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Total Return based portfolio for income

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dundas666
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Total Return based portfolio for income

#411702

Postby dundas666 » May 13th, 2021, 5:37 pm

I just wanted to confirm my understanding of a number of posts where I've seen posters mention that Total Return is a more valuable portfolio selection criteria for drawing income than High Yield.

Using a simplified example, is the general idea that instead of a high yield IT portfolio that returns, say, a 5% income plus 2% capital growth, you would invest in a portfolio of growth-based ITs with 0% yield but grew at 9% so you could sell 5% each year and have 4% 'profit' instead of 2%?

Thanks in advance for your comments!

Dod101
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Re: Total Return based portfolio for income

#411703

Postby Dod101 » May 13th, 2021, 5:57 pm

dundas666 wrote:I just wanted to confirm my understanding of a number of posts where I've seen posters mention that Total Return is a more valuable portfolio selection criteria for drawing income than High Yield.

Using a simplified example, is the general idea that instead of a high yield IT portfolio that returns, say, a 5% income plus 2% capital growth, you would invest in a portfolio of growth-based ITs with 0% yield but grew at 9% so you could sell 5% each year and have 4% 'profit' instead of 2%?

Thanks in advance for your comments!


I have mentioned that and as portfolios grow bigger I guess (or your need for income is less) one can afford to be less set on the highest income available. My belief is that a higher (a la HYP) increases the risk of the dividend being cut or slower growth of capital. You could look at the discussion earlier today re PHP on the HYP Board. The other side of that coin is the tobacco companies for the last year or two where a very yield is available but at considerable cost to capital . Dearly bought income as I call it. I am not keen to sell shares in order to generate an income because of course you have may to sell say in April 2020. I simply see it as a more conservative way of investing. So I do not think I would call 'a more valuable portfolio selection' but I would call it more conservative. I do not have time right now to develop my thoughts but may return to it later, although others will most likely cover the point.

Dod

dealtn
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Re: Total Return based portfolio for income

#411705

Postby dealtn » May 13th, 2021, 6:03 pm

dundas666 wrote:I just wanted to confirm my understanding of a number of posts where I've seen posters mention that Total Return is a more valuable portfolio selection criteria for drawing income than High Yield.

Using a simplified example, is the general idea that instead of a high yield IT portfolio that returns, say, a 5% income plus 2% capital growth, you would invest in a portfolio of growth-based ITs with 0% yield but grew at 9% so you could sell 5% each year and have 4% 'profit' instead of 2%?

Thanks in advance for your comments!


That might be one reason yes. Why would anyone prefer a portfolio that has a 5% return when a 9% return (that you can easily, and without cost, convert parts of it to cash/income) is available as an alternative?

Now obviously, especially in advance, you won't know which are 9% returns, and which are 5% returns. Nor will that cash/income conversion be absolutely easy, and costless.

Importantly also the "total universe" of selections is bigger than those that meet the niche description of high income. So by fishing solely in that niche pool you are limiting your selection options. At the extreme imagine all shares are high return, make large profits, likely to grow, and those profits are turned into cash at the company level. All except one that is. That one is not profitable, doesn't generate cash, and is shrinking. None pay dividends, except for one. You can guess which one.

An income portfolio, as often described, would consist of a single selection in a likely disappearing company, and the sole criteria for its selection is the result of a few (usually) men taking a few minutes twice a year around a Board table to declare an uncovered dividend.

Now that's clearly an exaggerated scenario (for effect) but who wouldn't prefer a diversified portfolio from the large variety of others, over the "risky" single share alternative?

Even in the real world, and perhaps the "rules" of a particularly favoured strategy on this site, that High Yield rules based system, limits your niche to large UK High Yield stocks, so maybe 30-40 qualifying companies, from a multiiple 1,000s of globally listed company alternatives.

"Total Return" is a broad church description and may mean different things to different people. With that in mind I would suggest "Income" and "Yield" can have multiple meanings too. If I wanted to adopt an "Income" strategy it would be the Income generated by the company (either Profit, or Cash return), or "yield" on company capital I would look towards. I would ignore the "dividend" income, or "dividend" yield, as its corelation to the underlying success of the company is far from perfect, and determined infrequently by just a few people whose agenda wouldn't align with mine. That suggests a likely potential for disappointment to me. It is much harder to "fake" the real, constant, aggregated, daily returns made by a company as a result of the entire workforce.

