The big question...

[BrummieDave]

There's a great debate going on in the 'Comments' section over at Citywire's Investment Trust Insider after James Carthew lit the blue touch paper with an article on the never ending debate: should you chase high yield or growth in search of good trust income?

Growth and top slice for income, or dividend paying, which is best for income, SMT v CTY you could say...

[StOmer]

Note that you need to register or sign in with Citywire to read the thread. Sometimes they open the articles after a few days when the comments would be open without registering.

[OllyDrod]

Interesting discussion on the Citywire board, which is now open to the public and is available here:
https://citywire.co.uk/investment-trust ... r/jcarthew

Clearly total return is what matters, so the real question is how you get there. For what it’s worth, I tend to favour income over growth for the following reasons:
- A bird in the hand is worth two in the bush. Whilst there is always the risk that a dividend may be cut, a well-run IT with decent reserves should be able to weather most storms (to wit: the AIC’s Dividend Heroes). I’m sceptical of the ability of growth trusts to perform over the long-term
- I’d rather minimise trading costs by buying and holding rather than salami-slicing (although I do reinvest some dividends… which obviously comes at a cost)
- Experience has taught me that I’m hopeless at ‘running my winners’, so I try not to
- I feel more comfortable ‘locking-in’ the cash from a dividend than sitting on a paper-gain (although I may then reinvest the dividend into something… with hindsight, this may reveal more about me and my own internal contradictions and inconsistencies than anything else)
- I don’t want to be a forced seller and, if I do choose to sell, I don’t want to be selling into a falling market. As one commenter on Citywire points out, if the market turns, you’ll need to sell more and more to maintain whatever sum you’re regularly withdrawing – a sure-fire way to ruin your portfolio
- I don’t auto-reinvest dividends and like the natural cash pot that builds up as a result. In good times, this is a diversifier; in bad times, a stock of ‘dry powder’ that can be deployed to top-up holdings at a favourable discount, or to act as my own personal revenue reserve
- I like the discipline that committing to paying a regular dividend requires of a fund manager

One thing that concerns me is the increasing number of ITs paying ‘enhanced’ dividends out of capital. Whilst some stalwarts like RIT Capital Partners (RCP) have been doing this for years with no ill-effect, I do worry what will happen in the event of a market correction to some of the relative newcomers. If the value of the underlying holdings is dropping… then either an undesirably-large chunk of these may have to be sold to furnish the dividend; or the dividend may have to be cut. Either way, surely the share price of the holding IT will drop like a stone – the ‘normal’ drop magnified by the exodus of now-panicked income investors…

In answer to BrummieDave’s big question… CTY for me please!

Full disclosure: I hold RCP.

- OllyDrod

[richfool]

Yes, I too tend to favour the income IT's (inc G&I) because I take the view that income given can't be taken away, whereas Mr Market can very quickly take away capital performance. Though that said, I do hold IT's of both types.

I like the trusts that draw upon capital to subsidise income (e.g. JPGI), as they give me exposure to growth stocks, whilst still giving me income along the way. Accepted that they may be more susceptible to market falls.

I sold CTY some time back because of it's poor capital performance and redirected the proceeds into MUT and JPGI and later added TMPL.

[Bagger46]

From our long investing journey, we would say that the more you push portfolio yield the poorer you will get in the long term.

Our own 3 portfolios, all of which are many decades old, clearly show overall long term returns in reverse order of yield. I usually run my taxed portfolio at under 2% yield, but despite the tax, it has substantially outperformed our two ISAs, which have performed fine, and run at around 3.8%(mine), and 4.75% (my wife's fairly defensive ISA). The latter being outperformed by the other two.

But more importantly, I have read access to thirty plus portfolios from family and close friends, all using the same portfolio recording system, identical unitising, plus XIRR. These portfolios cover a reasonably good range of approaches and needs. When I plot a scatter diagram of portfolio XIRRs vs yield, there is a very clear inverse relationship, the higher the portfolio yields, the poorer the overall returns. The few very high yield portfolios in particular lag badly.

