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Different ways of taking income

General discussions about equity high-yield income strategies
Itsallaguess
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Re: Different ways of taking income

#417287

Postby Itsallaguess » June 4th, 2021, 12:05 pm

UnclePhilip wrote:
Nothing to do with scoring points...


The greatest sadness for me personally is that people might see this thread as an indication of 'both sides' wishing to score points, which as far as I'm concerned couldn't be further from the truth...

From my previous analogy, if a 'Racer' cornered a 'Jogger' and tried to convince him to concede that 'because he runs', then 'he must be interested in speed and timings', then it wouldn't be 'point scoring' for that Jogger to explain why, actually, he's not, and that there's different, non-speed-related benefits to doing things the way they might prefer, with the complete understanding that gaining those non-speed-related benefits might come at a cost of, well, yes - some speed.....

Like I said before, whilst this debate persists in being framed using a fundamentally flawed 'Total Return vs Dividend Income' premise, then the above situation of the joggers trying to explain that it's a flawed concept will also persist, but that doesn't mean those Joggers are trying to score points - they're not, they're just trying to explain themselves....

It means the Racers are wrong to persist with not fully understanding the appeal of jogging to others, and trying to continually force their 'racing' mentality onto completely different people...

Cheers,

Itsallaguess

NotSure
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Re: Different ways of taking income

#417297

Postby NotSure » June 4th, 2021, 12:35 pm

Itsallaguess wrote:It means the Racers are wrong to persist with not fully understanding the appeal of jogging to others, and trying to continually force their 'racing' mentality onto completely different people...


And what about us 'interval trainers' ;)

https://en.wikipedia.org/wiki/Interval_training

88V8
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Re: Different ways of taking income

#417305

Postby 88V8 » June 4th, 2021, 12:58 pm

The question 'which is more profitable' is unanswerable as it depends wholly on who's running the portfolio and the time frame.

Basically, 'Income' provides an income.
TR provides an unpredictable income plus a hobby.

V8

UnclePhilip
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Re: Different ways of taking income

#417311

Postby UnclePhilip » June 4th, 2021, 1:15 pm

Itsallaguess wrote:
UnclePhilip wrote:
Nothing to do with scoring points...


The greatest sadness for me personally is that people might see this thread as an indication of 'both sides' wishing to score points, which as far as I'm concerned couldn't be further from the truth...

From my previous analogy, if a 'Racer' cornered a 'Jogger' and tried to convince him to concede that 'because he runs', then 'he must be interested in speed and timings', then it wouldn't be 'point scoring' for that Jogger to explain why, actually, he's not, and that there's different, non-speed-related benefits to doing things the way they might prefer, with the complete understanding that gaining those non-speed-related benefits might come at a cost of, well, yes - some speed.....

Like I said before, whilst this debate persists in being framed using a fundamentally flawed 'Total Return vs Dividend Income' premise, then the above situation of the joggers trying to explain that it's a flawed concept will also persist, but that doesn't mean those Joggers are trying to score points - they're not, they're just trying to explain themselves....

It means the Racers are wrong to persist with not fully understanding the appeal of jogging to others, and trying to continually force their 'racing' mentality onto completely different people...

Cheers,

Itsallaguess


The problem with this is that you set up an analogy whereby the 'racers' are forcing their mentality on the poor 'joggers' who, in this analogy, are not scoring points but merely 'trying to explain themselves'.

Now, if by constructing this analogy, you're putting me into the 'racer' camp, you're doing so with no justification from my post, which is offensive.

Or, if not, you're hijacking a reasonable thread to make a seeparate point, which is tiresome.

My question and motive gives no support to the inappropriate analogy. I will not be placed into a silly position of being in a battle; I am simply interested in evidence to gain better understanding

Uncle

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Re: Different ways of taking income

#417313

Postby UnclePhilip » June 4th, 2021, 1:17 pm

NotSure wrote:
UnclePhilip wrote:
Nothing to do with scoring points, just looking at past performance and taking a view with regard to probability, risk and human nature.



