When to bale out, and switch to ITs?

[TUK020]

I thought the thread on comparing CTY to HYP1 was thought provoking and contained some interesting input before it degenerated into the usual arguments and then got pulled in frustration.
I am not looking to continue that argument here, but examine a question that it prompted:

Yield last night on CTY was 5.3% according to HYPTUSS.
Approximately half of my individual company shareholdings are showing below this at the moment.
What are my reasons for holding on to them?
After all, CTY looks one of the most promising options for being able to maintain its dividend and ride through the storm (extensive thread on IT board about safety of its dividend, accounting of reserves, and its borrowing capability).

I wound up grouping these companies into 4 different buckets:
- Growth
- Recovery
- Safety comparable
- ? Question marks

Growth: This group included some main stream companies that would appear to have dividend growth prospects - full size stakes in AZN, DGE, RB, plus some part stake punts in some smaller companies Bodycote, Morgan Advanced Materials, Rotork. The growth expectations mean that these could be future significant value generation. (Lot of people mention Unilever in this context - I avoid then due to family exposure via wife's pension + stock.)

Recovery: The biggest group: companies that have cut or suspended their dividend, that it feels too hasty to unload, because they will hopefully recover, resume divis, and regain capital value as a result. This includes bombed out candidates such as Marstons, HSBA, BT (yeah, I know), ITV, WPP through to less damaged ones such as Persimmon, SMDS

Safety Comparable: Interesting but small group where I felt their dividend prospects are very strong, even if the yield wasn't as high as CTY. This group was basically my utilities Pennon, and NG (not technically in this list as the yield is a smidge above CTY) plus Schroders SDRC. This last as it has well covered dividend, and net cash last time I looked at the accounts.

Question Marks: Companies where I do not have comparable confidence in the security of the dividend (cf CTY), do not represent significant long term growth prospects, are not recovery opportunities from COVID damage, and have lower yield than CTY. Why am I hanging on to them? British Aerospace and GSK.
Any views on why hanging on to them would be better than unloading and reinvesting in CTY now?

[dealtn]

Imagine a scenario where CTY had exactly the same holdings as your HYP. The difference was that HYP paid out 5%, but CTY "reserved" that 5% by a fifth and only paid out 4% (reinvesting that into the portfolio in the same weightings).

(This analogy works even better if you reinvest all your dividends back into the portfolio, which seems to be common practice amongst some "elsewhere").

In normal times do you have a preference for the HYP 5% or the CTY 4%? In times such as this when the HYP has fallen to, say, 3% and CTY continues at, say, 4% do you have a preference, and if so is it the same or now different?

This fixation on dividend yield rather than the earnings of the underlying companies is perplexing. In the above analogy you would own exactly the same thing, have the same claims on company earnings, yet the "payout" is determining, at least for some, the order of preference.

Now of course it is valid at the micro level to question why you hold any investment, be that individual shares, or collectives. Indeed at the macro level it is a good question whether you prefer someone to make the investment decision for you (for which you pay a fee) or do that yourself (saving a fee but perhaps giving up "experience" but potentially increasing anxiety about getting the micro decisions wrong).

But these decisions are nothing to do with dividend yields and anyone should really understand that before making comparisons (at least in my opinion).

So looking at your post the question you are asking is "What are my reasons for holding them?", in respect of companies whose yield is below CTY's 5.3% you quote. That can only be answered by reference to what you are looking for. That isn't immediately clear, but given you have posted this on a Board that contains "High Yield" in its title it is presumably for that reason. So if they don't meet that "brief" and that is what is important to you, the answer is "you shouldn't".

If that isn't comfortable, or you have an alternative reason for holding them, maybe you could expand further to enable others in turn to assist you.

[Alaric]

In normal times do you have a preference for the HYP 5% or the CTY 4%? In times such as this when the HYP has fallen to, say, 3% and CTY continues at, say, 4% do you have a preference, and if so is it the same or now different?

Remember also that CTY got that extra 1% from somewhere. That was either from borrowing or selling assets. If you need 4% as a drawdown rather than 3%, selling assets becomes a necessary solution.

[Itsallaguess]

Any views on why hanging on to them would be better than unloading and reinvesting in CTY now?

I'm a big fan of income-IT's but I'm more than a little nervous about what feels like a repeated airing of a single one of them at the moment, in the form of City of London (CTY)..

Silver bullets rarely exist...

Whilst CTY might have a headline 5% yield that seems initially attractive, and whilst it might have almost 100 underlying holdings (although please note - 50% of CTY is held in just 20 of them...https://tinyurl.com/yarlzklb) and a long history of dividend payouts, it's underlying sectoral focus needs fully appreciating before anyone starts to think it's some sort of single-shot answer to those seeking an all-in-one income-source if held on it's own -


Source - https://www.janushenderson.com/en-gb/investor/product/the-city-of-london-investment-trust-plc/#sector

So that's 45% of holdings in just two sectors, and 73% of holdings in just 5 sectors.

