On Doris

[dealtn]

Precisely, and it's what HYPers have been banging on about for more than ten years, as you may have noticed We call the mitigation strategies the Income Reserve and Safety Margin.

TR investors no doubt do the same if they don't want to run out of readies.

Arb.

Not sure I understand what you mean, but as a TR investor I don't run an Income Reserve and/or Safety Margin. That's not to say that the portfolio has been immune to the sell off, and will be down in Capital terms, and also likely to have less Dividend Income too this year.

In that case, you may have to sell capital in the dips, which is not very advantageous. I had assumed that anyone living on a TR scheme would have a big enough pot (i.e.effectively including a Safety Margin) that falls didn't bother them, and sell off when times are good and hold cash or near cash to live on (i.e. income reserve) thus avoiding the need to sell off when prices are low.

So maybe, you have an income reserve and safety margin, but like Dod, just don't use those terms. They are they, but not recognised.

AFAI can see, TR or Income investors need to negotiate risk in a similar way.

Arb.

Maybe it is language that is the issue.

If I need "income", and there isn't sufficient "cash" then I will create that "income" from selling. That is true whether the market is high, low, or somewhere in between. Does that answer the question of strategy?

I don't think that is an income reserve or safety margin though, perhaps it is by your definition.

The difference is maybe that those that invest for income need to change the strategy, perhaps only partially, when that income fails to meet what is required, whilst in the same situation those that TR don't. They just carry on with the same strategy as before.

[Julian]

Precisely, and it's what HYPers have been banging on about for more than ten years, as you may have noticed We call the mitigation strategies the Income Reserve and Safety Margin.

TR investors no doubt do the same if they don't want to run out of readies.

Arb.

Not sure I understand what you mean, but as a TR investor I don't run an Income Reserve and/or Safety Margin. That's not to say that the portfolio has been immune to the sell off, and will be down in Capital terms, and also likely to have less Dividend Income too this year.

In that case, you may have to sell capital in the dips, which is not very advantageous. I had assumed that anyone living on a TR scheme would have a big enough pot (i.e.effectively including a Safety Margin) that falls didn't bother them, and sell off when times are good and hold cash or near cash to live on (i.e. income reserve) thus avoiding the need to sell off when prices are low.

So maybe, you have an income reserve and safety margin, but like Dod, just don't use those terms. They are they, but not recognised.

AFAI can see, TR or Income investors need to negotiate risk in a similar way.

Arb.

I was a pure HYP-er but as of about a year ago I moved to what I think can now best be characterised as a TR investor although my sole objective is generating an annual inflation-linked income sufficient to afford me the lifestyle I want. In that guise I certainly don't do what you mentioned in my bold above. I carried what I took to be the essence of the HYP "the time to buy is now" mantra forward to my TR world in that I do not believe that I am skilled enough to second guess where the markets are going so I do not try to time my sales when I raise cash for living expenses. I do a cash raise once a year, in the trading days between Christmas and New Year, with no regard for whether I think the market is weak or strong at the time. What you define as "when the prices are low" might be the early stages of an even bigger correction and if I chose not to sell in December I might regret it because the market continued to fall away underneath me. Similarly, if I thought the market was on an upward roller coaster and delayed my sale in the hope of getting even higher prices in the new year I might find that I'd missed a temporary peak.

I suppose one could say that releasing an entire year of income as cash at the start of each year does qualify as some sort of income reserve but it's not the same as a 1 year HYP income reserve that in ideal times is never touched. My cash pile will deplete over the year but hopefully not completely in that at least some divis will still be flowing in but I don't need them that year so am fairly uninterested in what level of dividend income is coming in. It is only when I get to the end of the year when it matters because the more divis have accumulated during the year just ending, the less capital I have to sell off in order to top up my cash balance to the level sufficient to fund my total expenditure (including tax liabilities and ISA subscription) for the year about to start.

One can criticise my scheme for leaving a lot of cash lying around although my cash account is actually 2 accounts so that I can shuffle surplus income into a savings account that at least pays some interest but the loss of return on my cash pile is a price that I am willing to pay for the extra peace of mind this gives me. Right now I am totally unconcerned and oblivious to all the dividend cuts and suspensions that are happening in my portfolio (probably about half of my investments are still in HYP shares, the rest are income ITs and passive trackers geared to growth rather than income) because I will simply sell whatever I need to sell in late December to get me to where I want to be at the start of 2021 (although at this rate my spending is so low during lockdown and probably for at least the next few months that I suspect I won't actually need to sell anything for income at the end of 2020 and will probably only make the sales to make use of my CGT allowance and re-invest into trackers).

