends or even capital itself, and no-one is denying that's the case, or suggesting that Investment Trusts are the be-all and end-all - we're simply asking ourselves if there's a less volatile way to approach an income-strategy that might perhaps be simple enough for the average man-in-the-street to be able to both carry out as an investment-strategy, and live with to help pay towards retirement...

I should say here that since this thread started, I've seen some strong evidence elsewhere that the income-IT approach is indeed likely to deliver on the lower-volatility front over the long term, so I'll leave a link here to that post, just so there's a cross reference to one of the single best long-term income-comparison charts I've ever seen on these boards -

https://www.lemonfool.co.uk/viewtopic.php?f=31&t=26214&start=120#p358283

That pink line on the above chart? That's what floats my boat....

Cheers,

Itsallaguess

[kempiejon]

I reinvest accumulated dividends and one of the advantages of ITs for me is that I have had a unbroken stream of IT dividends to reinvest while the markets have been cheaper which hasn't been the case with many of my individual shareholdings. Overall, it looks as if my dividend income is down c. 14% this year.

RC

In these circumstances one can take advantage of the low prices in those individual shares or put the money back into those ITs running down their income reserves or selling holdings. I have been mostly investing new money into individual shares but some dividends into a global tracker too.

[Itsallaguess]

Where's the appeal in someone else periodically selling some of your stocks and handing you the proceeds just so that you can go and buy stocks, suffering the round trip costs involved in such a process?

I wanted to come back to the above point separately here, because this straw-man is rolled out with such regularity that I think it needs some focus on its own...

If someone is using a portfolio of income-related Investment Trusts to help to provide their retirement income, the above statement simply doesn't apply anyway, because there would be no repurchasing going on - the dividends would largely be getting spent as income...

If someone is still in the building phase, then yes, there will be some degree of repurchasing going on, but that building-phase is highly unlikely to *only* be getting funded from received-dividends, and it's *highly* likely that there will be other external savings also being invested as part of that 'building phase' programme, and as such, it is *highly likely* that even ignoring any ongoing 'received dividends', there will be ongoing broker purchase costs as part of those building-phase purchases *anyway*, the same as *any other* 'building phase' investment strategy, and all that any additional 'received dividends' capital is going to do is to add an extra very small cost of additional stamp-duty to those 'building-phases' purchases, so we can most probably *completely ignore* any actual trading-costs as part of the above straw-man statement, because those would be likely to be happening anyway, when continuing to invest 'saved capital', and not just 'received dividends'...

That's certainly been the case with me over the years, as I'm still working and still in the portfolio-building/management phase of my income-investment journey, and whilst I do acknowledge the slight drag that re-cycled stamp-duty might add onto those dividends received during this building phase, I personally think that's a really tiny price worth paying to enable me to see the very long-term evolution of a mature 'dividend-delivering' income-strategy that hopefully one day, with a fair wind, might have its 're-investment' switch flipped over to the 'deliver income' position, and I can, hopefully with some confidence gained from the long-term use and observation of my income-strategy, start to use the proceeds from it to help fund my retirement phase of life...

So with the above explained, and getting back to the original straw-man statement - the *real world* additional costs of me recycling ongoing 'received dividends' from my income-IT's consists purely of the additional 0.5% Stamp Duty Reserve Tax on those received dividends, and the recycling cost is therefore precisely 0.5%, which is a 'recycling cost' so low in reality that we may as well simply *ignore it*, along with any straw-man arguments trying to convince us that it's really an issue worth worrying about at all....

Cheers,

Itsallaguess

[Dod101]

As per discussions earlier in the year on this subject, I remain convinced (not least by the marketing emphasis placed on this reserves feature by the ITs themselves - "when the ducks quack feed them"), that many, probably most, investors in these ITs don't really understand reserves accounting and as such are operating under an illusion.

Whatever floats your boat, I guess.