To me it doesn't feel like an alternative 'HYP in a box', unless that original HYP was as sectorally skewed as the above list in the first place, and I think it's often worth a poke under the bonnet to get a much better understanding of just how these collectives are individually constructed before such thoughts might start to get embedded..

I own CTY, and see it as a great addition to a wider set of more broadly selected income-IT's, but I'd be nervous about making it my only income-IT and running it alongside another more HYP-like section of my portfolio on it's own, and especially when those remaining HYP holdings might add even further weight to some of the more prominent CTY sectors in the above list...

Cheers,

Itsallaguess

[Arborbridge]

I wouldn't unload and invest in one IT, even one as well known as CTY. I am notorious for not putting alll my eggs in one basket, so I'd have round a dozen or so ITs. Even for those IT managers fishing in the same pond, results are radically different and I know of no way of predicting which will become laggards and which will put on a spurt.


Arb.

[richfool]

Imagine a scenario where CTY had exactly the same holdings as your HYP. The difference was that HYP paid out 5%, but CTY "reserved" that 5% by a fifth and only paid out 4% (reinvesting that into the portfolio in the same weightings).

Remember that CTY could be paying out some of its income reserves from a previous period, bringing you back up to the 5%. Indeed a new investor could be receiving a portion of dividend income that accumulated before he bought into the trust.

I prefer and hold MUT in preference to CTY, in that sector. And as mentioned I wouldn't rely on one single trust for my income, so I hold many across several sectors and geographies.

[Lootman]

So that's 45% of holdings in just two sectors, and 73% of holdings in just 5 sectors.

To me it doesn't feel like an alternative 'HYP in a box', unless that original HYP was as sectorally skewed as the above list in the first place

I seem to recall you and I making a similar comment about HYP1 with its dependence on a very small number of shares. Ironic if a "diversified" CTY suffers the same problem.

But then isn't that the UK market's problem rather than any fund that invests in it? It is dominated by a relatively small number of shares in a handful of sectors. There is no way I'd have 20% in financials but many income strategies lead you there by default.

The US is much more diversified and, despite the enormous trillion-dollar market caps of AAPL, MSFT and ANZN, no one American share is more than 6% of that index. Of course you might have a problem with Tech being 22% there. But there are tech income shares like Intel, Cisco, IBM, Broadcom etc.

If you are going to dump HYP for an income IT I'd go for a global one. I am not aware of any other major national market with as many dividend cuts right now as the UK. We could be in a death spiral.

[dealtn]

Imagine a scenario where CTY had exactly the same holdings as your HYP. The difference was that HYP paid out 5%, but CTY "reserved" that 5% by a fifth and only paid out 4% (reinvesting that into the portfolio in the same weightings).

Remember that CTY could be paying out some of its income reserves from a previous period, bringing you back up to the 5%. Indeed a new investor could be receiving a portion of dividend income that accumulated before he bought into the trust.

It was only an analogy (and makes no sense when quoting just a part of it)

All I am saying is that it is the underlying investments that matter, and the earnings those companies make. Constant focus on the dividend yield drives behaviours that ignore that. Hence the comparisons between a "HYP" and a "fund" (whatever it is called) that have identical investments. Of course it's hypothetical, but that "HYP" and "fund" could have different dividend policies, but as an investor in either (or both!) you have identical claims on the underlying investments and dividends.

Now as events unfold the dividend policies of those alternatives could change (but the underlying investments don't) so someone for whom the dividend policy was the driving factor might change preference accordingly which is a nonsense and irrational.

Now the main point of my initial reply to the OP was it isn't clear what he wants from his investments, and it seems he wants help in deciding what to do with those investments that no longer meet the Income requirement he presumably required. But without that clarification of why they were bought, or why they are still held if they aren't meeting that brief, it doesn't appear possible to answer him. Yet.

[Dod101]

I think we are a long way from a death spiral in UK dividends. I reckon I hold 21 income shares and of these one has cancelled its dividend (HSBC) and two have cut their dividends (Imperial Brands and Shell) Neither the cancellation nor the cuts are entirely related to Covid19, but rather to rather over generous payments in earlier years.