This is something I have looked at - I am accumulating at this point, but if I can achieve a better total return via re-investing income producing stock, then I would try to do so. Plus, I am 'practising' for when I retire to try to decide whether to use drawdown or annuity. If drawdown, then what approach should I adopt.

A couple of articles on this linked below, but from what I read, the consensus is that when in retirement using a TR approach rather than purely focussing on income has been much more successful since about 2008, coincidentally or otherwise the advent of the QE experiment.

There seem to several reasons for this - focus on income reduces diversification since e.g. tech stock do not tend to pay out much so are generally avoided by income seeking investors. There are tax implications. To summarise:

A 2016 study by Vanguard Research identified the following four key advantages: better diversification, more control over portfolio withdrawals, better tax efficiency and the potential of increasing a portfolio’s longevity(6).


https://cipinvest.com/investment-perspective-blog/2020/1/21/constructing-retirement-portfolios-the-income-versus-the-total-return-approach

https://illuminate.nucleusfinancial.com/blog/income-vs-total-return-debate-retirement

As is usual in these things, I fall into neither the 'purist' TR or income camps, and am experimenting with a blend of growth in the hope of accumulating, plus income, also in the hope of accumulating more steadily, but I also feel income shares can be 'defensive'. The main argument against 'pure' income in my mind is the reduced sector diversification it enforces.


Thanks for these links NotSure, much appreciated; I'll have a read!
Uncle

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Re: Different ways of taking income

#417315

Postby scrumpyjack » June 4th, 2021, 1:27 pm

I looked at the first one and it rather lost credibility as not once was inflation mentioned. Inflation is a rather important consideration in retirement planning and was the main reason for interest rates, and bond yields, being higher in the earlier part of the period discussed by the article.

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Re: Different ways of taking income

#417319

Postby NotSure » June 4th, 2021, 1:34 pm

UnclePhilip wrote:
Thanks for these links NotSure, much appreciated; I'll have a read!
Uncle


Here is a little more 'proper' research on this, which does seem to be surprisingly lacking (or carried out by parties trying to sell one approach or the other)

https://www.timelineapp.co/blog/retirement-income-natural-yield-and-free-dividend-fallacy/

And an article close to my heart :)

https://www.morningstar.co.uk/uk/news/69233/income-vs-total-return-strategies-why-take-sides.aspx

Itsallaguess
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Re: Different ways of taking income

#417321

Postby Itsallaguess » June 4th, 2021, 1:36 pm

UnclePhilip wrote:
Now, if by constructing this analogy, you're putting me into the 'racer' camp, you're doing so with no justification from my post, which is offensive


No offence was intended, of course, and I'm not quite sure how any could be taken if I'm quite honest...

Can we please just remember that it was you who framed your original post with the following context -

"there seems to be a continuing debate around whether it is more profitable to follow a 'total return and sell a few when needed' versus 'live off the dividends and/or yield'"

and I have simply been trying to explain that doing so is starting from a false position, because as far as I'm aware, the 'live off dividends and/or yield' side of the debate doesn't ever try to actually argue that doing so 'is more profitable', so please accept that by opening this topic in the way that you did, you set a false premise that I think it's quite correct to be able to discuss....

Please though - if you're able to find any example of someone who persistently tries to point out that 'living off dividends and/or yield' is 'more profitable' than taking a more 'Total Return' approach to investment, I would be very interested in links to those posts on this board...

I've regularly asked Alaric the same question in the past, and all we've ever got following that question is complete radio silence, so I hope that by framing your own question in such a way, that you're able to back up that opening premise with examples of where the 'more profitable' angle has ever been claimed from someone who 'lives off their dividends and/or yields'.

This 'debate' that you raised needs two sides to be claiming it - please show me where the yield crowd are doing so....

If you can't do so, do you accept that your opening premise was a false one?

Cheers,

Itsallaguess
Last edited by Itsallaguess on June 4th, 2021, 1:39 pm, edited 1 time in total.