I would if I were you not fall into the trap of thinking that you are one of the few to understand investment trust accounting and how they deal with revenue that is surplus to their requirements in any one year 'reserve accounting' as you call it. Some apparently do not but a quite a few do and in any case it is not difficult because IT accounts are a good place to start to understand company accounts, as they are straightforward and easy to follow.

IAAG has made the point, but if you are a somewhat unsophisticated investor, and most are, including me I'd say, and living off your investment income, or needing some steady investment income to supplement other income, it is very comforting and effortless to have a steady income from a portfolio of investment trusts and whether that comes from current dividends, current dividends plus some from revenue reserves, from one or other or both supplemented by some realised capital reserves does not really matter. These are mostly used to 'bridge the gap' in current revenue at a time when current revenue may for one reason or another be insufficient to cover a steady increase in dividend. Investing is seldom black or white and everyone has different aspirations.

I have never understood why anyone building a pot from which to take future income would emphasise income shares whether they are ITs or another share and in effect do just what you have mentioned. Income ITs are usually not, in my experience, the best vehicle for doing that.

Dod

[TUK020]

Not to be a party pooper, but...

Presumably, these ITs shine most in the eyes of those who haven't fully internalised the accounting concept of reserves, or the fungibility of money w.r.t capital/income for that matter

Where's the appeal in someone else periodically selling some of your stocks and handing you the proceeds just so that you can go and buy stocks, suffering the round trip costs involved in such a process?

As per discussions earlier in the year on this subject, I remain convinced (not least by the marketing emphasis placed on this reserves feature by the ITs themselves - "when the ducks quack feed them"), that many, probably most, investors in these ITs don't really understand reserves accounting and as such are operating under an illusion.

Whatever floats your boat, I guess.

I think that's a little too black and white. It is ignoring the IT's ability to borrow to achieve the same

[dealtn]

So with the above explained, and getting back to the original straw-man statement - the *real world* additional costs of me recycling ongoing 'received dividends' from my income-IT's consists purely of the additional 0.5% Stamp Duty Reserve Tax on those received dividends, and the recycling cost is therefore precisely 0.5%, which is a 'recycling cost' so low in reality that we may as well simply *ignore it*, along with any straw-man arguments trying to convince us that it's really an issue worth worrying about at all....

All you write is sensible, however I would disagree with this little bit. For me even 0.5% is an unnecessary drag, but quite possibly not for many others. What I would say is that 0.5% compounds a lot over time. 0.5% doesn't sound much but when considered as a percentage of the income from the portfolio, rather than as a percentage of the capital, perspective might be different.

There is merit in simplicity, reduced (income) volatility, and "learning from seeing/doing" in having an income strategy during an accumulation phase as you say.

[Arborbridge]

Not to be a party pooper, but...

Presumably, these ITs shine most in the eyes of those who haven't fully internalised the accounting concept of reserves, or the fungibility of money w.r.t capital/income for that matter

Where's the appeal in someone else periodically selling some of your stocks and handing you the proceeds just so that you can go and buy stocks, suffering the round trip costs involved in such a process?

As per discussions earlier in the year on this subject, I remain convinced (not least by the marketing emphasis placed on this reserves feature by the ITs themselves - "when the ducks quack feed them"), that many, probably most, investors in these ITs don't really understand reserves accounting and as such are operating under an illusion.

Whatever floats your boat, I guess.

Illusion or not, the proof of the pudding is in the eating, and my particular results to date over ten years suggest that my IT dividend income has been more resilient and is increasing faster than the income from my HYP of directly owned shares. So whatever the ITs are doing, it seems to be working relative to what I'm doing. And the overall TR produced by my ITs is also higher than my HYP.

Whether that will carry on being the case over the next ten years I will find out*. At the moment, I see an excellent case for investing in income producing ITs and also a case for hedging my bets so that I have both pooled investments and directly owned shares.