The other income shares I hold (in no particular order) and all paying dividends are

Edinburgh IT
BAT
Phoenix Holdings
Chesnara
National Grid
Primary Health Properties
AstraZeneca
Glaxo
Temple Bar IT
Murray International
Murray Income
Admiral(OK cut their special)
Schroder Non Voting
HFEL
Unilever
Segro
3i Infrastructure
Legal & General

I have not looked at the sectors because I do not care; I just like the shares. I see that 6 of these are ITs but I have no bias one way or the other . Obviously, Edinburgh is in many ways similar to City of London but I would never ditch my directly held individual shares for one or two ITs. I expect HSBC, Shell and Imps to maintain or in the case of HSBC to reinstate their dividends within the next 12 months. I think I might be down about 10% on my dividend income for this year and I can happily live with that.

In addition I hold 9 Growth shares but that is off topic for this Board.

Dod

[TUK020]

I wouldn't unload and invest in one IT, even one as well known as CTY. I am notorious for not putting alll my eggs in one basket, so I'd have round a dozen or so ITs. Even for those IT managers fishing in the same pond, results are radically different and I know of no way of predicting which will become laggards and which will put on a spurt.


Arb.

And also in response to IAAG's post.
Sloppy phrasing on my part.
Was using CTY as a benchmark for the decision, rather than the sliver bullet for the funds destination. Likely target is a mix of ITs.
Question was more about the decision to sell GSK & BA
tuk020

[Itsallaguess]

Sloppy phrasing on my part.

Was using CTY as a benchmark for the decision, rather than the sliver bullet for the funds destination. Likely target is a mix of ITs.

Thanks for that clarification - although I still hope that given the wider conversations that have been happening with regards to CTY lately, it's been a useful exercise in looking under the bonnet a little anyway, and especially regarding the sectoral weighting..

Cheers,

Itsallaguess

[88V8]

Question was more about the decision to sell GSK & BA.

GSK's divi has been uncovered/static for quite a while. We had about 30% of our total investments in GSK, six figures - OH used to work there and one can fall in love with a share - and even having pried some out of her grasp we still have an overlarge holding. I don't think they have any special merit, except perhaps that they haven't actually cut. Yet.
That said, one can find fault with many potential shares if one pokes and prods enough.

BA has a major pension overhang, I sold them a while back for that reason.

I too am trending towards ITs. More for stability than anything, given the perhaps temporary collapse of the HYP universe. For the next couple of years at least I think ITs with a long divi record to defend are going to be more reliable and perhaps more yieldy. After that, it may be that an HYP can once again be constructed which will outyield the B7/B8 for instance. Perhaps even outyield CTY.
But right now, the poster who described ITs as a bridge over the dividend chasm got it spot on.

V8 (holds CTY, MUT, JCH, MRCH, BERI, HFEL)

[tjh290633]

The problem is that we do not know what dividends CTY will pay in the future. By switching to it you could be swapping the devil for a witch. People are assuming that CTY will maintain its dividend, but that is only an assumption. I've been caught that way before.

TJH

[TUK020]

The problem is that we do not know what dividends CTY will pay in the future. By switching to it you could be swapping the devil for a witch. People are assuming that CTY will maintain its dividend, but that is only an assumption. I've been caught that way before.

TJH

Yup, this is a probability assessment, not a certainty.
tuk020 (recently burnt by Shell's cut)

[88V8]

The problem is that we do not know what dividends CTY will pay in the future. By switching to it you could be swapping the devil for a witch. People are assuming that CTY will maintain its dividend.....

That's a step up from the frying pan and the fire.

The uncut divi is CTY's usp, its moat if you will.
Without it they're just another IT.

There will be no cut. You read it here.

V8

[mao44]

The problem is that we do not know what dividends CTY will pay in the future. By switching to it you could be swapping the devil for a witch. People are assuming that CTY will maintain its dividend.....

That's a step up from the frying pan and the fire.

The uncut divi is CTY's usp, its moat if you will.
Without it they're just another IT.

There will be no cut. You read it here.

V8

Wasn't that RDSB moat until very recently?

[moorfield]

There will be no cut. You read it here.

I see no signal, Foley ?

[88V8]

Wasn't that RDSB moat until very recently?

Ah, but Shell does not have to attract retail investors.

V8 (holds rather a lot of Shell)

[MDW1954]

The problem is that we do not know what dividends CTY will pay in the future. By switching to it you could be swapping the devil for a witch. People are assuming that CTY will maintain its dividend.....

That's a step up from the frying pan and the fire.

The uncut divi is CTY's usp, its moat if you will.
Without it they're just another IT.

There will be no cut. You read it here.

V8

I am not so sanguine. I am expecting minuscule dividend increases in the short term, just to try and maintain CTY's dividend growth record. But its reserves are not as high as some other income ITs.

MDW1954

[88V8]

I am expecting minuscule dividend increases in the short term, just to try and maintain CTY's dividend growth record.

You are probably right. A small cut in real terms.
But that will be OK, to tide us over for a couple of years.

V8