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ITs with %NAV dividend policy

Closed-end funds and OEICs
88V8
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Re: ITs with %NAV dividend policy

#419134

Postby 88V8 » June 12th, 2021, 10:41 pm

It may seem a silly question, but what is the advantage of this variety of IT?

And as I write it occurs to me and I shall look tomorrow, are any of them AIC Dividend Heroes?

V8

torata
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Re: ITs with %NAV dividend policy

#419161

Postby torata » June 13th, 2021, 4:54 am

88V8 wrote:It may seem a silly question, but what is the advantage of this variety of IT?

And as I write it occurs to me and I shall look tomorrow, are any of them AIC Dividend Heroes?

V8


From memory European Assets Trust (EAT) moved to this format a few years ago, and their rationale was that it allowed them greater scope of investment opportunities, not having to limit themselves to companies paying a divided. (But I note their dividend is still below 2017 amount)
I think the rationale from other traditionally non-dividend paying ITs was that it makes them more attractive to a wider group of retail investors.

Whether it's an advantage to the investor or not, I don't know.

torata

Itsallaguess
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Re: ITs with %NAV dividend policy

#419166

Postby Itsallaguess » June 13th, 2021, 7:37 am

torata wrote:
88V8 wrote:
It may seem a silly question, but what is the advantage of this variety of IT?

And as I write it occurs to me and I shall look tomorrow, are any of them AIC Dividend Heroes?


From memory European Assets Trust (EAT) moved to this format a few years ago, and their rationale was that it allowed them greater scope of investment opportunities, not having to limit themselves to companies paying a divided. (But I note their dividend is still below 2017 amount)

I think the rationale from other traditionally non-dividend paying IT's was that it makes them more attractive to a wider group of retail investors.

Whether it's an advantage to the investor or not, I don't know.


As an income-investor primarily, this evolution of the income-investment landscape makes a lot of sense to me, as it starts to close what many people might see as a 'gap' between the 'income investment' and the 'total return' spheres, whilst still looking to maintain many of the attractions of the 'income-related' options that some of us look for...

If income-investing is often popular because it simply 'delivers' dividend income to investors that has been pooled from a diverse set of underlying investments, without the need for owners of those IT's to personally have to consider how that delivered-income is 'generated', then the obvious question to then ask might be why those underlying investments have to necessarily all be 'dividend generating' options themselves...

If more ''growthy' areas of the market can be accessed by the investment managers of these '%-NAV' dividend-paying IT's, where they are able to manage those underlying 'growthy investments' themselves in a way that is ultimately 'invisible' to the income-investor who owns those IT's, and where the income-investor who owns them still hopefully sees long-term, reliable, and hopefully steadily growing dividend-income from them, then this investment-market development might well turn into a very useful 'sweet-spot option' for those of us who don't necessarily look to 'chase' particularly high-yields for our income-investments, but would welcome some relatively lower yields, so long as the underlying 'dividend-delivery' of those holdings was maintained in as seamless a way as possible, whilst also now being able to discover wider areas of the 'growthy' market that were otherwise difficult to access...

In addition to the above, one of the often valid criticisms of many income-related Investment Trusts is that whilst they might continue to deliver on the income front, over many years the share price of the IT's themselves often languish with low returns in a capital sense. Income-related IT's that might look to enter this '% NAV dividend' sphere, and which perhaps operate in some of the more 'growthy' areas of the global markets, might well start to deliver respectable returns in both areas, with underlying dividend returns being acceptable to the owners of them at the same time as seeing IT share-prices rise in relation to any underlying rise in those 'more growthy' NAV's, so again, this might begin to look like a potential 'sweet spot' area that income-investors who ultimately don't wish to make regular granular investment decisions might wish to take an interest in...

If I can be pardoned for going slightly off-topic for a short time, this '% NAV dividend-income' development, along with the longer term one where many income-investors have been enjoying the dividends from highly diverse income-related Investment Trusts for many years, is one of the primary reasons that I moved away from the vanilla HYP strategy many years ago, as I felt that sticking with single-share holdings for dividend-delivery forced income-investors to paint themselves into a smaller and smaller part of the maturing investment universe, and denying ourselves important wider options as sectors and markets opened themselves up in exactly these ways, whilst still maintaining the important underlying 'income-delivery processes' that were, for me at least, the primary attraction of the approach....

