If you were picking a new basket of 7/8 ITs for income

[TUK020]

I didn't mean to be harsh. When I glanced at the recommensation and found they were yielding less than the range given, I just thought it worth noting that the OPs specification was being ignored. But as you say, there is the word "approx".

OP was being purposefully vague. If anyone thinks 4% too ambitious, I would love to see their recommendation and reasoning to match.
I do have a slight split brain approach according to which wrapper it is in
- income portfolio in my SIPP that I am drawing from including the likes of CTY, LWDB, MRCH etc
- growth portfolio in my ISA for long term capital development inc FCIT, CLDN etc

[Dod101]

A guess. The reported investment income received includes that generated by their financial engineering activities? It's still investment even if it's not direct equity or bond investment?

All the footnote (3) states is "All of the above income is derived from equity related investments." Perhaps an accountant or auditor here can help us here whether realised gains/losses are permitted to be restated as "investment income". I would have thought that is a big no no? If it isn't the case then I think we can read that HFEL has been well able cover dividend outflow from inflow for the last 2 years. I haven't looked further back than that.

I held HFEL for a couple of years or so but it was not what I wanted so I got out. I have no regrets in doing so. Once again, do not chase income!

Dod

[Arborbridge]

I didn't mean to be harsh. When I glanced at the recommensation and found they were yielding less than the range given, I just thought it worth noting that the OPs specification was being ignored. But as you say, there is the word "approx".

OP was being purposefully vague. If anyone thinks 4% too ambitious, I would love to see their recommendation and reasoning to match.
I do have a slight split brain approach according to which wrapper it is in
- income portfolio in my SIPP that I am drawing from including the likes of CTY, LWDB, MRCH etc
- growth portfolio in my ISA for long term capital development inc FCIT, CLDN etc

Vague? 4-5% was the range. I took anything inside that as being relevant, anything outside - at this time - not relevant. I think others might have thought differently because they are subconsciously promoting sub 4% yields as preferable, in their view.

[moorfield]

Once again, do not chase income!

Isn't that, essentially, what we are all here for...? This isn't the High TR Shares & Strategy board after all.

I think others might have thought differently because they are subconsciously promoting sub 4% yields as preferable, in their view.

Nor is it the Low Yield Shares & Strategies board.

[Dod101]

Once again, do not chase income!

Isn't that, essentially, what we are all here for...? This isn't the High TR Shares & Strategy board after all.

To me the answer to your question is basically ‘No’ at least I think that. It is High Yield Shares and Strategies. That to me more or less sums up an income investor. I regard myself as one but I do not chase excessively high yields such as I think we see in HFEL.

Yield is a mirage if it is at the expense of capital which is where HFEL falls down and so does for instance EAT. Total return trumps the focus on yield to me anyway because we could all sell some shares to create an ‘income’ but realising capital has never seemed to me to be quite the same as getting some capital growth with a good income. So to me the emphasis is on income but not at the expense of capital.

Often a big yield is a result of a falling share price so we are kidding ourselves that all is wonderful. This Board is not anyway confined to ITs and maybe the question would have been better posed on the IT Board.

Dod

[vand]

I recently bought some HFEL and then almost immediately regretted it, as I see from their list of top 10 holdings that none of them are actually paying out anything like the dividend yield that the trust pays out.. therefore its clear that they have a strategy of selling down capital to meet the "dividend" payout.

I have read its last annual report and am a little puzzled by this comment.

2021 Investment Income £37,236m, Equity Dividends Paid £34,040m
2020 Investment Income £35,344m, Equity Dividends Paid £31,651m

Where is the selling down of capital going on here?

I may be incorrect about this, at least historically as they state:

For the first time since the Company launched in 2007 the
dividend distributed has not been covered by the revenue
generated. The shortfall has resulted in a small drawdown of
the reserves which will stand at just under a half years' worth
of dividends following the payment of the 4th interim dividend.

They are now stretching the limits of what is payable and, given their progressive dividend policy, further payouts hikes will have to come from dividend growth from their underlying holdings.

They must be producing a fair bit of income through option writing. However this is not itself a free lunch, as sometimes those options get exercised and you end up missing out of upside growth, hence perhaps why the capital growth hasn't done as well as you might expect.