*actually, statistically, I probably won't because I will be 85 and unlikely to stay the course

Arb.

[Itsallaguess]

So with the above explained, and getting back to the original straw-man statement - the *real world* additional costs of me recycling ongoing 'received dividends' from my income-IT's consists purely of the additional 0.5% Stamp Duty Reserve Tax on those received dividends, and the recycling cost is therefore precisely 0.5%, which is a 'recycling cost' so low in reality that we may as well simply *ignore it*, along with any straw-man arguments trying to convince us that it's really an issue worth worrying about at all....

All you write is sensible, however I would disagree with this little bit. For me even 0.5% is an unnecessary drag, but quite possibly not for many others. What I would say is that 0.5% compounds a lot over time. 0.5% doesn't sound much but when considered as a percentage of the income from the portfolio, rather than as a percentage of the capital, perspective might be different.

There is merit in simplicity, reduced (income) volatility, and "learning from seeing/doing" in having an income strategy during an accumulation phase as you say.

I agree - but on the face of the position I was replying to, which seemed to imply that costs might be much higher than that if we were only really talking about recycling dividends, and not taking into account the fact that dealing costs would more often than not be paid anyway, as part of an 'accumulation-of-saved-capital' process as well, then I did want to highlight that it's really only the 0.5% stamp-duty that we're usually considering as an 'extra' here, and not more than that in most accumulation-phase processes...

I also agree that 'something small' often compounds into 'something bigger' over long time-periods, of course, but I personally begin to see that relatively small cost as a price I'm willing to pay to enable me to see the long-term evolution of an income-strategy that can help me build confidence in its capabilities to 'deliver-to-plan' over long periods, and also the long-term steady increases in the overall 'income' that it's delivering over those timescales (whether that income is taken yet or not...), and which therefore eventually just enables me to keep an eye on the single 'payout' switch, which will be sat in the 'reinvest' position during my working lifetime, but will hopefully at some stage be confidently switched over into the 'payout' position...

I have absolutely no doubt at all that others are able to do things differently, better, and more efficiently than the processes I've described, often using different approaches at different stages and often using different underlying investments too, but I'm really quite happy to have found an income-strategy process, largely using income-IT's as a delivery mechanism for it, that feels simple to run, and much less volatile than the approach I used to use, and beyond that, so long as it's capable of persistently delivering on its remit over long periods, then that's good enough for me...

Cheers,

Itsallaguess

[tikunetih]

Re Dod's point about investor understanding of revenue reserves, then it was me who earlier in the year (April) posted to remind readers around here about what these reserves actually are (and what they are not) - because as was clear from the thread at that time a number of posters most definitely did not understand - so hopefully knowledge around these parts is now good, but in the wider world it still isn't and I know this to be the case from other investing forums etc. But that's their problem!

More broadly it's really interesting to me to see how psychologically-wedded many investors are to someone handing them a "paycheck" every month or so, ie. the attraction of so-called income portfolios, even investors who may be years or decades away from the time when they'll even draw down that income. This may be justified along the lines of an ongoing exercise in observing how and whether the income producing machine works so they feel confident about cutting over from employment income to investment income one day in the distant future. There is a logic there.

I'm a bit unusual, because I only worked until my very early 30s, and I was only a waged employee for 3 years of this working life, meaning my waged-income duration was over an order of magnitude shorter than regular people.

What this means is that I wasn't conditioned into receiving monthly paychecks in the way that nearly everyone else seems to become from decades of work and this allowed me to transition to living off investments without having to overcome any learned/conditioned mental dependency on structuring a portfolio so that it automatically churned out a wage substitute, thus freeing me up from the need for so-called income investing.

IMO this proved to be a big deal and enormously beneficial, because many - not all, but many - investments (businesses) structured towards regular income generation make relatively poorer long term investments due to the lack of internal investment (and internal compounding) that underpins very long term business success. In short, a focus on regular income generation steers people towards lower quality investments, which can become increasingly apparent with a portfolio that's held for the very long term such as for multiple decades (unless that portfolio is actively traded successfully, which is something most people are poor at and thus wisely avoid).