NotSure
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Re: Different ways of taking income

#417323

Postby NotSure » June 4th, 2021, 1:38 pm

scrumpyjack wrote:I looked at the first one and it rather lost credibility as not once was inflation mentioned. Inflation is a rather important consideration in retirement planning and was the main reason for interest rates, and bond yields, being higher in the earlier part of the period discussed by the article.


Indeed. This seems an issue with a lot of published work in this area. The link I posted (just) above tries to address this, but it US oriented. Does have some nice data showing what portion of TR was income generated, decade by decade.

I'm just interested in research backed evidence on what approach to use in retirement. 1nvest has posted a lot that tries to address this, but for some reason, as alluded to above, the debate can often seem artificially polarised (IMHO).

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Re: Different ways of taking income

#417331

Postby Alaric » June 4th, 2021, 2:14 pm

Itsallaguess wrote:I've regularly asked Alaric the same question in the past, and all we've ever got following that question is complete radio silence, so I hope that by framing your own question in such a way, that you're able to back up that opening premise with examples of where the 'more profitable' angle has ever been claimed from someone who 'lives off their dividends and/or yields'.


The HYP people seem to regard capital value as unimportant. Why is this not the same as treating £ 1 of capital gain as having a lower worth than £ 1 of dividend? It's even in the terms of reference for their discussion board to refuse to discuss shares with lower dividend yields than the FTSE 100 average.

Never mind joggers and runners, is it accepted that a share with 6% running income, with both zero dividend and share price growth gives the same return as a share with 2% running income but 4% dividend and share price growth?

If the theory of risk v reward is correct, the higher returns are given by the strategies that take on the greater risks. There's a greater risk of failure alongside the returns. The extremities would seem to present the greatest risks. On the growth side that's where a share's value is based mostly on what other people will pay you for it on its future prospects. On the income side that's where the dividend is well on the other side of sustainability and essentially a return of capital or even worse borrowing to distribute.

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Re: Different ways of taking income

#417333

Postby 1nvest » June 4th, 2021, 2:25 pm

Dividends are just a part element of total returns, paid out in amounts and at times that someone else prefers. Measuring/comparing total returns is a reasonable choice for relative comparisons. If another held a dividend paying version of a stock index and I held the accumulation version where dividends were auto-re-invested, and I sold sufficient shares in amount/times that matched the dividend payments then other than possible differences in taxation and the cost of a trade there'd be little/no difference. Unless dividends precisely match how much and when you wanted to liquidate some of total returns then you're also having to trade, either sell some shares to supplement the dividend or buying shares with some of the dividend payment.

DIY dividends, selling down some of total returns in amounts and at the times I desire/need is my personal preference of taking income. I also like the SWR approach as that provides a regular inflation adjusted income. With ii as my broker I pay a £10/month fee and get a free trade as part of that, which can be used to draw/pay my monthly 'wage' for no extra cost. A household pair have £12,300/year capital gains tax allowance, £24,600 combined, so if the stock value had doubled over the holding period you can sell £49,200 worth of stock in a single fiscal year without incurring a tax liability. If both also have £12,570 each of pensions/wages and no other income/interest that again is within the tax free personal income tax allowance.

Buffett says that Berkshire Hathaway (a by policy non divided paying stock) will retain cash for as long as it can redeploy it more effectively within the business and grow shareholder value at a higher rate than investors would get by receiving dividends. Dividends induce potential tax events and are in effect the firm throwing out some of its core capital presumably because they think you can better deploy that capital than them. If the firm/stock was priced at twice book-value, where the book value is reduced by a £1 for each £ of dividend paid, then if instead the firm retained that capital and each investor sold shares to generate their own DIY dividends then those dividends are being paid by others - the buyer of the shares at a 2:1 price to book-value rate.

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Re: Different ways of taking income

#417339

Postby scrumpyjack » June 4th, 2021, 2:48 pm

Many of these arguments seem to me akin to ‘is the glass half full or half empty’.