[moorfield]

Yield is a mirage if it is at the expense of capital which is where HFEL falls down and so does for instance EAT.

Well I have read HFELs financial statements and it seems to me that it has been covering its dividend well enough (see above), and is not "eating capital" as some put it. So I don't agree with you, but am happy to be proven wrong.

What are we missing here Dod? https://cdn.janushenderson.com/webdocs/ ... t_2021.pdf

[Arborbridge]

Yield is a mirage if it is at the expense of capital which is where HFEL falls down and so does for instance EAT.

Well I have read HFELs financial statements and it seems to me that it has been covering its dividend well enough (see above), and is not "eating capital" as some put it. So I don't agree with you, but am happy to be proven wrong.

What are we missing here Dod? https://cdn.janushenderson.com/webdocs/ ... t_2021.pdf

If the longer term TR is less than the long term yield+inflation, then I think Dod would argue the income is at the expense of capital. To look at it another way, if my TR is 5% and the yield is 5%, that's a fair indication that my capital is losing out to inflation.

Where I think Dod may be incorrect is that the yield is abnormally high for HFEL at the moment - it isn't usually 8% - so this might suggest it is a good time to buy since ITs rarely go belly-up and the price is likely to recover.

Another point to watch: the above considers SP not NAV. Company reports are more based around NAV which should be more important in the long term than SP.

Arb.

[dealtn]

One of the data points from the AIC site which seems to get little attention is '5 Year Dividend Growth (%pa)'.
Does it not make sense to aim for a more modest initial dividend, which is growing quickly?
I noticed that many of the ITs mentioned in this thread have very low dividend growth rates. MCT, for example, grew at only 0.4% pa over the past 5 years.

Very true.

But taking a random example of a 4% yield growing at 5%, and a 6% yield growing at 1%, it takes twelve years for the tortoise's annual divi to catch the hare's, and twenty years for the cumulative payout to catch up.

If you're going to start with a low yielder, you'd better be very sure of your growth rate!

V8

Only if you ignored Total Return and solely focussed on dividend income. What might happen to your capital over those 12 years or don't you care?

[Dod101]

Well to answer Arb, I guess that HFEL could go on for long enough as is but that is certainly not what I want. Getting smaller each year.

The price for HFEL shares might well recover but that is not to me the point. I would like to see dividend income/yield to increase as a result of the business doing well (an IT is a business don’t forget) That is, the business produces income such that it can afford good dividends. Not quite like an IT which is obliged to pay out 85% of its revenue profits but I am sure you get the drift.

Frankly I would have preferred that the old rules were left in place so that only revenue profits of the IT could be distributed.

Dod

[sizzors]

Just looked at the AIC website and if you'd have been discounting HFEL twelve months ago for the same reasons you are now you'd be disappointed to see that it's outperformed every other Asian Pacific Equity income Investment trust and every other Asian Pacific Investment Trust bar one by a miniscule amount.What do i know or is the AIC website or is the website wrong ?

[CryptoPlankton]

One of the data points from the AIC site which seems to get little attention is '5 Year Dividend Growth (%pa)'.
Does it not make sense to aim for a more modest initial dividend, which is growing quickly?
I noticed that many of the ITs mentioned in this thread have very low dividend growth rates. MCT, for example, grew at only 0.4% pa over the past 5 years.

Very true.

But taking a random example of a 4% yield growing at 5%, and a 6% yield growing at 1%, it takes twelve years for the tortoise's annual divi to catch the hare's, and twenty years for the cumulative payout to catch up.

If you're going to start with a low yielder, you'd better be very sure of your growth rate!

V8

Only if you ignored Total Return and solely focussed on dividend income. What might happen to your capital over those 12 years or don't you care?

Well, the remit was to select a basket of ITs with a target yield of 4-5%, without any reference to TR. However, I would suggest that the answer to your question "what might happen to your capital?" if you focus solely on dividend income is surely that it might go up, down or stay roughly the same. If your implication is that a faster growing lower starting yield will lead to greater capital gain then, though it may prove to be more likely, it is far from certain. A few examples from the FTSE 100 over the past ten years:

Unilever - original yield approx 4%, dividend compound annual growth rate (CAGR) about 6%, capital gain 70%.