- Julian

[Lootman]

you may have to sell capital in the dips, which is not very advantageous. I had assumed that anyone living on a TR scheme would have a big enough pot (i.e.effectively including a Safety Margin) that falls didn't bother them, and sell off when times are good and hold cash or near cash to live on (i.e. income reserve) thus avoiding the need to sell off when prices are low.

So maybe, you have an income reserve and safety margin, but like Dod, just don't use those terms. They are they, but not recognised.

AFAI can see, TR or Income investors need to negotiate risk in a similar way. .

Maybe it is language that is the issue.

If I need "income", and there isn't sufficient "cash" then I will create that "income" from selling. That is true whether the market is high, low, or somewhere in between. Does that answer the question of strategy?

Yes, I think much of the disagreement here falls away if people are using the word "income" in different ways. HYPers are using a narrow sense of the word, probably limited to dividends and interest. (Rents, maybe as well since some property investments are allowed). Where for dealtn, myself and others, what is really important is cashflow. The notion of cashflows includes all the above, but may also include capital gains and, for me anyway, premia from the sales of options against equity positions.

If you have a portfolio yielding a 3% dividend yield and it accretes on average by another 3% a year, then the available cashflows to you without sustaining a loss of capital is 6% a year. As long as your spending is no more than 6% of your capital, it hardly matters whether that cashflow is drawn from capital, dividends or (most likely) a mix of the two. And it hardly matters if you have a contrived "reserve" of cash or not.

This fear of selling baffles me, especially since there is a generous annual CGT-free allowance and relatively low rates of CGT. Why waste that on an arbitrary principle?

[Lootman]

By "Primary advocates" I presume you mean Pyad - so Primary Advocate. singular.

No I meant plural. pyad doesn't contribute personally very much.

I wonder if there are any Lemons here who were also Fools around 1999 and 2000 when pyad started promoting his ideas? I was, joining TMF about the same time as he did. I recall I had a number of debates with him (and others whose names I cannot recall) about the embryonic ideas being discussed there.

I don't claim any credit for it. And HYP was not created by a committee or consensus, although I feel sure pyad's thinking was refined in some ways by the criticism he received at that time. So I think it is probably a bit unfair to characterise his contribution as not "very much".

Where I think you might have a point is if you instead offered the observation that it was perhaps not as original as some may think. The five or six principles that underlie the method all pre-date anything pyad came up with, specifically:

1) Equal-weighting. That's been around a long time, although in most cases it also involves rebalancing to retain the equal weight.
2) High yield, obviously. Income funds predated that by decades.
3) Strategic Ignorance. Basically a restatement of the efficient market hypothesis and an inducement to minimise trading and trying to time the market.
4) UK only. And largecap only. Again, lots of funds and strategies follow that. Although in Pyad's case it always seemed to me that was what he knew about which is why he favoured it.
5) Always be buying; never sell. LTBH was hardly new either.

And as we all know, TJH has been running what is effectively a HYP long before pyad came along.

So what one can infer from the above is that the components of HYP are not original and Pyad didn't invent any of them. What was unique was the particular permutation of those principles that he adopted and promoted. And the method lives on now in this forum, and nowhere else that I know of. Whether all 5 above principles each add value, or whether some add value whilst others detract value, is a reasonable question that I have not seen answered.

[Alaric]

So I think it is probably a bit unfair to characterise his contribution as not "very much".

That's "not very much" with the meaning of "not very often", which is certainly the case on TLF.

[Alaric]

1) Equal-weighting. That's been around a long time, although in most cases it also involves rebalancing to retain the equal weight.

For an income orientated strategy why use initial market value? Equal weight by dividend income would avoid concentration of the cancellation risk on any one sector or Company. It doesn't mitigate greatly against half the market cancelling their dividend, but apart from the IT approach or holding cash instead of shares, what does?

