5 years ago

[moorfield]

There is of course a huge elephant in the room lurking behind this question. Without discussing explicitly what that is, I thought it might be fun/interesting/insightful to ask ...

Is your HYP now producing the income you were expecting it to be producing five years ago today ?

[funduffer]

In my case, No, my HYP is not producing the income I expected.

I expected it (income per unit) to increase roughly with inflation, but instead it has declined by 30% over the last 5 or 6 years.

In contrast, my IT portfolio has produced an increase in income per unit of 20% over the same time period, beating inflation.

My 'elephant in the room' is of course the pandemic and it's effect on dividends, although the decline of my HYP started at least 1 year before the pandemic struck.

The lesson learnt for me is that to make HYP robust to big, adverse events, you need to have a lot of safety reserves in place to allow time for recovery. I.e. exactly what IT's do with their income reserves!

FD

[Dod101]

I expect my HYPish portfolio to produce around the same income as it did 5 years ago for the current year. It may be down a little but nothing like 30%. For last year it was about 10% below. It is though a very broad question and can only get a very broad answer. Interesting though to look back at the numbers.

The never ending discussion about the merits of ITs compared to say a HYP goes on, because the trouble with funduffer's comments re them is that some of them at least will be using their revenue reserves to bolster their income. Despite the name, that means that they are effectively using some capital as income. This is not presumably happening with the income from a HYP.
Dod

[monabri]

#if I could turn back time (Cher)....

I would have generally avoided individual shares...my stockpicking skills are not good enough. I would have invested in a mix of ITs for income and a mix for growth.

I think for someone to reach retirement age and then decide to invest to produce an income is fraught with danger and this danger is compounded by individual share selection.

"Reliable" dividend shares suddenly aren't and cut or suspend dividends! some for the first time in 3/4 of a century ( HSBA, RDSB, IMB). I would also have stuck with the more mainstream broker platforms ( rather than the likes of SVS Securities).

[Dod101]

#if I could turn back time (Cher)....

I would have generally avoided individual shares...my stockpicking skills are not good enough. I would have invested in a mix of ITs for income and a mix for growth.

I think for someone to reach retirement age and then decide to invest to produce an income is fraught with danger and this danger is compounded by individual share selection.

"Reliable" dividend shares suddenly aren't and cut or suspend dividends! some for the first time in 3/4 of a century ( HSBA, RDSB, IMB). I would also have stuck with the more mainstream broker platforms ( rather than the likes of SVS Securities).

I am of course an example of that someone who lives off and relies on his investments for his income as I have no pension other than the State Pension. I do not see this as 'fraught with danger'. I agree that the three shares monabri has quoted were a bit of a shock to the system, more so than any others for me, but I survived without any hardship and without drawing on any reserves. Of my 30 shares, 5 are ITs and of those only three are income ITs so I certainly rely on individual shares for the bulk of my income.

Fundamental is the security of the platform and that always worries me more than the shares held.

Dod

[moorfield]

"Reliable" dividend shares suddenly aren't and cut or suspend dividends! some for the first time in 3/4 of a century ( HSBA, RDSB, IMB).

I think we can now add GSK to that list.

[Gengulphus]

There is of course a huge elephant in the room lurking behind this question. Without discussing explicitly what that is, I thought it might be fun/interesting/insightful to ask ...

Is your HYP now producing the income you were expecting it to be producing five years ago today ?

That question is ambiguous. Which of the following do you mean?

1) Back in 2016, I was expecting my HYP to produce a certain amount of income in the following year (i.e. the year from June 2016 to June 2017). Is my HYP now producing that amount of income?

2) Back in 2016, I was expecting my HYP to produce a certain amount of income in 2021. Is my HYP now producing that amount of income?

