HYPs versus income ITs, 2011-22

[Luniversal]

After last Monday's inspection of my 'LuniHYP100' portfolio, now 11 years old, here is how it stands up against other proposals for income primarily from British shares.


The conservatively selected 'Sturdy HYP', recently reverse-engineered, and the two baskets of investment trusts conceived in 2010 are joined by City of London Investment Trust (CTY) from the Basket of Eight as a solo option. It is often suggested that this old faithful-- the epitome of the middle-of-the-road fund-- could do the job by itself (2).


Uniform assumptions are:

Launch: Jul. 18, 2011, LuniHYP100's birth date.
Close: Jul. 18, 2022.
Sum invested: <=£18,000 before purchase costs.
Allocation: equal amounts within portfolio.
Dividends not reinvested.
No subsequent changes in composition except when a member was taken over (1).


Benchmarks:

FT All-Share Index: +32.7%, 2011-22; compound annual growth rate (CAGR) 2.6% pa
FTSE 100 index: +25.5%, CAGR 2.1% pa
Retail Prices Index: +44.6%, CAGR 3.4% pa


To preserve purchasing power-- though this is not the main goal-- £18,000 must have grown to c. £26,000. To match the FTAS it should grow to £23,700. To equal the Footsie it should be worth £22,500.


Contestants:

LUNIHYP100

DESIGN AND OBJECTIVE: 'Classic' 15-share High Yield Portfolio, picked from FTSE 100 members. Aims to supply steadily rising dividends which conserve initial purchasing power, if not all the time. Target yield substantially above FTSE 100 average. No unforced tinkering. Design life upwards of 20 years, cash-in value of capital a minor consideration.

LATEST REVIEW:
viewtopic.php?f=15&t=35207&p=515414#p515414


STURDY HYP

DESIGN AND OBJECTIVE: Similar to LuniHYP100 but limited to 'Sturdy Seventeen' companies, defined in 2010 as most reliable income generators over previous quarter-century.

LATEST REVIEW:
viewtopic.php?f=31&t=33422&p=481775#p481775


BASKET OF EIGHT (B8)

DESIGN AND OBJECTIVE: Eight investment trusts, initially all in 'UK Equity Income and Growth' sector. They yield appreciably above average but with more underlying spread than HYPs, and less volatile as payers after internal reserving of receipts. Managers try for progressive distributions, but they also eye capital gain through rotation of constituents.

CONSTITUENTS: AEI/CTY/DIG/EDIN/MRCH/MUT/SCF/TMPL

CURRENT YIELD (%): 4.7

LATEST REVIEW:
viewtopic.php?f=54&t=32455&p=464307#p464307


CITY OF LONDON INVESTMENT TRUST (CTY)

DESIGN AND OBJECTIVE: 'To provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange'. Much the same as B8.

CURRENT YIELD (%): 4.8


BASKET OF SEVEN (B7)

DESIGN AND OBJECTIVE: Seven trusts, average yield about same as UK equity market. Real and steady income growth sought, quicker than for the B8 but from a lower starting payout. Capital growth incidental, volatility moderate. Being 'growthy' rather than 'juicy', the B7 is not expected to match other options' income over first 10-12 years, hence ellipses below.

LATEST REVIEW:
viewtopic.php?f=54&t=28791&p=401947#p401947

CONSTITUENTS:
BNKR/CTUK (previously BCI)/JCH/LWI/MRC/MUT/MYI
CURRENT YIELD (%): 4.0

-----------------------------------------------------------------------------------------------------------------------------------
Results shown in order detailed above, i.e LuniHYP100 first... B7 fifth.

INCOME (£)

Latest annual total and change year/year (%)
878/916/1121/1181...1022

Total to date
12,685/10,634/10,687/11,156...9616

CAGR (%)
0.5/2.6/4.7/3.6...4.5
Number of real increases (out of ten, year/year)
6/5/6/6...9


First things first. The biggest income is being furnished by the 'juicy' B8, followed by the other IT portfolios; the HYPs are well behind, having taken the blows of 2020-21 to dividends without the protection of trusts' revenue reserves and their other means of sheltering income, such as writing covered options or manipulating debt. But this gap is recent. Over the full term, the LuniHYP generated nearly £13,000 from an £18,000 principal, versus c. £10-11,000 from the trusts. The Sturdy HYP, however, paid out no more than the B8.


WITHDRAWAL RATE (%)

Original
4.0/3.9/3.6/3.6...3.3
Time-weighted average
4.9/4.5/4.2/4.3...3.8
Current
4.3/3.7/4.6/4.6...4.3


Gyrations of income translated into spendable yields on the sum invested which range from an average 4.9% for LuniHYP to 3.8% for the growthy Basket of Seven. The B7's relative paucity in early years could have been predicted from research into 2000-10, and it may come into its own from now on if its members live up to their mandates.


Other options' withdrawal rates have clustered between 4.2% and 4.5%. At present the Sturdy HYP alone pays under 4%. Trusts promise more-- even the B7. Whatever one chose, all streams have been shielded against inflation.