This of course does not mean that one has to simply run at a lower yield to get better results, as brilliant or poor portfolios I am sure will exist with both approaches.

Investors running at a lower yield(and of course not everybody can afford to do so, retirees on tighter means might not feel they can) will just have a much better choice of good opportunities, less constraints, will be able to really think globally, and avoid the increasingly poorly performing central plank of the FTSE 350 (full of very tired outfits imho, not that well equipped to meet todays savage business scene) vs a combination of US/Global Small Cos/Tech/Disruptors. It is in the latter 'field' that we have encouraged our youngsters to put their nascent savings. They most certainly only need to concentrate on TR rather than HY/HYP.

As for using capital to fund one's retirement, we do not luckily need any portfolio income, but if we did we would most probably use a balanced mixture of realisations and natural portfolio income.

But using mostly capital to fund retirement is precisely what my eldest sister has been doing for many years, and right through the financial crisis. She says that the fear of having to sell in down markets is a perceived rather than real difficulty, as even in the heart of the crisis, some of her gems could be plucked, and in any case all investors needing portfolio income, whatever their approach, ideally need to have a suitable reserve(as HYP practitioners taking income will attest on the divi income diving in the heart of the crisis, and taking years to properly recover). She invest only in fairly small global Cos, her speciality. Her capital has kept growing well despite slicing on average about 4%(iirc) of its worth every year.

So if I had to choose between CTY and SMT, it would be a no brainer for me. My XIRR on my fairly long held SMT is 23.7%, my wife's very long held CTY just above 11% last time I looked. But an investor looking at CTY would, imho do really well by blending it with, say a good slice of the likes of IPU, a much better long term prospect imho.

Bagger

PS: Having said all that our best returns have come from the slices of small businesses we have owned in the past. But of course that is not for all, and we were luckly to be mostly inactive partners and avoid the day to day hassles.

[EssDeeAitch]

In answer to BrummieDave’s big question… CTY for me please!

For me, SMT every time based on....

[Bagger46]

In answer to BrummieDave’s big question… CTY for me please!

For me, SMT every time based on....

I think I am getting misquoted here. It was another poster who chose CTY.

Bagger

[EssDeeAitch]

I think I am getting misquoted here. It was another poster who chose CTY.

Bagger

How very strange! It can only have been operator error on my part, my apologies Bagger46. It was indeed another poster, OllyDrod

In answer to BrummieDave’s big question… CTY for me please!

[BrummieDave]

I think I am getting misquoted here. It was another poster who chose CTY.

Bagger

You and me both perhaps...

I was simply using SMT v CTY as a metaphor for the very specific question about investing for income...and drawing Fools' attention to an article and associated debate back when it was published a month ago; TR and top slice, with the inherent risk that entails but with the prospect for higher income when we are in a growth favoured market, or the steady eddy natural yield with lower expected TR, but probably lower downside risk to your income and implicitly ignoring future capital values?

Bagger46 has certainly answered this from his broad experience, and I have my views too, and there isn't a definitive answer anyway other than to the individual, as it all depends on your attitude to risk, age, health, wider financial circumstance, blah blah blah.

I think we all know SMT has delivered a better TR than CTY, but that wasn't the question.

[OllyDrod]

I was simply using SMT v CTY as a metaphor for the very specific question about investing for income...

Apologies - a clumsy line with which to finish my previous post. Hopefully my broader meaning was clear.
- OllyDrod

[Darka]

I've gone for a HYP with a IT portfolio on the side containing both Income and Growth IT's.

Doing OK so far, I don't need to shoot the lights out but I do need a simple to run portfolio that my wife can take over if something happens to me.
She has no interest in investing and anything I can do now to avoid her panicking and having to decide what to sell and when is worth it's weight in gold.

So my choice is to live of the natural yield of our portfolio, and if I die first then my wife can continue to do so without having to worry about it too much.

I've focusing more on IT's now and leaving the HYP alone.

So for me, it would be a large chunk of CTY with a side helping of SMT.