But I can produce (non-)answers to both of those questions:

For question 1, my HYP-tracking spreadsheet does produce a forecast income figure for the next year (roughly - varying company financial years mean that in June 2016, the forecasts used would have been for periods ranging from July 2015 - June 2016 (e.g. for BHP Billiton) to May 2016 - April 2017 (e.g. for DS Smith) and the figure the spreadsheet produces is therefore for a sort of blend of those year-long periods). But unfortunately, I regularly update that spreadsheet and don't take 'snapshot' records of it, so those forecast income figures are long gone, and so I cannot answer question 1) with any certainty.

Furthermore, while I could use my tax records of income actually produced by my HYP in the previous year, supplement them with income produced in tax shelters and add a few percent to get a rough idea of what I was expecting back then, I've done some quite major additions and withdrawals of cash to/from my HYP in the last five years, so comparing that rough idea with my HYP's current value would be a rather futile exercise unless I were also to unitise my HYP. That's something I've never done, basically because by the time I learnt about unitisation, I already had far too many historical transactions on dates when I could no longer determine the HYP's value, an essential input to the unitisation calculations. I could in principle unitise my HYP for the last several years, extending backwards until the inaccuracies (due to companies that have since been taken over or otherwise left the market, long enough ago that their historical share prices are no longer available) built up too much for me to regard the results as roughly correct, and I'm fairly certain that would be substantially more than 5 years. But it would be a lot of work... So while I'm fairly certain that I could in principle produce a rough-but-not-too-rough answer to your question, in practice I'm not going to - sorry!

Question 2 is simpler: I have never bothered even trying to forecast how much income I'm expecting my HYP to produce in 5 years' time, an exercise I've long regarded as completely futile because of the high likelihood of major changes in market conditions over a 5-year period. So question 2's implicit premise that I had an expectation in 2016 about how much income my HYP would be producing in 2021 is incorrect and as a result, the question it asks is meaningless.

Unless you're interested in the highly-qualitative answer "Yes - in 2016, I was expecting my HYP's income to be well more than adequate for my needs, not just in 2021 but in all future years, and it is indeed still producing a well-more-than-adequate amount of income".

Gengulphus

[moorfield]

To answer my own question, the last 5 years have not quite gone according to plan as one can see from the chart, however I am expecting to be back on track by the end of this year. I do not operate a "never sell" HYP, but I do aim to buy and hold high yield FTSE350 and preference shares. I have had to churn a lot of my portfolio this year to keep up with that red line.

[monabri]

In terms of modelling, one would have had to rebase both income level and (likely) an assumed future dividend growth rate to a more pessimistic value. To answer the original question, in my Excel modelling I have had to make corrections, downwards, ameliorated to a degree by addition of new money.

Rejigging a portfolio to recover income might work short-term as long as one hasn't done this by moving to the Carillions ( zip code, Crapsville 123).

[funduffer]

To answer my own question, the last 5 years have not quite gone according to plan as one can see from the chart, however I am expecting to be back on track by the end of this year. I do not operate a "never sell" HYP, but I do aim to buy and hold high yield FTSE350 and preference shares. I have had to churn a lot of my portfolio this year to keep up with that red line.

Presumably the last yellow point on the graph is a forecast for 2021? How is this forecast made?

And the elephant in the room for you is……what exactly?

[Gengulphus]

And the elephant in the room for you is……what exactly?

after moorfield had started the thread earlier with:

There is of course a huge elephant in the room lurking behind this question. Without discussing explicitly what that is, ...

Need I say more?