NUMBER OF WITHDRAWAL RATE CHANGES (out of possible ten, year/year)

Increase
1/1/1/1...1
Cut
2/2/0/0...0


Each portfolio achieved at least one uplift in withdrawal rate besides indexation. My assumption is that increases should stick if not too ambitious or frequent: say, every five years or thereabouts. That was confounded for the HYPs by their vulnerability to the one-two punch of covid and inflation since early 2020; each has incurred two cuts, of 10-15% apiece. The LuniHYP's trim left it on a yield which compares well with what it was throwing off a decade ago, but the Sturdy HYP's withdrawal rate of 3.7% is 0.2 points under its original rate.


SAFETY MARGIN (%)*
87/96/90/88...91


The Sturdy HYP's 'derisking' has been gentlest, to maintain a respectable quotient of spendable income. All but 4% of its raw income has been thus liberated, which could prove dangerous. The reserve will empty pdq if huge, sluggardly dividend-dispensers in the Sturdy Seventeen keep finding reasons not to get back on the ball.


Other options have held back between 9% and 13% of raw receipts while supporting a better withdrawal rate than the Sturdy HYP's. Remember that the trust-based options already retained c. 3% in their own revenue reserves: less than a few years ago, after declaring mostly uncovered dividends during the pandemic and after.

*Spendable receipts relative to 'raw' income, after transfers to income reserve.


INCOME RESERVE (months cover for current payout)

Latest
18/6/11/14...10
Previous
20/6/13/16...11
Average
13/6/10/11...7


Reserves stand at between the Sturdy HYP's skimpy six months-- seldom higher in better days-- and a possibly excessive 18 months in the LuniHYP100. At least the Sturdy's second cut ensured its kitty was no smaller than in Jul. 2021; the rest are all lower by a month or two. One month in the stash for each year's operation is desirable. The broad state of play is close to that.


CAPITAL

Latest value (£)
23,399/30,605/22,594/24,045...26,430


The perverse inverse of the Sturdy HYP's poor income delivery is that you could now flog it for £30,605-- far more than the other four. The B7, befitting its growthiness, ranks second on £26,430, possibly anticipating superior dividend advances. The Sturdy HYP may share such optimism, though it is hard to discern whence such acceleration may arise.


LuniHYP100, on the contrary, has gained less than one-third since its launch. The message here seems to be that its generous income has been of lower quality, less capable of running on strongly. The B8 bunch also failed to shine. Edinburgh and Temple Bar are recent detractors which needed a shake-up. Beyond those stumbles, one sniffs a tendency in the juicy basket to push for tempting headline running yields and nominal 'dividend hero' status. The B8 could be too full of shares whose best days are past.


CAGR (%)
2.5/5.0/2.1/2.7...3.6


Maybe Sturdy HYP's capital strength expresses satisfaction that although its income to date has not led the field, income growth has done so by quite a margin: 5% compound. Next best is the B7's 3.6%. The other three choices did not even keep up with inflation.

Real value (launch=100)
91/118/87/93...102


The Sturdy HYP is worth almost one-fifth more than at launch, thanks to the shift from growth to value stocks since 2021 which has rehabilitated old, obvious Big Board names more than smaller issues. Again, the B7 is runner-up on the capital side, realisable for about the same purchasing power as was committed in 2011. The others would fetch less than then.


Number of real increases (out of 11, year/year)
6/9/4/4...6


This is an unusually depressed time to be pricing either HYP. In six years out of eleven they rose faster than inflation and were usually disposable for more than had been invested. The B8 and City of London were not resilient, beaten by the RPI seven times out of eleven; however, falls were generally smaller than rises. The Sturdy HYP lived up to its name by lifting real worth nine times out of eleven.


PERFORMANCE v. FTSE 100 INDEX

Number of years outperforming (out of 11)
6/9/6/7...5

Average outperformance pa (points)
0.4/2.8/0.4/1.2...2.0


As a hold-forever fellow I care little about capital movements except as an indicator of income potential, and worry less about results relative to the equity market. FWIW, four of the five variants bested the Footsie half the time or more, and all of them have shown long-term superiority. This edge was between 0.4 points a year for LuniHYP100 and the Basket of Eight and 2.8 points for Sturdy HYP, that 'hero in error'. Once again the B7 was next behind it on this measure.

============================================================================================

(1) In the Basket of Eight AEI replaced Invesco Income Growth (IVI), taken over for cash in early 2021. In the Basket of Seven, MUT acquired PLI by share exchange, Nov. 2020.

(2) Beware of staking everything on one runner, though-- even if. like CTY. it has upped the dividend 55 years running. Outcomes within apparently similar trusts can diverge a lot.


Dividend growth rates and share price changes (%) for B8 members, 2011-22:

abrdn Equity Income (previously Invesco Income Growth): 6.6, +20.9
City of London: 3.5, +36.2
Dunedin Income Growth: 2.0, +21.3
Edinburgh: 3.1, +7.6
Merchants: 1.8, +37.1
Murray Income: 0.6, +22.5
Schroder Income Growth: 3.4, +41.7
Temple Bar: 1.0, +16.5