Itsallaguess
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Re: Total Return based portfolio for income

#411709

Postby Itsallaguess » May 13th, 2021, 6:12 pm

dealtn wrote:
Now that's clearly an exaggerated scenario (for effect) but who wouldn't prefer a diversified portfolio from the large variety of others, over the "risky" single share alternative?

Even in the real world, and perhaps the "rules" of a particularly favoured strategy on this site, that High Yield rules based system, limits your niche to large UK High Yield stocks, so maybe 30-40 qualifying companies, from a multiiple 1,000s of globally listed company alternatives.


ReallyVeryFoolish wrote:
I would suggest myself that by selecting UK shares only on the high yield criteria as sometimes proposed at TLF, not only are you potentially dialing up risk to capital unnecessarily - You are also ruling out investing in maybe 98% of the entire world's companies.


For clarity, the OP is discussing an income-investment option based on more broadly diversified Investment Trusts, and not a single-share HYP approach...

Income-related IT's offer a much more diverse set of options in terms of themes, geographies, and markets, so I think it's unfair to bring single-share HYP's (which I agree would carry all the risks you mention, if the OP was actually considering it as an option...) into this discussion really, and to do so is likely to confuse things...

I think Dod's earlier reply that did mention HYP might have inadvertently caused that particular side-discussion...

Cheers,

Itsallaguess
Last edited by Itsallaguess on May 13th, 2021, 6:14 pm, edited 1 time in total.

dealtn
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Re: Total Return based portfolio for income

#411717

Postby dealtn » May 13th, 2021, 6:21 pm

Itsallaguess wrote:
dealtn wrote:
Now that's clearly an exaggerated scenario (for effect) but who wouldn't prefer a diversified portfolio from the large variety of others, over the "risky" single share alternative?

Even in the real world, and perhaps the "rules" of a particularly favoured strategy on this site, that High Yield rules based system, limits your niche to large UK High Yield stocks, so maybe 30-40 qualifying companies, from a multiiple 1,000s of globally listed company alternatives.


ReallyVeryFoolish wrote:
I would suggest myself that by selecting UK shares only on the high yield criteria as sometimes proposed at TLF, not only are you potentially dialing up risk to capital unnecessarily - You are also ruling out investing in maybe 98% of the entire world's companies.


For clarity, the OP is discussing an income-investment option based on more broadly diversified Investment Trusts, and not a single-share HYP approach...



True, but the exaggerated example I gave is nothing to do with that strategy, and I deliberately didn't name it. The point still stands if the strategy is being undertaken by an investment trust manager, and the OP, is merely buying into their fund (and its rules).

(The problems of such can be mitigated by diversifying investments in other funds with different rules or niches, though).

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Re: Total Return based portfolio for income

#411729

Postby 1nvest » May 13th, 2021, 7:05 pm

dundas666 wrote:I just wanted to confirm my understanding of a number of posts where I've seen posters mention that Total Return is a more valuable portfolio selection criteria for drawing income than High Yield.

It simply has a broader universe of potential candidate holdings, isn't restricted to certain stocks simply because of their dividend policies. Generally, take the same income out of total return from a portfolio of a diverse range of stocks as provided by for instance a HYP portfolio and the two might be expected to result in similar total return outcomes (on average).

Rather than taking the same income as provided by a HYP, that can have quite high volatility in actual income from year to year, a alternative approach is to use a 4% SWR withdrawal approach, where you take 4% of the portfolio value at the start, and then uplift that amount by inflation each year as the amount drawn in subsequent years, thereby providing a regular and consistent inflation adjusted income. Which some might consider as being more valuable in the way of better liability matching with spending. It's also more often safer as over time the tendency is for the portfolio value to grow ahead of inflation after withdrawals, such that after a decade the former 4% start date SWR value might be just 3% or lower of the ongoing inflation adjusted portfolio value.