Gengulphus

[tjh290633]

Dividends rise and fall, but by less than share prices. Here is the record of my dividends in pence per income unit:

.            Ordinary 
Year to      Divs/unit
05-Apr-88         2.83
05-Apr-89         2.25
05-Apr-90         3.40
05-Apr-91         4.67
05-Apr-92         5.94
05-Apr-93         5.52
05-Apr-94         5.31
05-Apr-95         6.45
05-Apr-96         6.27
05-Apr-97         7.13
05-Apr-98         7.55
05-Apr-99         7.92
05-Apr-00        10.79
05-Apr-01        11.39
05-Apr-02        12.46
05-Apr-03        11.68
05-Apr-04        11.13
05-Apr-05        13.03
05-Apr-06        14.21
05-Apr-07        15.18
05-Apr-08        18.73
05-Apr-09        21.60
05-Apr-10        11.91
05-Apr-11        15.12
05-Apr-12        17.78
05-Apr-13        19.93
05-Apr-14        20.34
05-Apr-15        21.35
05-Apr-16        21.68
05-Apr-17        24.17
05-Apr-18        27.02
05-Apr-19        26.36
05-Apr-20        29.71
05-Apr-21        19.34

As you can see, there was a reduction last year, approximately one third. It is too early to opine on 2021-22.

TJH

[1nvest]

Dividends rise and fall, but by less than share prices.

But not always. Barclays Equity Gilt Study historic data for instance shows inflation adjusted stock income index drawing down deeper than the inflation adjusted stock price index declines. -86% for dividends, -72% for price.

A risk with spending dividends is that dividends could collapse and historically share prices were also deeply down in real terms around the same time. Dividends are variable and might not sit well with your spending. High dividends might tempt to spend too much. High Yield stocks aren't magical, likely will provide the same broad total return rewards as other choices. Historic US data suggests that 4% SWR was reasonably safe at covering 30 years of retirement (4% of initial portfolio value drawn the first year, with that £ amount uplifted by inflation as the amount drawn in subsequent years). 3% was very safe, 2% safe enough to be considered as a perpetual withdrawal rate. HYP might entice into something similar to a 5% SWR for which the prospects are riskier.

[1nvest]

In my case, No, my HYP is not producing the income I expected.

I expected it (income per unit) to increase roughly with inflation, but instead it has declined by 30% over the last 5 or 6 years.

In contrast, my IT portfolio has produced an increase in income per unit of 20% over the same time period, beating inflation.

My 'elephant in the room' is of course the pandemic and it's effect on dividends, although the decline of my HYP started at least 1 year before the pandemic struck.

The lesson learnt for me is that to make HYP robust to big, adverse events, you need to have a lot of safety reserves in place to allow time for recovery. I.e. exactly what IT's do with their income reserves!

FD

Relying upon dividends to match spending is a mismatch. A HYP stock set can still provide income in a more consistent manner with a revision in how and how much income is drawn from the portfolio. If a 60 year old, anticipated a 83 life expectancy, 24 years, allocated 222K to a self insured DIY 12K/year (5.4% initial yield) regular income US SPIA type holding, with a projection of a 2%/year nominal investment total return and 2% inflation, but where the funds were invested by Terry into a TJH HYP accumulation, then they'd be very comfortable after the last 5 years.

Perhaps a way might be to combine the two approaches for better income production stability. If dividends are covering spending then fine. If not then switch into a DIY SPIA type mode. And maybe later rotate back to just using the dividends again. On that basis you might not need any safety reserve and continue to see acceptable levels of income production to meet your spending needs. Safety reserves are more just a comfort thing. There's not much difference between having some cash reserves and spending those rather than from stocks compared to no cash reserves and spending from stocks.

[tjh290633]

We should perhaps reiterate that matching dividend income to expenditure is not a good idea. Better to limit expenditure to perhaps 80% of income and use the surplus to build up a reserve. Once that is secure, then reinvest the surplus to increase the dividends.

Easily said, but Mr Micawber knew all about the perils of overspending.

Those who have state and occupational pensions to underpin the dividend income are usually in a much happier place.

TJH

[moorfield]

Presumably the last yellow point on the graph is a forecast for 2021? How is this forecast made?