[AJC5001]

I do a cash raise once a year, in the trading days between Christmas and New Year, with no regard for whether I think the market is weak or strong at the time. What you define as "when the prices are low" might be the early stages of an even bigger correction and if I chose not to sell in December I might regret it because the market continued to fall away underneath me. Similarly, if I thought the market was on an upward roller coaster and delayed my sale in the hope of getting even higher prices in the new year I might find that I'd missed a temporary peak.
- Julian

As I understand it. you hold a mixed portfolio of individual shares (some of which are/were High Yield) plus IT's and trackers. When you do your annual cash raising, how do you decide what to sell? Do you sell/top slice the 'winners', get rid of the 'losers', sell a bit of everything or just sell from a particular tracker or IT? Do you consider trading costs in this, as I assume the more trades you make the higher the costs, although this may on its own be trivial.

The question of 'What to Sell' from a HYP that was supposed to be minimal trading is one of the problems with the strategy.

Adrian

[SalvorHardin]

For an income orientated strategy why use initial market value? Equal weight by dividend income would avoid concentration of the cancellation risk on any one sector or Company. It doesn't mitigate greatly against half the market cancelling their dividend, but apart from the IT approach or holding cash instead of shares, what does?

Diversifying outside the UK. Restricting HYP investments to UK quoted shares has always been a big weakness IMHO as it greatly limits the pool from where investors can select their investments. Overseas dealing was much more expensive in the time of Doris (and much harder to monitor your shares), so there was a good case for staying in the UK. But since online brokers came on the scene it's not much more difficult than buying a share quoted in London.

A good example is the Canadian banks. They are much more reliable dividend payers than British banks and take shareholder interests much more seriously. None of the "Big Five" have cut their dividends since 1940.

https://business.financialpost.com/investing/why-canadas-big-banks-defend-dividends-in-coronavirus-market-rout-and-at-all-other-times

KraftHeinz has had a rough couple of years but as a result it fits the HYP criteria (except that it's a foreign share). Multinational food producer, yield 5.4% before 15% withholding tax and it hasn't cut or suspended its dividend in 2020 (it cut heavily in early 2019). I reckon that if KraftHeinz was quoted in the UK it would be a very popular HYP share.

Whilst American shares don't yield as much as British shares (or rather what British shares used to yield), America does have the "S&P500 Dividend Aristocrat"; a category of shares which is taken quite seriously by the investing community. These companies are members of the S&P 500 index, have a current market capitalisation of at least $3 billion and have increased their dividends in each of the past 25 years (or longer). Wikipedia has more information, there are roughly 50 such companies (e.g. Procter & Gamble - dividend increases since 1956).

https://en.wikipedia.org/wiki/S%26P_500_Dividend_Aristocrats

[Julian]

I do a cash raise once a year, in the trading days between Christmas and New Year, with no regard for whether I think the market is weak or strong at the time. What you define as "when the prices are low" might be the early stages of an even bigger correction and if I chose not to sell in December I might regret it because the market continued to fall away underneath me. Similarly, if I thought the market was on an upward roller coaster and delayed my sale in the hope of getting even higher prices in the new year I might find that I'd missed a temporary peak.
- Julian

As I understand it. you hold a mixed portfolio of individual shares (some of which are/were High Yield) plus IT's and trackers. When you do your annual cash raising, how do you decide what to sell? Do you sell/top slice the 'winners', get rid of the 'losers', sell a bit of everything or just sell from a particular tracker or IT? Do you consider trading costs in this, as I assume the more trades you make the higher the costs, although this may on its own be trivial.

The question of 'What to Sell' from a HYP that was supposed to be minimal trading is one of the problems with the strategy.

Adrian

Hi Adrian,

You understand correctly. Since as an overall objective I am migrating away from individually held shares towards income ITs (since I think they will be easier to manage and give me a less volatile income stream in my dotage) and trackers (since I still want to grow my growth portfolio vs my income portfolio when looking just at my portfolio outside of ISA and SIPP) the first level cut of what to sell is simple. Until my HYP is gone I will always make the sales from within my HYP shares and not touch my trackers or income ITs. An exception to that might be if I end up having bought what I consider a mistake within one of those portfolios in which case I might sell it. When then selecting which HYP shares to sell it’s a bit of an art rather than a science, a mixture of how I feel about a company, keeping a balance or at least not making an imbalance worse within my dwindling HYP, and releasing the cash I need while trying to stay within my CGT allowance which tends to mean a mixture of the winners which will generate disproportionately high capital gains for a given amount of capital released and relative losers to generate larger amounts of cash with lower associated capital gains or even generating losses. It’s a matter of blending all those factors. Nothing I can type into a spreadsheet. Once my HYP is gone and I am selling growth and/or income ITs I will top-slice in a way that I maintain balance between income & growth, across asset classes within my growth portfolio, and across geographical focus in my income IT portfolio.