The income-investment world keeps developing - why choose to fight that, and not perhaps take advantage of it....?

Cheers,

Itsallaguess

OldPlodder

Re: ITs with %NAV dividend policy

#419167

Postby OldPlodder » June 13th, 2021, 8:00 am

torata wrote:
88V8 wrote:It may seem a silly question, but what is the advantage of this variety of IT?

And as I write it occurs to me and I shall look tomorrow, are any of them AIC Dividend Heroes?

V8


From memory European Assets Trust (EAT) moved to this format a few years ago, and their rationale was that it allowed them greater scope of investment opportunities, not having to limit themselves to companies paying a divided. (But I note their dividend is still below 2017 amount)
I think the rationale from other traditionally non-dividend paying ITs was that it makes them more attractive to a wider group of retail investors.

Whether it's an advantage to the investor or not, I don't know.

torata


We hold a few of these types of ITs and quite like the concept. What I mean by that is we accept that the divi will fluctuate, but that reflects the reality of what is happening to the underlying NAV.It is more ‘honest’ that trying to maintain it just from income if the income is not there. It is an elegant way to get income from capital imho. We would of course not want to hold too many, but the few we hold have been fine, with perfectly good divi CAGRs over a long enough period. My wife holds more than me, I only hold EAT, and you need to check your figures, as it is paying more than in 2017, over my long tenure the CAGR of the divi is 6.5%, and on current NAV, should it still be there at year end, another good increase on the cards.

The advantage is that they are growth oriented ITs. Very long term their combined TRs have been more than good. The best way to get serious income long term is to stick with growth in the long building phase, which is what we did to very good effect. On retirement day only one thing matters, the size of your pot.

Of course not all retirees can work with fluctuating Divis, in our case, although all our retirement is funded by the portfolios( no works pensions) we have large surplus divi income anyway, we don’t use my wife’s divi income, which goes to the family, and use only about 70% of mine, which will reducing as the income grows inevitably through the reinvestment of the surplus, plus general divi growth in excess of RPI. (But even hypers have to deal with fluctuations, taking another pasting, the second in a decade or so, rubbish method imho).

In fact, we barely saw a blip in our divi combined income curve over the pandemic, because HYP is not for us at all. Our ITS served us well.


Plodder

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Re: ITs with %NAV dividend policy

#419170

Postby Lootman » June 13th, 2021, 8:25 am

OldPlodder wrote:Of course not all retirees can work with fluctuating Divis, in our case, although all our retirement is funded by the portfolios( no works pensions) we have large surplus divi income anyway, we don’t use my wife’s divi income, which goes to the family, and use only about 70% of mine, which will reducing as the income grows inevitably through the reinvestment of the surplus, plus general divi growth in excess of RPI. (But even hypers have to deal with fluctuations, taking another pasting, the second in a decade or so, rubbish method imho).

In fact, we barely saw a blip in our divi combined income curve over the pandemic, because HYP is not for us at all. Our ITS served us well.

If most of these dividends that you draw are not needed, and so get reinvested in the same type of holdings, then it seems to me that the process might be inefficient. Essentially you are being paid distributions that come from your capital, and then you reinvest the surplus into replacing much of that capital.

This gives you transaction costs like commissions, stamp duty and spreads. And if not in an ISA, then tax events are created for being paid money that you do not need. Isn't it better to be in a fund that can compound tax-free and charge-free?

So whilst I can see why some people might like these kinds of vehicles, my first thought in your case is that you might be better off with low-yielding ITs that focus on growth, since you do not need that excess artificial income. And then sell off a few shares here and there if needed.