Income (ntm) - next twelve months - is a best guess of the cashflow my portfolio will generate if it were to be left alone ie. no further sales or top ups.
It makes an assumption that all companies hold their dividends unless or until told otherwise, for example:

VOD's income (ntm) is currently 8.06p/share, until its next results expected in November
UU's income (ntm) is 43.24p/share, its next dividend due to be paid in August having already been announced
SAN's income (ntm) is always 10.375p/share, it being a preference share
GSK's income (ntm) is 80p/share, which will be adjusted to 45p/share at some point next year. I haven't decided exactly when yet although it is likely to be either on 1 Jan 2022 once I have fixed my target for the new year, or as soon as that corporate action completes.

The overall figure is constantly in flux as dividend announcements come and go and shares are bought and sold. Following some tinkering earlier this year it has already exceeded target, which is my cue to now do nothing until next January.

[funduffer]

And the elephant in the room for you is……what exactly?

after moorfield had started the thread earlier with:

There is of course a huge elephant in the room lurking behind this question. Without discussing explicitly what that is, ...

Need I say more?

Gengulphus

Got it, Thanks!

A bit slow today!

[tjh290633]

GSK's income (ntm) is 80p/share, which will be adjusted to 45p/share at some point next year. I haven't decided exactly when yet although it is likely to be either on 1 Jan 2022 once I have fixed my target for the new year, or as soon as that corporate action completes.

It is worth reading https://www.investegate.co.uk/glaxosmit ... 00018471C/ carefully to avoid giving wrong information.

In 2022, GSK shareholders will receive dividends from GSK and New Consumer Healthcare due to the expected mid-year timing of the demerger. Together, these are expected to amount to approximately 55p per share for the year, assuming a New Consumer Healthcare dividend at the lower end of the previously announced 30-50% pay-out ratio range and subject to approval from the Board of New Consumer Healthcare. This pro-forma full year 2022 dividend would be a 31% reduction compared to the expected 2021 dividend of 80p per share.

and

New GSK will adopt a progressive dividend policy targeting a dividend pay-out ratio equivalent to 40-60%, starting at 45p per share in 2023, the company's first full year of operation.

The current year looks like remaining at 80p total for the year,

TJH

[MDW1954]

And the elephant in the room for you is……what exactly?

after moorfield had started the thread earlier with:

There is of course a huge elephant in the room lurking behind this question. Without discussing explicitly what that is, ...

Need I say more?

Gengulphus

Got it, Thanks!

A bit slow today!

If I may elaborate a little, this thread began life on the HYP-P board, and was subsequently moved here. In that context, one can speculate a little more precisely as to what the OP's intentions were with his 'elephant in the room' remark.

MDW1954

[MDW1954]

Dividends rise and fall, but by less than share prices. Here is the record of my dividends in pence per income unit:

.            Ordinary 
Year to      Divs/unit
05-Apr-88         2.83
05-Apr-89         2.25
05-Apr-90         3.40
05-Apr-91         4.67
05-Apr-92         5.94
05-Apr-93         5.52
05-Apr-94         5.31
05-Apr-95         6.45
05-Apr-96         6.27
05-Apr-97         7.13
05-Apr-98         7.55
05-Apr-99         7.92
05-Apr-00        10.79
05-Apr-01        11.39
05-Apr-02        12.46
05-Apr-03        11.68
05-Apr-04        11.13
05-Apr-05        13.03
05-Apr-06        14.21
05-Apr-07        15.18
05-Apr-08        18.73
05-Apr-09        21.60
05-Apr-10        11.91
05-Apr-11        15.12
05-Apr-12        17.78
05-Apr-13        19.93
05-Apr-14        20.34
05-Apr-15        21.35
05-Apr-16        21.68
05-Apr-17        24.17
05-Apr-18        27.02
05-Apr-19        26.36
05-Apr-20        29.71
05-Apr-21        19.34

As you can see, there was a reduction last year, approximately one third. It is too early to opine on 2021-22.

TJH

In case anyone is interested, here is the logarithmic linear least squares regression fit of TJH's data, showing an annual compound growth rate of 6.728%.

(Calculated using the statistical package R; plotted with ggplot2.)

MDW1954