British American Tobacco - yield approx 4%, CAGR about 5%, capital growth O%

BAE Systems - yield > 5%, CAGR < 3%, capital gain 165%

AstraZeneca - yield approx 6%, CAGR 0.17%, capital gain 270%

Clearly, I have picked these examples to illustrate the point, and it may well be that, more generally, there is a tendency towards outperformance by the lower yielders. However, if a reliable income is one's main requirement, it strikes me that it is easier to find steady dividend payers than to rely on having the ability to pick shortish term "growers". Having said that, I am personally happy to invest in "growthier" shares for the longer term as long as my dividend income requirements have been met.

As always, I think it comes down to individual resources, needs, enthusiasm and expertise. For me, at least, it's not so much a case of not caring about TR, it's simply more about trying to generate a regular and reliable income as the first priority, without having to be particularly concerned about capital fluctuations. A few years in, I am very relaxed about how it is going. If I had been more skilled and adventurous, I'm sure I could have achieved a greater TR but, as long as the strategy appears sustainable (and it seems to be stress tested quite a lot!) then that's of little consequence to me.

Back on topic, I'd find it difficult to stick to just seven or eight, so best not try. TBH, at the risk of being called a heretic, I never really felt there was enough diversification in the B7/B8 portfolios for my liking - I would certainly have looked for less duplication with an IT portfolio that size.

[Itsallaguess]

Only if you ignored Total Return and solely focussed on dividend income. What might happen to your capital over those 12 years or don't you care?

As always, I think it comes down to individual resources, needs, enthusiasm and expertise.

For me, at least, it's not so much a case of not caring about TR, it's simply more about trying to generate a regular and reliable income as the first priority, without having to be particularly concerned about capital fluctuations.

A few years in, I am very relaxed about how it is going. If I had been more skilled and adventurous, I'm sure I could have achieved a greater TR but, as long as the strategy appears sustainable (and it seems to be stress tested quite a lot!) then that's of little consequence to me.

I think the key point lost on many of the recent TR-proponents who like to get involved in these discussions, well-meaning as they are I might add, is that many income investors are simply looking for an annuity-substitute that allows them to keep their own capital, but which still delivers a useful and reliable 'annuity-like income' from it, without the need to give someone else that initial lump of investment capital and lose it forever from day one...

Taken in that specific context, then hopefully they might see that 'capital growth' in and of itself might already be seen 'to have happened' in some sense, in that their capital at least starts off the whole exercise at 100% of the initial investment level, rather than what might be seen as a drop to 0% straight away if an alternative, annuity-driven path were to be taken...

Now I suspect that many of those TR-proponents might counter that philosophy with the view that the above is not an argument they'd approve of, because they'd not buy an annuity either, and that might well be the case given the investment experience of those that might make such an argument, but hopefully we might agree that there is often little to be gained from only ever seeing this clash of strategic styles purely through the eyes of much more experienced investors, who seem to insist on ignoring many of the primary underlying requirements of the income-investors that they often find themselves clashing up against...

Cheers,

Itsallaguess

[dealtn]

One of the data points from the AIC site which seems to get little attention is '5 Year Dividend Growth (%pa)'.
Does it not make sense to aim for a more modest initial dividend, which is growing quickly?
I noticed that many of the ITs mentioned in this thread have very low dividend growth rates. MCT, for example, grew at only 0.4% pa over the past 5 years.

Very true.

But taking a random example of a 4% yield growing at 5%, and a 6% yield growing at 1%, it takes twelve years for the tortoise's annual divi to catch the hare's, and twenty years for the cumulative payout to catch up.

If you're going to start with a low yielder, you'd better be very sure of your growth rate!

V8

Only if you ignored Total Return and solely focussed on dividend income. What might happen to your capital over those 12 years or don't you care?

Well, the remit was to select a basket of ITs with a target yield of 4-5%, without any reference to TR. However, I would suggest that the answer to your question "what might happen to your capital?" if you focus solely on dividend income is surely that it might go up, down or stay roughly the same. If your implication is that a faster growing lower starting yield will lead to greater capital gain then, though it may prove to be more likely, it is far from certain. A few examples from the FTSE 100 over the past ten years:

Well, I think you are making my point for me.