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Re: ITs with %NAV dividend policy

#419176

Postby 77ss » June 13th, 2021, 9:24 am

OldPlodder wrote:....
We hold a few of these types of ITs and quite like the concept. What I mean by that is we accept that the divi will fluctuate, but that reflects the reality of what is happening to the underlying NAV.It is more ‘honest’ that trying to maintain it just from income if the income is not there. It is an elegant way to get income from capital imho. We would of course not want to hold too many, but the few we hold have been fine, with perfectly good divi CAGRs over a long enough period. My wife holds more than me, I only hold EAT, and you need to check your figures, as it is paying more than in 2017, over my long tenure the CAGR of the divi is 6.5%, and on current NAV, should it still be there at year end, another good increase on the cards.

The advantage is that they are growth oriented ITs. Very long term their combined TRs have been more than good. The best way to get serious income long term is to stick with growth in the long building phase, which is what we did to very good effect. On retirement day only one thing matters, the size of your pot.

Of course not all retirees can work with fluctuating Divis, in our case, although all our retirement is funded by the portfolios( no works pensions) we have large surplus divi income anyway, we don’t use my wife’s divi income, which goes to the family, and use only about 70% of mine, which will reducing as the income grows inevitably through the reinvestment of the surplus, plus general divi growth in excess of RPI. (But even hypers have to deal with fluctuations, taking another pasting, the second in a decade or so, rubbish method imho).

In fact, we barely saw a blip in our divi combined income curve over the pandemic, because HYP is not for us at all. Our ITS served us well.


Plodder


I hold three of these (JAGI, JCGI and JGGI). About 8.5% of my capital and providing about 12% of my dividend income (I was surprised when I added that up).

I fully accept that the the dividend income may fluctuate, but I did not buy them for income - diversification/moving into ITs/total return were my drivers.

I note that over the past 12 months they are showing NAV increases of 32%, 48% and 36%. To what extent this will translate into dividend payouts remains to be seen.

Itsallaguess
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Re: ITs with %NAV dividend policy

#419185

Postby Itsallaguess » June 13th, 2021, 10:21 am

77ss wrote:
I hold three of these (JAGI, JCGI and JGGI). About 8.5% of my capital and providing about 12% of my dividend income (I was surprised when I added that up).


I've just checked how my own combined JAGI (JP Morgan Asia Growth & Income) and JGGI (JP Morgan Global Growth & Income) holdings compare with your figures at portfolio level -

Capital - 10.3%
Income - 7.6%

Like others, I'm happy that there may be some fluctuation in granular income for these NAV-based holdings, but I'm happy to hold these types of investments within an income-portfolio where I'm primarily focussed on portfolio-level performance, and I think these types of investments can add usefully to the mix of globally diversified individual components, whilst still complying with my overall income-based strategy...

Cheers,

Itsallaguess

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Re: ITs with %NAV dividend policy

#419192

Postby Lootman » June 13th, 2021, 10:38 am

Itsallaguess wrote:I'm happy to hold these types of investments within an income-portfolio where I'm primarily focussed on portfolio-level performance, and I think these types of investments can add usefully to the mix of globally diversified individual components, whilst still complying with my overall income-based strategy...

If they meet a market need then who can reasonably complain about them? But I think it is important to understand that these funds are structured this way for marketing reasons. In the UK, yield sells like hot cakes. The line is that you can have both higher growth and high-yielding income. Your cake and eat it too. I recall 20 or so years ago there was a spate of split-capital IT launches with a similar message - back then it was "tech with income". That didn't end well but of course these newer vehicles are not leveraged to the same degree, as far as I know anyway.

One other thing. I used to work with US fund managers and one of the constant complaints of US fund investors was that US tax law compels US funds to distribute not only 100% of their dividends, but also any and all realised capital gains annually. It is a huge advantage of UK funds that there is no such requirement to distribute realised capital gains. So it is in a sense ironic that these UK funds have effectively renounced that benefit and elected to make such distributions anyway.

That said such acceleration of your tax liability may not bother you if everything is sheltered in an ISA or some such.