Hence my earlier aside re the fungibility of money re capital/income.

If I was in itsallaguess's shoes, having made a transition away from single name income stocks towards income ITs, I'd be thinking about embarking on the next stage of the journey that began freeing me from a dependency on income generating assets themselves in order to raise the quality of my portfolio and potentially its very long term resilience and returns.

Something to think about....

[Itsallaguess]

Post edit - N/A

[Itsallaguess]

More broadly it's really interesting to me to see how psychologically-wedded many investors are to someone handing them a "paycheck" every month or so, ie. the attraction of so-called income portfolios, even investors who may be years or decades away from the time when they'll even draw down that income. This may be justified along the lines of an ongoing exercise in observing how and whether the income producing machine works so they feel confident about cutting over from employment income to investment income one day in the distant future. There is a logic there.

I'm a bit unusual, because I only worked until my very early 30s, and I was only a waged employee for 3 years of this working life, meaning my waged-income duration was over an order of magnitude shorter than regular people.

What this means is that I wasn't conditioned into receiving monthly paychecks in the way that nearly everyone else seems to become from decades of work and this allowed me to transition to living off investments without having to overcome any learned/conditioned mental dependency on structuring a portfolio so that it automatically churned out a wage substitute, thus freeing me up from the need for so-called income investing.

IMO this proved to be a big deal and enormously beneficial, because many - not all, but many - investments (businesses) structured towards regular income generation make relatively poorer long term investments due to the lack of internal investment (and internal compounding) that underpins very long term business success. In short, a focus on regular income generation steers people towards lower quality investments, which can become increasingly apparent with a portfolio that's held for the very long term such as for multiple decades (unless that portfolio is actively traded successfully, which is something most people are poor at and thus wisely avoid).

Hence my earlier aside re the fungibility of money re capital/income.

Thanks for the constructive and thought-provoking engagement tikunetih.

I'm not convinced there's as much correlation as you might think between peoples general appreciation of regular monthly income, as they may have been used to whilst in a working capacity, and how some investors might then find themselves attracted to a more income-based investment strategy.

I would certainly agree with the first part of that view, because after all, the vast majority of people will go through most of their working lives being financially organised around the regular four-week or monthly drum-beat of a wage being 'delivered' to their bank accounts in the form of work-related wages, and our personal lifetimes of 'financial plate-spinning' will inevitably gain its timing from living under those wage-based circumstances for such long periods of time - that's just an inevitable part of adult life for many of us, to be honest.

But where I'd disagree would be where you then might want to use that inevitable (for many of us...) wage-based drum-beat to perhaps define 'an attraction' towards income-strategies, rather than some of the more growthy-approaches.

I disagree with that because whilst income-investments might hopefully deliver regular dividends for those that prefer them, I would think it would be really quite rare for income-investors to live 'hand-to-mouth', directly off the delivered dividends themselves as they actually land, and even then, they're never likely to even 'land' in such a fashion as to really 'allow' any sort of regular 'hand-to-mouth' usage in the first place..

So that usually means that income-investors would set up some sort of 'holding account' into which those regular dividends would be received, and where perhaps a level of 'income-buffer' is also built up to help provide some level of financial safety (a positive dividend overdraft, I suppose...), and which would only *then* provide the sort of 'pooled-cash-reserve' from which to then 'pay out' those 'regular paychecks' that you've mentioned above...

I think it's important to split those two processes up in the above descriptions, because I really don't see it being all that much different if any other investment strategies might be used to deliver the first-process funds into that second process 'paycheck delivery mechanism'...