I don’t consider trading costs at all for the reason you mention - I consider them trivial. If for instance I pay £10 a trade and could do X at a cost of 10 trades (£100) vs doing Y at a cost of 20 trades where I felt that Y would leave me with a portfolio composition that I felt more comfortable with then I would consider the extra £100, maybe a mid-range meal out for two people (remember those?!), as a trivial sum to pay for even a tiny bit of extra peace of mind for the coming year. Maybe I can understand it with very, very small portfolios but to me I just don’t understand why people even give a second thought to an extra handful of trades if they feel those extra trades would give them the best outcome and let them sleep just a little bit better at night.

I absolutely agree on that final point. There is no guidance in the HYP strategy on how to sell down so an individual investor has to decide that for themselves. One HYP stalwart, Terry (TJH) runs an HYP that he does do some rebalancing on and has some definite rules for what to top-slice and what to top up when he rebalances so I wonder whether just the top-slicing criteria that he uses might, on their own without then using the cash released to do top-ups, be an interesting starting point for an orderly way to start selling down an HYP if a shortfall in divi income with all other options exhausted meant that one needed to release capital to bolster income during difficult years.

- Julian

[Arborbridge]

you may have to sell capital in the dips, which is not very advantageous. I had assumed that anyone living on a TR scheme would have a big enough pot (i.e.effectively including a Safety Margin) that falls didn't bother them, and sell off when times are good and hold cash or near cash to live on (i.e. income reserve) thus avoiding the need to sell off when prices are low.

So maybe, you have an income reserve and safety margin, but like Dod, just don't use those terms. They are they, but not recognised.

AFAI can see, TR or Income investors need to negotiate risk in a similar way. .

Maybe it is language that is the issue.

If I need "income", and there isn't sufficient "cash" then I will create that "income" from selling. That is true whether the market is high, low, or somewhere in between. Does that answer the question of strategy?

Yes, I think much of the disagreement here falls away if people are using the word "income" in different ways. HYPers are using a narrow sense of the word, probably limited to dividends and interest. (Rents, maybe as well since some property investments are allowed). Where for dealtn, myself and others, what is really important is cashflow. The notion of cashflows includes all the above, but may also include capital gains and, for me anyway, premia from the sales of options against equity positions.

If you have a portfolio yielding a 3% dividend yield and it accretes on average by another 3% a year, then the available cashflows to you without sustaining a loss of capital is 6% a year. As long as your spending is no more than 6% of your capital, it hardly matters whether that cashflow is drawn from capital, dividends or (most likely) a mix of the two. And it hardly matters if you have a contrived "reserve" of cash or not.

This fear of selling baffles me, especially since there is a generous annual CGT-free allowance and relatively low rates of CGT. Why waste that on an arbitrary principle?

I think Lootman comes to the nub of what troubles me about the TR way of doing this. The notion that it doesn't much matter whether you sell you stock after a downturn is something I find difficult to get to grips with. Cash is fungible, fine, and if the stock value is increasing, there's nothing wrong with taking profits. But if stock values have fallen when you need to realise your income, capital is being eaten into, this year, possibly next year and the one after. That just begins to look like a downward spiral which can be tolerated only if your capital is big enough to allow this - this excess of capital is what I meant earlier this evening when I called it the safety margin. If one can confidently sell off capita and know that one has sufficient margin to do this for possibly several years, then that surely is the safety margin, though one may not have labelled it that. And drawing out sufficient to have a year's cash in the bank is more or less the same as my income reserve.

Perhaps the problem is that I do not feel weaslthy enough to live in this way of selling of the seed corn of future growth. That is, my safety margin isn't big enough to take the risk of zero stock market growth for a year or two whilst I sell stock, but it is hopefully big enough to stand a few years of decreased dividends while companies recover.
That's how I feel about it, anyway.
Arb.