The remit was to select ITs with a target yield, without any reference to future Dividend Income return either. And I agree Capital might go up, it might go down, or stay roughly the same. The argument about which would produce more likely capital growth is a complex one, and would depend on a number of factors. A lower, but growing starting yield may well turn out to lead to such outperformance - but it too will depend on many unpredictable future outcomes. I would suggest these are at least investigable from the outset, but Dividend Income Yield would be a poor single tool set to do so in selection. Earnings Yield would be a much better start point than Dividend Yield to start with, and metrics such as ROCE (to gauge the sustainability of such income at least).

My objection though is to judge with the hindsight of future history on the success of any portfolio, or individiual selection, on dividend income alone. It makes no sense when that is only part of an investments return. The poster measuring the alternatives of 12 years of different income streams - even if an income investor - is only looking at part of the job. (Do golfer's decide tournaments on "fairways hit" or "fewest puts", despite a high score on the former, or a low score on the latter, indicating success? I'm aware of "Total shots" being the usual determinant of the winner).

Even if you were to eschew literal capital value as a component of "success" when comparing strategies, and decide it is income that is the sole measure of success consider the following. An initial £100k investment with an initial income of £6k growing at 1%. After 12 years it might still be worth £100k - but had delivered a meaningful income stream. An alternative £100k delivering £4k growing at 5% might after 12 years be worth £200k. Both strategies in year 13 are to sell and invest in the highest availabe yield for income at that point, which might be 7%. Does any income investor prefer £7k over £14k at that point, and onward?

Total Return is a better measurement at all stages, regardless of your strategy or the constraints you place upon it, whether you are an income investor, a growth investor, a value investor, or indeed any investor.

[dealtn]

Taken in that specific context

In that specific context, and measured against an annuity, then I have little issue with what you say. But that specific context wasn't a constraint mentioned by the OP (nor the poster to whom I replied).

In that case you would also need to assess life expectancy, and the appropriateness of 12 years as the measure of those alternative income streams, and also to consider the investors attitude to the destination of the inherited capital on expiry to its beneficiaries. Does the investor place any value on that, or not? (And if not why is income, not likely drawdown, more important?).

[Itsallaguess]

Taken in that specific context

In that specific context, and measured against an annuity, then I have little issue with what you say. But that specific context wasn't a constraint mentioned by the OP (nor the poster to whom I replied).

In that case you would also need to assess life expectancy, and the appropriateness of 12 years as the measure of those alternative income streams, and also to consider the investors attitude to the destination of the inherited capital on expiry to its beneficiaries. Does the investor place any value on that, or not? (And if not why is income, not likely drawdown, more important?).

But I think it might be more appropriate, when an income investor simply and clearly says that 'they are not overly interested in capital growth, but the income delivery from it', to assume that *for them*, all those additional questions have been answered to their own satisfaction, and that they are content to proceed with what might hopefully be a broadly low-maintenance income-delivery strategy that doesn't initially require the complete relinquishing of their initial capital funds, as an annuity would...

There's no 'In that case you would also need....' about it to be honest.

Investors don't need to satisfy a list of other people's 'needs' to be happy with their own investment approaches, surely?

Cheers,

Itsallaguess

[dealtn]

Taken in that specific context

In that specific context, and measured against an annuity, then I have little issue with what you say. But that specific context wasn't a constraint mentioned by the OP (nor the poster to whom I replied).

In that case you would also need to assess life expectancy, and the appropriateness of 12 years as the measure of those alternative income streams, and also to consider the investors attitude to the destination of the inherited capital on expiry to its beneficiaries. Does the investor place any value on that, or not? (And if not why is income, not likely drawdown, more important?).

But I think it might be more appropriate, when an income investor simply and clearly says that 'they are not overly interested in capital growth, but the income delivery from it', to assume that *for them*, all those additional questions have been answered to their own satisfaction, and that they are content to proceed with what might hopefully be a broadly low-maintenance income-delivery strategy that doesn't initially require the complete relinquishing of their initial capital funds, as an annuity would...

There's no 'In that case you would also need....' about it to be honest.

Investors don't need to satisfy a list of other people's 'needs' to be happy with their own investment approaches, surely?

Cheers,

Itsallaguess

I'm not disagreeing. But again, the OP, nor the person to whom I specifically replied (which drew your response) made that case. I am not the one taking this away from the general, to the specific. You are.