Dividends are a potential cost event, maybe paid and taxed when accumulating only to be reinvested back in again. Or too little or too much when drawing a income. If the firm instead reinvested what otherwise might be paid in dividends, perhaps at times buying back some of its own shares, then all else being equal the share price will relatively increase at a faster rate than had dividends been paid. And investors can each take their own dividend at the time and amount they individually prefer simply by selling some shares. A couple for instance might have near £25,000/year of capital gains tax allowance so if selling some shares that had doubled in price since purchase £50,000 could be sold without any tax liability perhaps in addition to £12,000 of income. Unless the shares were in tax exempt such as ISA then £50,000 of dividends might involve a £3300 tax liability. Similar to a difference of a 4% dividend versus a 3.75% dividend.

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Re: Total Return based portfolio for income

#411735

Postby Itsallaguess » May 13th, 2021, 7:19 pm

1nvest wrote:
Rather than taking the same income as provided by a HYP, that can have quite high volatility in actual income from year to year..

<snip>



But that's completely irrelevant to the discussion at hand - the OP isn't talking about a single-share HYP being one of his two options, he's talking about a collection of income-related Investment Trusts, which have generally been shown to provide much lower volatility in terms of delivered income, as can be seen by this chart from someone who's been running long-term comparisons for some years.

The income-IT line is the pink one -

https://www.lemonfool.co.uk/viewtopic.php?f=31&t=26214&start=140#p405896

Cheers,

Itsallaguess

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Re: Total Return based portfolio for income

#411742

Postby GoSeigen » May 13th, 2021, 7:42 pm

dundas666 wrote:I just wanted to confirm my understanding of a number of posts where I've seen posters mention that Total Return is a more valuable portfolio selection criteria for drawing income than High Yield.


Total return is not a portfolio selection criterion of any sort. It simply refers to the way returns are calculated.

Exactly the same portfolio can be evaluated in pure income terms, where the final value of the portfolio is assumed to be zero (usually at infinite time) or on a total return basis, in which case the portflio is taken to be notionally liquidated at some date and the return calculated from both the income cash flows and the final sale cashflow. This is similar to how bond performance is typically measured.


GS

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Re: Total Return based portfolio for income

#411747

Postby Alaric » May 13th, 2021, 8:15 pm

Itsallaguess wrote: he's talking about a collection of income-related Investment Trusts, which have generally been shown to provide much lower volatility in terms of delivered income


Also they are managed to deliver a stable, probably increasing income as illustrated over the past fifteen months. If the received dividends from investments aren't enough, they can sell assets or borrow to make up the shortfall.

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Re: Total Return based portfolio for income

#411767

Postby NotSure » May 13th, 2021, 9:05 pm

Alaric wrote:
Itsallaguess wrote: he's talking about a collection of income-related Investment Trusts, which have generally been shown to provide much lower volatility in terms of delivered income


Also they are managed to deliver a stable, probably increasing income as illustrated over the past fifteen months. If the received dividends from investments aren't enough, they can sell assets or borrow to make up the shortfall.


Also, it seems much more realistic to 'promise' to deliver YoY increases in earnings (and for dividend shares, income) over extended periods of time. Quality growth companies, e.g Apple, may realistically be expected to increase earnings YoY over extended periods, but how the market values earnings can fluctuate wildly - currently P/Es for quality companies are historically very high. If this changes, as history suggests it will at some point, while Apple's earnings may continue to grow handsomely, their total return could fall dramatically.

We're well into a period of rapidly increasing P/E (PEG is very, very high by historical standards). Things may look different in a year or three. If so, income ITs may fare far better than full-on growth funds, for someone seeking income.

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Re: Total Return based portfolio for income

#411774

Postby Dod101 » May 13th, 2021, 9:30 pm

In the absence of the OP I am not at all sure that he was zeroing in solely on ITs. I stand by my reply and although IAAG maybe has a point, his view is rather coloured I think by his interest and belief in ITs as a source of income. I am always wary of others interpreting an OP's query or views.

Dod

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Re: Total Return based portfolio for income

#411780

Postby Arborbridge » May 13th, 2021, 9:54 pm

dundas666 wrote:I just wanted to confirm my understanding of a number of posts where I've seen posters mention that Total Return is a more valuable portfolio selection criteria for drawing income than High Yield.

Using a simplified example, is the general idea that instead of a high yield IT portfolio that returns, say, a 5% income plus 2% capital growth, you would invest in a portfolio of growth-based ITs with 0% yield but grew at 9% so you could sell 5% each year and have 4% 'profit' instead of 2%?