[Arborbridge]

1) Equal-weighting. That's been around a long time, although in most cases it also involves rebalancing to retain the equal weight.

For an income orientated strategy why use initial market value? Equal weight by dividend income would avoid concentration of the cancellation risk on any one sector or Company. It doesn't mitigate greatly against half the market cancelling their dividend, but apart from the IT approach or holding cash instead of shares, what does?

I'd agree with you on this. Equal weight is just a "theory", which may or may not be advantage. However, in the context of a system set up for a Joe Bloggs investor, I think the idea was to take out one area of possible confusion. Just starting with equal weights rules out a variable.

Where I and others modified Pyad's position was in keeping the weights within bounds for all time and not letting one stock knock the portfolio out of balance. I also use limits on any one stocks contribution to income which seems a sensible way of restricting company risk.


Arb.

[Arborbridge]

By "Primary advocates" I presume you mean Pyad - so Primary Advocate. singular.

No I meant plural. pyad doesn't contribute personally very much. [Deleted]

Moderator Message:
Unnecessary negative allusion to another poster removed. - Chris

As I remember it, the negative allusion was to me. I'd like to say, Alaric, that you may have "done me wrong"! I've never been such a HYP advocate that I have run down other ideas. From my POV, my HYP is still an experiment - perhaps an everlasting one! I am one record, more than once, in saying that I would not necessarily advocate HYP for pot building, and in that respect I am certainly open minded.
Further, as regards drawing an income to live on, although I prefer to arrange my finances on a dividend stream basis, I've always been in that camp that accepts we are all different - each to whichever method suits his/her personality.

As regards the HYP I'd prefer to keep it a close to the orginal idea as possible, but like the Greeks, I believe that perfection only exists in the firmanent - what I can do here on earth is just a tawdry projection!

So, I just hope neither you nor anyone else runs away with the idea that I'm some ort of HYP fanatic - or as you put it Primary Advocate. I guess that could be flattering, but it does not fit me at all. I'm just a copyist who ran with Pyad's idea because the philosophy suited me to a point when I retired.

On that point, I'm closing down for the night, and reading some more of my rather heavy book on Russian political history. Did I mention? written in early 1914, so it's interesting to see whether they knew they were standing on the edge of a precipice*, and to read a contemporary account.
*they didn't.

Arb.

[1nvest]

I think Lootman comes to the nub of what troubles me about the TR way of doing this. The notion that it doesn't much matter whether you sell your stock after a downturn is something I find difficult to get to grips with. Cash is fungible, fine, and if the stock value is increasing, there's nothing wrong with taking profits. But if stock values have fallen when you need to realise your income, capital is being eaten into, this year, possibly next year and the one after. That just begins to look like a downward spiral which can be tolerated only if your capital is big enough to allow this - this excess of capital is what I meant earlier this evening when I called it the safety margin. If one can confidently sell off capital and know that one has sufficient margin to do this for possibly several years, then that surely is the safety margin, though one may not have labelled it that. And drawing out sufficient to have a year's cash in the bank is more or less the same as my income reserve.

Perhaps the problem is that I do not feel wealthy enough to live in this way of selling of the seed corn of future growth. That is, my safety margin isn't big enough to take the risk of zero stock market growth for a year or two whilst I sell stock, but it is hopefully big enough to stand a few years of decreased dividends while companies recover.
That's how I feel about it, anyway.
Arb.

It is dividends that 'eat capital'. A firm paying a dividend ends up with less capital/value than the exact same firm that doesn't pay a dividend. If two identical firms are both priced at 2x book value and one (dividend payer) pays out 4% of its book-value as a dividend payment then it has less capital value remaining. A investor selling some shares to generate the same amount of 'dividend' has no impact upon the firms capital value whatsoever and being priced at 2x book value requires only 2% of shares to be sold to provide the same capital value amount of 'dividend'. A non dividend paying firm using surplus capital to repurchase its own shares at times when the share price was down will tend to see its share price rise higher than had it not repurchased shares. If a 2x book value stock sees its price halve down to 1x book value then yes, to generate the same 4% dividend would require a investor to sell 4% of their shares.