Were an investor, or contributor to these boards, make that simple and clear 'they are not overly interested in capital growth, but the income delivery from it' I, nor anyone else should be drawing alternative conclusions about their needs. Why, in a general discussion should you, or anyone, place such tight constraints when the OP, and others, haven't made this conditions? Unless somebody does, then Total Return is the appropriate metric, not Some Return.

[Itsallaguess]

Why, in a general discussion should you, or anyone, place such tight constraints when the OP, and others, haven't made this conditions?

Unless somebody does, then Total Return is the appropriate metric, not Some Return.

But it's a discussion on the 'High Yield Shares & Strategies' board, where I don't think it's at all a given that 'Total Return is the appropriate metric'...

You're trying to impose that constraint, not me, and on a board where I don't think it's fair to do so, and I've tried to explain why it isn't necessarily appropriate to do so in many cases where income-investors are generally less interested in capital performance, so long as they broadly still have access to the underlying capital that is hopefully generating what they are interested in, which is the income delivered from it...

Cheers,

Itsallaguess

[dealtn]

Why, in a general discussion should you, or anyone, place such tight constraints when the OP, and others, haven't made this conditions?

Unless somebody does, then Total Return is the appropriate metric, not Some Return.

But it's a discussion on the 'High Yield Shares & Strategies' board, where I don't think it's at all a given that 'Total Return is the appropriate metric'.

You're trying to impose that constraint, not me, and I've tried to explain why it isn't necessarily appropriate to do so in many cases where income-investors are less interested in capital performance, so long as they broadly still have access to the initial underlying capital that is hopefully generating what they are interested in, which is the income delivered from it...

Cheers,

Itsallaguess

So there are 4 words there

High, Yield, Shares and Strategy(ies)

In the context of this discussion both 4% and 6% (and growing) are both high.

Yield, I can't see this defined as Dividend Yield, and personally would look at Earnings Yield, but in the context of this discussion is irrelevant. Both are Dividend Yield.

Shares. Despite the whole thread being about ITs, and the existence of a better board, they are shares, but again irrelevant as the same applies in both case.

So it comes down to Strategy. There are numerous strategies for investing and a number of things investors are looking for, including annuity alternatives, and capital growth only and some in between. Regardless I am not even talking about alternative strategies (my response was to a pair of strategies already defined by someone else - and presumably on-topic for the board) simply a measure of how they pan out. The important metric, even to an income investor (but accepted much less relevant to an annuity replacement only seeker), is Total Return.

As an aside would investing in accumulation units in a High Income, or Yield, fund be off topic here? Would a reinvest all income HYPer on HYPP be off topic? Total Return, outside of very specific constraints discussions is the appropriate measure of any strategy.

[Itsallaguess]

Do golfer's decide tournaments on "fairways hit" or "fewest puts", despite a high score on the former, or a low score on the latter, indicating success?

I'm aware of "Total shots" being the usual determinant of the winner.

I think a better analogy in terms of where income-investors often come from with these TR-based arguments is related to cars...

Do car owners decide which car to buy purely on miles-per-gallon metrics?

Clearly that's not the case, because whilst the miles-per-gallon efficiency of a particular car might be a consideration, there are often many other over-riding factors behind which particular car might ultimately be bought, over and above a given 'winning' miles-per-gallon metric, and which are often determined by personal circumstances and particular requirements...

I think the same thing is being covered in many of the TR-based points already mentioned on this thread by income investors, in that many, including myself I might add, see little point in looking for dividend-based income-returns if the ultimate price of some of those income-investment options might feel like an eating away of the underlying investment capital. I made that point clearly on my first post here, when I opted to test for 'non-eaters' as part of the filtering process when I posted my income-IT table.

That's TR being 'a consideration' for income-investors, rather than it being an absolute 'driver' when looking for income-investment options, which again highlights the middle-ground that I think is often lost in these types of discussions...

Total Return is the miles-per-gallon of the investment world, but there's an odd disconnect I think, where it might hopefully be generally agreed that miles-per-gallon might well not be the most important metric to use when choosing a car for a particular situation, and yet that never seems to be an accepted approach for some people, to personal investment strategies as well...

Cheers,

Itsallaguess