I have never sought dividends per se, but strong growing companies. These tend to be ones with a record of consistent growth, well covered and increasing dividend, absence of creative accounting (eg no core or adjusted profit fiddling) etc etc. If a company cannot pay a third of its profits in dividends without compromising future growth, maybe it isn’t that strong? Having invested on that basis for over 50 years, the dividends easily exceed the income required, but that is a result of buying strong companies shares, not of seeking income.

History is littered with companies that have become hugely profitable and have squandered it buying other companies at the peak of the cycle and wasting shareholders funds. In the US dividends have been much higher taxed than gains – that must contribute to Buffets preference not to pay them. So maybe it is better to pay reasonable dividends and let shareholders decide where to reinvest them, rather than gung ho executives building their empire.

My attitude to fixed interest is formed by living through the ultra high inflation of the seventies so I will never touch them. That example is one reason that I doubt any academic research of past returns on different mixes of asset would be a reliable pointer to what is best for the future. Circumstances change and we cannot forecast what will happen to inflation, stock market returns etc for the next 40 years.

So my take on this is obviously diversify, buy assets that have a good chance of at least maintaining real value, have a good chunk of cash to tide you over the crashes, and don’t get too hung up on each company’s dividend this quarter.

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Re: Different ways of taking income

#417340

Postby UnclePhilip » June 4th, 2021, 2:52 pm

NotSure wrote:
UnclePhilip wrote:
Thanks for these links NotSure, much appreciated; I'll have a read!
Uncle


Here is a little more 'proper' research on this, which does seem to be surprisingly lacking (or carried out by parties trying to sell one approach or the other)

https://www.timelineapp.co/blog/retirement-income-natural-yield-and-free-dividend-fallacy/

And an article close to my heart :)

https://www.morningstar.co.uk/uk/news/69233/income-vs-total-return-strategies-why-take-sides.aspx


Thanks for these, they're interesting.

I was struck by the mention of the large tech and tech-like stocks which pay none or negligible dividends, which have carried our portfolio very successfully through recent 2020 volatility.

More to think about; thanks for the links,

Uncle

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Re: Different ways of taking income

#417341

Postby NotSure » June 4th, 2021, 3:00 pm

scrumpyjack wrote:....My attitude to fixed interest is formed by living through the ultra high inflation of the seventies so I will never touch them. That example is one reason that I doubt any academic research of past returns on different mixes of asset would be a reliable pointer to what is best for the future. Circumstances change and we cannot forecast what will happen to inflation, stock market returns etc for the next 40 years....


That highlights a problem with much of the research - it assumes 'income' seekers will be using a good proportion of fixed interest assets, and it is based over periods where real interest rates were often positive.

Vanguard have looking into this. Arguably, they have an axe to grind, but since they sell fixed interest products, plus have got FTSE to produce an index specifically aimed at UK yield, they have no real reason for bias:

https://personal.vanguard.com/pdf/total-return-investing.pdf

The Vanguard UK Equity Income index (if you look at the current portfolio, it seems to be basically a 'tinkerer's HYP'):

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-uk-equity-income-index-fund-gbp-acc

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Re: Different ways of taking income

#417349

Postby Alaric » June 4th, 2021, 3:58 pm

NotSure wrote:The Vanguard UK Equity Income index (if you look at the current portfolio, it seems to be basically a 'tinkerer's HYP'):

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-uk-equity-income-index-fund-gbp-acc


If you follow the link and look at the income distributions per unit, they drop considerably in 2020 from a high in December 2019.

Anyone following an index tracking approach to generating income may have needed to sell assets during 2020 to maintain a previous level of income.

Vanguard's fund is weighted by market capitalisation, the largest holding is Unilever.

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Re: Different ways of taking income

#417366

Postby NotSure » June 4th, 2021, 5:11 pm

Alaric wrote:Anyone following an index tracking approach to generating income may have needed to sell assets during 2020 to maintain a previous level of income.