Fundamentally paying dividends eats the capital that the firm might have otherwise used to buy back shares or invest. Your share of total ownership in the business might however remain constant. If no dividend is paid and you reduce your share of ownership (by selling some shares) then broadly you will be less of a overall owner in that stock, but generally see the value of that slice of the total business rise more than had the firm depleted its capital base by paying dividends

Dividends also raise cost and tax events. Costs the firm pays to transfer dividends to shareholders; Whilst the shareholder may have to pay tax on the dividends (along with perhaps currency conversion costs) when perhaps their intent was to reinvest the dividend back into the same stock. Such reinvestments add nothing to the capital base of the firm, its just a capital transfer event between shareholders. Similar but opposite to when you sell some shares to generate a 'dividend' - that is a transfer of capital event from another (buyer of the shares) to you. The only cost the firm pays for that is the time/effort to record the change of shares ownership.

[Dod101]

Yes all true, but so what? Shareholders usually decide that they like to have a return on their investment in cash from the profits that a company of which they are a part owner generates. Many proprietors see things that way (although not all of course) If they own some asset it is usual to expect an income from it rather than sell a part of the capital, which has the feelings of a tontine to me.

Dod

[1nvest]

Yes all true, but so what?

Buffett's reasoning is that not paying dividends has the capacity to earn you more. Paraphrasing a extract from one of his annual letters ...

Assume that you and I are the equal owners of a business with £2 million of net worth. The business earns 15% on tangible net worth – £300,000 – and can reasonably expect to earn the same 15% on reinvested earnings. Furthermore, there are outsiders who always wish to buy into our business at 150% of net worth. Therefore, the value of what we each own is now £1.5 million. You would like to have the two of us shareholders receive one-third of our company’s annual earnings and have two-thirds be reinvested. So you suggest that we pay out £100,000 of current earnings and retain £200,000 to increase the future earnings of the business. In the first year, your dividend would be £50,000, and as earnings grew and the one-third payout was maintained, so too would your dividend. In total, dividends and stock value would increase 10% each year (15% earned on net worth less 5% of net worth paid out). After ten years our company would have a net worth of £5,187,485 (the original £2 million compounded at 10%) and your dividend in the upcoming year would be £129,687. Each of us would have shares worth £3,890,613 (150% of our half of the company’s net worth). With dividends and the value of our stock continuing to grow at 10% annually.

There is an alternative approach, however, that would leave us even happier. Under this scenario, we would leave all earnings in the company and each sell 3.33% of our shares annually. Since the shares would be sold at 150% of book value, this approach would produce the same £50,000 of cash initially, a sum that would grow annually. Call this option the “sell-off” approach. Under this “sell-off” scenario, the net worth of our company increases to £8,091,115 after ten years (£2 million compounded at 15%). Because we would be selling shares each year, our percentage ownership would have declined, and, after ten years, we would each own 35.6% of the business. Even so, your share of the net worth of the company at that time would be £2,880,437. And every Pound of net worth attributable to each of us can be sold for £1.50. Therefore, the market value of your remaining shares would be £4,320,655, about 11% greater than the value of your shares if we had followed the dividend approach. Moreover, your annual cash receipts from the sell-off policy would now be running 11% more than you would have received under the dividend scenario. Voila! – you would have both more cash to spend annually and more capital value.

[Alaric]

Shareholders usually decide that they like to have a return on their investment in cash from the profits that a company of which they are a part owner generates.

Another way of looking at it is that companies need capital. They can borrow it from banks at a cost. They can borrow it by issuing bonds at a cost. Alternatively they can issue shares. The dividend that investors may expect to receive is the price the Company pays for raising the capital.

[Dod101]

1nvest
Again all true of course but life is not like that. As an income investor (and as an income requirer) I prefer to have dividends paid out to me on a regular basis because share prices do not move on a regular basis or certainly not pro rata to the value of the underlying investments. Every proprietor in a joint stock company has a different requirement but that is mine, and the benefit of a relatively well spread market is that I have a choice.

Dod

[CryptoPlankton]

The notion that it doesn't much matter whether you sell your stock after a downturn is something I find difficult to get to grips with. Cash is fungible, fine, and if the stock value is increasing, there's nothing wrong with taking profits. But if stock values have fallen when you need to realise your income, capital is being eaten into, this year, possibly next year and the one after...