Thanks in advance for your comments!


The higher TR is more attractive all things being equal, naturally. However, assuming that one has reached the stage of living off the proceeds of one's investments, attitude of mind plays a part.

I prefer to see my dividends coming in without having to sell assets. I know, I know, it's just the psychology of it - I prefer a quiet life. I have some low yielding ITs and you could argue that I should make up the shortfall in income by selling off bits now and again, but I don't. To me that feels like selling your seed corn, and I don't want to have to face the decision of which shares should I sell next.
Call me a coward if you like, but I really find it just easier to watch those dividends roll in and not think too much about the serious business of lopping off some of my growthy investments, or as an alternative, selling some of my worst investments, to raise "income".

Arb.

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Re: Total Return based portfolio for income

#411788

Postby JuanDB » May 13th, 2021, 10:16 pm

I think the point often made around “total return” vs “income investing” is that all investing has a total return but focusing on income can often lead to selection of products that generate income at the expense of a lower overall total return. As long as one makes a conscious decision and selects investments based on our temperament and comfort then that trade off is ok. What is not ok is to unconsciously compromise total return by focusing on income.

I am 45 and contrary to prevailing wisdom have a large dividend income portfolio. I know my preference is for divided income vs selling down assets to produce income. However, only my pension bridge (GIA and ISAs) are invested in that way. All pensions, which cannot be touched for 12 years or so, are focused on total return with dividends as coincidental. I expect to be “done” within a year at which point I’ll live off the dividends whilst the pensions do their thing for a decade more.

I know I have compromised ultimate portfolio value in the decisions I have made. I am very comfortable in that knowledge and would not change anything.

Cheers,

Juan

dundas666
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Re: Total Return based portfolio for income

#411789

Postby dundas666 » May 13th, 2021, 10:20 pm

Arborbridge wrote:To me that feels like selling your seed corn, and I don't want to have to face the decision of which shares should I sell next.
Call me a coward if you like, but I really find it just easier to watch those dividends roll in and not think too much about the serious business of lopping off some of my growthy investments, or as an alternative, selling some of my worst investments, to raise "income".
Arb.


I think this is the crux of why I posted the original question, because to me it did feel like selling my seed corn, and emotionally it made more sense to just watch the dividends come rolling in without having to consider selling any holdings for income. However I wanted to know if I was being misled by my instinct and whether a Growth / Total Return approach was a viable and indeed better long-term strategy.

I suppose it doesn't have to be one or the other too, you could have some Growth, some Income and some Growth + Income ITs too. It's interesting that some Income and G+I ITs themselves have re-aligned to return a certain percentage of NAV and will combine dividends and selling off assets to provide this.

And in response to a previous comment, I was only thinking about ITs but you could apply the same question to individual shares.

Many thanks for all your comments!

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Re: Total Return based portfolio for income

#411790

Postby Itsallaguess » May 13th, 2021, 10:23 pm

Dod101 wrote:
In the absence of the OP I am not at all sure that he was zeroing in solely on ITs.

I stand by my reply and although IAAG maybe has a point, his view is rather coloured I think by his interest and belief in ITs as a source of income.

I am always wary of others interpreting an OP's query or views.


I'm sorry Dod, but the two examples given in the OP's comparison are specifically related to two IT-related portfolios -

Using a simplified example, is the general idea that instead of a high yield IT portfolio that returns, say, a 5% income plus 2% capital growth, you would invest in a portfolio of growth-based IT's with 0% yield but grew at 9% so you could sell 5% each year and have 4% 'profit' instead of 2%?

Why anyone then wished to start discussing single-share income-holdings within the context of the above example is something that's coloured other people's responses on this thread, and not mine....

Cheers,

Itsallaguess

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Re: Total Return based portfolio for income

#411791

Postby Dod101 » May 13th, 2021, 10:25 pm

OK IAAG. I agree.

Dod

Itsallaguess
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Re: Total Return based portfolio for income

#411797

Postby Itsallaguess » May 13th, 2021, 10:38 pm

dundas666 wrote:
I just wanted to confirm my understanding of a number of posts where I've seen posters mention that Total Return is a more valuable portfolio selection criteria for drawing income than High Yield.