The fund has a currently quoted turnover rate of 132.7%! However, the OCF is only 0.14% (rising to 0.29% if you read the small print and include transaction costs, but would still be hard to match by 'DIY'). Yield is 4.38%

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Re: Different ways of taking income

#417376

Postby kempiejon » June 4th, 2021, 5:58 pm

UnclePhilip wrote:For someone of retirement age looking to take some income from equity investments, there seems to be a continuing debate around whether it is more profitable to follow a 'total return and sell a few when needed' versus 'live off the dividends and/or yield'.

At present we have global index tracking ETFs, from which we can sell off a few to top up our current account, with a couple of years worth of cash as reserve to lessen the danger of needing to sell after market drops.

However, I've been interested to read of those here who buy pooled active investments for the yield they distribute.

Has anyone done research as to the relative merits of these two approaches?

For the avoidance of doubt, I'm not interested in any hot ideological debate; rather in looking at reasonable evidence....

Uncle


What's the received wisdom - most active fund managers cannot beat the market long term - those that can are lucky.
There are much worse plans than holding global tracker(s) taking any income thrown off and adding to that with sales in good times or drawing from a cash float to lessen any hit from down years. How big does the float have to be becomes your question and will you hold it cash or bonds or something else?

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Re: Different ways of taking income

#417398

Postby UnclePhilip » June 4th, 2021, 8:38 pm

What's the received wisdom - most active fund managers cannot beat the market long term - those that can are lucky.
There are much worse plans than holding global tracker(s) taking any income thrown off and adding to that with sales in good times or drawing from a cash float to lessen any hit from down years. How big does the float have to be becomes your question and will you hold it cash or bonds or something else?


In practice I hold about two years. In cash.

Do you think bonds would be a good idea? And am intrigued, what do you mean by 'something else'??

Uncle

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Re: Different ways of taking income

#417420

Postby Itsallaguess » June 5th, 2021, 7:02 am

UnclePhilip wrote:

What's the received wisdom - most active fund managers cannot beat the market long term - those that can are lucky.
There are much worse plans than holding global tracker(s) taking any income thrown off and adding to that with sales in good times or drawing from a cash float to lessen any hit from down years. How big does the float have to be becomes your question and will you hold it cash or bonds or something else?


In practice I hold about two years. In cash.

Do you think bonds would be a good idea? And am intrigued, what do you mean by 'something else'??


Pemium Bonds seem to be a fairly popular method of holding emergency funds, and I plan on utilising that method in some way too for near-term cash requirements once retired, but it's sometimes not clear when people might talk about 'cash' in the above sense whether they might already group 'Premium Bonds' into that 'cash' description..

Given that an adult can hold up to £50,000 in Premium Bonds, then it opens up a relatively safe option for this type of emergency funding, especially for couples, but of course there may be an element of inflation-risk sat alongside the reduced chances of the capital actually being at risk itself...

Cheers,

Itsallaguess

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Re: Different ways of taking income

#417442

Postby kempiejon » June 5th, 2021, 11:04 am

UnclePhilip wrote:
What's the received wisdom - most active fund managers cannot beat the market long term - those that can are lucky.
There are much worse plans than holding global tracker(s) taking any income thrown off and adding to that with sales in good times or drawing from a cash float to lessen any hit from down years. How big does the float have to be becomes your question and will you hold it cash or bonds or something else?


In practice I hold about two years. In cash.

Do you think bonds would be a good idea? And am intrigued, what do you mean by 'something else'??

Uncle


I'm still constructing my route out of permanent, full-time, paid employment; my cash is held in current and savings accounts, I also like premium bonds. I have some preference shares and other fixed interest and ishare and vanguard bond and gilt ETFs which I guess are part of that "cash like".
I think 3 years of cash/cash like is where my head is at but I guess that's a live experiment and as I have a backstop of the state pension and a local government defined benefit pension as I get nearer to claiming them I think the float can come down a bit.


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