...Perhaps the problem is that I do not feel wealthy enough to live in this way of selling of the seed corn of future growth. That is, my safety margin isn't big enough to take the risk of zero stock market growth for a year or two whilst I sell stock, but it is hopefully big enough to stand a few years of decreased dividends while companies recover.
That's how I feel about it, anyway.
Arb.

Fundamentally paying dividends eats the capital that the firm might have otherwise used to buy back shares or invest. Your share of total ownership in the business might however remain constant. If no dividend is paid and you reduce your share of ownership (by selling some shares) then broadly you will be less of a overall owner in that stock, but generally see the value of that slice of the total business rise more than had the firm depleted its capital base by paying dividends

This seems to illustrate the difference between income investors and TR investors quite clearly. Income investors prefer to retain their share of the ownership of a company and TR investors don't care, having faith that the market will reflect the retention of profits by low/non dividend paying companies in their future share price.

While the TR investor may feel that he/she will get greater returns in the long run (which may or may not be true over different periods), the income investor is either unconvinced of this or simply more comfortable not giving up some of their share of company ownership to generate income (or both).

Personally, having seen the argument drag on for years on the Fool(s), I can't quite understand why one side refuses to accept that the other is simply more comfortable with their approach and just let them get on with it. There is no right way to invest, we all have to find the best strategy for ourselves based on our different resources, requirements, abilities and personality traits.

Anyway, I seem to be adding to that sense of deja vu all over again, once more...

[1nvest]

Recent events would suggest that an equity orientated income strategy should perhaps consider the risk of a 50% fall in dividend income. Mitigation strategies include having more income than needed and perhaps as well a cash or near cash reserve. Not chasing income for its own sake might also come into it.

Precisely, and it's what HYPers have been banging on about for more than ten years, as you may have noticed We call the mitigation strategies the Income Reserve and Safety Margin.

TR investors no doubt do the same if they don't want to run out of readies.

Arb.

Not sure I understand what you mean, but as a TR investor I don't run an Income Reserve and/or Safety Margin. That's not to say that the portfolio has been immune to the sell off, and will be down in Capital terms, and also likely to have less Dividend Income too this year.

SWR provides a consistent inflation adjusted income, year after year. The lower the SWR the lower the risk. Using a low SWR as a baseline to cover basic expenses is common, along with top slicing additional real gains as and when apparent into a cash account for the niceties.

From my experience the sum of SWR + real gain top slicing is greater than real gain alone.

For instance this had a 10.5% CAGR with no withdrawals, or 9.66% CAGR after 2% SWR (11.66% combined). https://tinyurl.com/y9jjccst Obviously if you took the full 5.57% annualised additional real gains (apparent in that example) on top of that 2% SWR as and when real gains were apparent then overall the remainder portfolio value would tend to just have paced inflation. If you leave the real gains to grow the portfolio value then as time progresses the SWR % value tends to decline - such that risk reduces over time.

Synthetic dividends - taking your own dividend out of total return, along with SWR provides the overall better choice IMO. Higher reward (being paid dividends by other investors (selling shares) rather than out of the stocks book-value), less risk (more consistent inflation adjusted 'dividends').

[Itsallaguess]

Equal weight is just a "theory", which may or may not be advantage. However, in the context of a system set up for a Joe Bloggs investor, I think the idea was to take out one area of possible confusion. Just starting with equal weights rules out a variable.

Where I and others modified Pyad's position was in keeping the weights within bounds for all time and not letting one stock knock the portfolio out of balance. I also use limits on any one stocks contribution to income which seems a sensible way of restricting company risk.

Which is a timely reminder of a question that I meant to ask earlier in the week - has anyone worked out the likely impact of the current dividend-cuts on HYP1?

Here's a link to the last 'HYP1 is 19' report - https://www.lemonfool.co.uk/viewtopic.php?f=15&t=20380

and here's a link to a separate thread that I started about the 19th-birthday report, looking at HYP1 income and capital weightings at that time - https://www.lemonfool.co.uk/viewtopic.php?f=15&t=20386

I've never been an advocate of the 'fire-and-forget' approach to income-investment, and on a cursory glance of the above, my view on that is likely to get more firmly established, especially in the light of the discussions on this thread, where HYP1 was set up without a mention of any sort of requirement for 'Income Reserves' or 'Safety Margins'....

Cheers,

Itsallaguess