I imagine if a more growth-based strategy might be used to generate retirement funds, then sporadic sales of investments might be used to fill the above 'holding account', and those sales would be likely to 'financially cover' a period of time where those secondary 'paychecks' could then be paid out, so I hope you can see that the 'paychecks' side of things might not be quite as wedded to the 'input-dividends' aspect, when used by income-investors, as you seem to imply...

Both types of strategies are simply methods to fill the 'holding account' with funds, and as such, I don't think there's as much correlation as you seem to imply between people's lifetime-reliance on regular paychecks and their potential attraction to income-investing...

The 'paycheck' side of things, I imagine, is likely to be really quite common for many retired investors, ignoring the actual strategies they might use to generate those 'holding-account' funds in the first place...

Cheers,

Itsallaguess

[Dod101]

I had forgotten the earlier posts about the use of Revenue Reserves and the fact that they are not a pile of cash deposited somewhere in the vaults of the IT, ready to be brought out in time of need. You may well be right there tikunetih.

I certainly do not take a 'paycheck' every month from my investments. I live off my investments though, having no pension of any sort, other than the State pension which, as I have said many times, I use as a travel fund. I find it useful to have dividends as a source of income which roll in more or less come what may. I would not have liked to have had to release some capital say in March/April this year for instance. I know that can be countered by a suitable cash reserve but that is usually a rather inefficient use of cash, although I always have cash in hand, quite apart from long term reserves covering in my case getting on for three years of spending. That is far too much but is useful as a form of asset allocation, although I am considering reducing it a bit following what may or may not be a 'worst case' scenario this year.

I actually would use the term fungible to cover my investments, as I do not make much of a distinction between individual shares and ITs. I hold some individual shares for growth and most for the dividend and the same can be said for the ITs I hold.

It will be interesting to see how ITs react to the shortfall in income which I fancy will show up in many of their accounts to 31 December.

Dod

[TahiPanasDua]

Apologies for repeating a point that has been discussed here many times in the past. The younger you are the greater the range of possible investment strategies. However, as we age the feasible range narrows considerably for many such as myself.

Leaving a stable income producing portfolio to my wife with minimal involvement on her part is a priority. She is highly educated and has enviable skills but negligible interest or knowledge in investment. ( I might also go gaga, indeed some would say I am well on the way!) As a result, buying or selling, harvesting capital gains, rebalancing, etc are out the window. She is terrified of having to do this. The only unavoidable chore is filing an online tax return so I have been coaching her by supervising her doing the online annual return. We are getting there!

I am 76 and am preparing for the worst by gradually converting individual shares to ITs, mostly income, and ETFs. We have no pensions, not even the state pension. Actually, I lie. My wife does have a paltry civil service pension of only 5k per year! That's it!

All income is paid into a holding account with a generous cash fall-back that will be familiar to many readers. Income ITs fit beautifully into this strategy. A "salary" is paid monthly into our normal spending account. It's about as effort-free as I can make it. I don't seem to have other options. as I wouldn't consider annuities.

TP2.

[88V8]

All income is paid into a holding account ....

This simple step, for us is a missing link.
Most of our divis flow through ii, previously TD and formerly NatwestStockborkers, and the 'push' facility whereby account balances flowed automatically into a nominated bank account, was long since removed.
Now, I have to go in periodically and move it manually.
Which if one becomes gaga, is not ideal.

V8

[Dod101]

All income is paid into a holding account ....

This simple step, for us is a missing link.
Most of our divis flow through ii, previously TD and formerly NatwestStockborkers, and the 'push' facility whereby account balances flowed automatically into a nominated bank account, was long since removed.
Now, I have to go in periodically and move it manually.
Which if one becomes gaga, is not ideal.

V8

ATS used to that as well, but it is no great hassle to draw out money as required, although did someone not say that II have a facility to do that as well? Not that I have found it.

TP2 holds a lesson for anyone working abroad at the moment. Arrange to pay your Class 3 contributions. I doubt that you will get a better bargain! These secure the State pension for a UK expatriate (or at least did)

Dod