Using a simplified example, is the general idea that instead of a high yield IT portfolio that returns, say, a 5% income plus 2% capital growth, you would invest in a portfolio of growth-based ITs with 0% yield but grew at 9% so you could sell 5% each year and have 4% 'profit' instead of 2%?


I think that the first thing you'd need to do in relation to the above is to define what you mean by 'valuable'....

Clearly 'value' in relation to investment can be applied to the monetary benefit of taking one investment approach over another, but some investors might also place some 'value' on being able to carry out a 'satisfactory' long-term investment strategy (in terms of the returns made from it over the long term) in a way that's perhaps better aligned to how that particular investor wants to approach investing generally, using a method or methods that are perhaps more closely aligned to their particular investment-personality, rather than trying to fit a square strategic peg into a round investment-personality hole...

You've touched on this point in one of your more recent replies, when you say this -

..because to me it did feel like selling my seed corn, and emotionally it made more sense to just watch the dividends come rolling in without having to consider selling any holdings for income. However I wanted to know if I was being misled by my instinct and whether a Growth / Total Return approach was a viable and indeed better long-term strategy.

So, again, in relation to the above quote, you'd really need to define what you mean by 'better'...

Do you mean 'better' in purely monetary terms, or do you mean 'better' in terms of 'this strategy might not quite deliver the same monetary benefits of that other strategy, but I feel that I know myself well enough as an investor to appreciate that I'm likely to be able to live with slightly worse (though still acceptable..) returns if it means carrying out an alternative long-term investment strategy that might be better-aligned to my own individual investment personality....'

Cheers,

Itsallaguess

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Re: Total Return based portfolio for income

#411810

Postby Itsallaguess » May 14th, 2021, 5:47 am

Arborbridge wrote:
Call me a coward if you like, but I really find it just easier to watch those dividends roll in and not think too much about the serious business of lopping off some of my growthy investments, or as an alternative, selling some of my worst investments, to raise "income".


But why would someone want to 'call you a coward' Arb?

If I was a fast runner, and knew that my daily 10K run burnt through 800 calories on average, and on my daily run I regularly passed the same guy who was out enjoying his 10k jog, which he told me burns through 600 calories on average at the speed he jogs, would I be right to think that I was in a position to tell him that he was 'doing it all wrong', and that he was a 'coward' for not simply trying a bit harder?

I mean, why didn't he just speed up a bit, and run faster like me to burn more calories in the same exercise-timescale?

I've been around these boards, and the earlier Motley Fool boards, for many years, and the pursuit for total return at the potential expense of 'long term investor enjoyment and comfort' is something that's constantly perplexed me...

Why aren't we all doing one, single, 'efficient exercise', with the best 'time/calorie total return'?

Why aren't we all driving one, single, 'efficient car', with the best 'mpg total return'?

Are most of us 'cowards' for not doing so?

Cheers,

Itsallaguess

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Re: Total Return based portfolio for income

#411812

Postby Darka » May 14th, 2021, 6:58 am

I started off with a HYP as many do but after a while decided that I was extremely uncomfortable relying on 15-30 individual shares for my retirement, especially after a few mistakes such as Carillion and others.

So I moved over to income IT's for diversity and a more stable income and I do not regret that decision at all.

I'm fully aware that I can get a higher return by following a "total return growth" strategy, but like itsallaguess, I just don't care - I prefer not to have to make annual sell decisions, especially as I get older.

If I die before my wife, I would much rather the income just keep flowing than for her to then begin making those sell decisions herself, especially as she has little interest/knowledge in investing.

Once my investment income was enough to retire I started to buy some growth IT's and have done well with those, future investments will be a mixture of income and growth - but income was my primary objective, especially income without having to sell down my capital each year (unless I wanted to).

So for me, income IT's are my focus but some growth on top is nice too so I have both.

regards,
Darka

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Re: Total Return based portfolio for income

#411815

Postby Arborbridge » May 14th, 2021, 7:13 am

Itsallaguess wrote:But why would someone want to 'call you a coward' Arb?

Itsallaguess


Cowardly, in the sense that I cannot/could not face up to the dilemma of which shares/ITs to partially sell to realise an "income" equivalent. Easier to walk away from that and settle for income from dividends.

Arb


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