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Re: ITs with %NAV dividend policy

#419193

Postby mc2fool » June 13th, 2021, 10:41 am

OldPlodder wrote:
torata wrote:From memory European Assets Trust (EAT) moved to this format a few years ago, and their rationale was that it allowed them greater scope of investment opportunities, not having to limit themselves to companies paying a divided. (But I note their dividend is still below 2017 amount)

I only hold EAT, and you need to check your figures, as it is paying more than in 2017, over my long tenure the CAGR of the divi is 6.5%, and on current NAV, should it still be there at year end, another good increase on the cards.

Shoving EAT's dividends from https://www.theaic.co.uk/companydata/0P00008ZMY/overview/dividends into a pivot table gets:

2000    4.122 
2001 13.066
2002 5.973
2003 2.485
2004 3.624
2005 4.363
2006 5.721
2007 7.109
2008 10.688
2009 3.148
2010 4.092
2011 4.577
2012 3.806
2013 4.837
2014 5.894
2015 5.661
2016 7.243
2017 7.218
2018 8.166
2019 6.055
2020 7.020
2021 4.000

The last being only a half year of course.

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Re: ITs with %NAV dividend policy

#419196

Postby 88V8 » June 13th, 2021, 10:57 am

Mmm, this is interesting.

I've about as much as I want in Income ITs, so here's a new avenue.
We have surplus income... Looty makes a good point... we should spend more as we have no one to whom to leave it, but we've never been much into spending. Didn't Dod start a thread somewhere about having enough income....

Anyway, a fluctuating income would not be a problem.

Thankyou all.

V8

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Re: ITs with %NAV dividend policy

#419198

Postby Itsallaguess » June 13th, 2021, 11:01 am

Lootman wrote:
Itsallaguess wrote:
I'm happy to hold these types of investments within an income-portfolio where I'm primarily focussed on portfolio-level performance, and I think these types of investments can add usefully to the mix of globally diversified individual components, whilst still complying with my overall income-based strategy...


If they meet a market need then who can reasonably complain about them?

But I think it is important to understand that these funds are structured this way for marketing reasons. In the UK, yield sells like hot cakes.

The line is that you can have both higher growth and high-yielding income. Your cake and eat it too.


Oh absolutely, but I think it always makes sense to keep an eye on what's available and how other available options might align with our own requirements, and adjust accordingly over the years.

The safe withdrawal rate question is one thing, but then another is to ask as to just who it might be that needs to do the withdrawing, and many investors are happy to contract-out those particular decisions, and IT-based options like this can deliver useful methods of achieving that, if it's something that an investor is willing to pay for, of course...

Up until recently the primary option for IT-income has been in relation to IT's that involve themselves mainly with underlying dividend-paying investments, which often moved focus away from the growthier areas of the market, and so if the investment industry find a way to market options where the underlying income-delivery philosophy can be maintained, with managers now looking to generate such yield-based SWR's by working in those more 'growthy' areas of the global market and trading accordingly within those IT-based remits, then all power to their elbows, I say...

I refuse to believe that anyone coming up with a renewed HYP strategy in 2021 would choose to ignore these important and useful developments in the income-based investment arena....

Cheers,

Itsallaguess

torata
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Re: ITs with %NAV dividend policy

#419358

Postby torata » June 13th, 2021, 10:54 pm

OldPlodder wrote: and you need to check your figures, as it is paying more than in 2017, over my long tenure the CAGR of the divi is 6.5%, and on current NAV, should it still be there at year end, another good increase on the cards.


yes, you are right, there were only 3 dividends paid in 2017. I had mentally rounded up to 4.

torata

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Re: ITs with %NAV dividend policy

#419360

Postby SalvorHardin » June 13th, 2021, 11:06 pm

Itsallaguess wrote:I refuse to believe that anyone coming up with a renewed HYP strategy in 2021 would choose to ignore these important and useful developments in the income-based investment arena...

I suspect that many would ignore them. Furthermore they'd report posts on HYP-Practical which mentioned Investment Trusts.

Just look at how heated that board can get, and how defensive some posters are, when a REIT is mentioned. Even though REITs are property companies, not Investment trusts, the "IT" bit of REIT sets some of the purists off like the proverbial red rag to the bull.

I'm sure there are people who having seen their HYP-Purist income fall by up to 50% with the coronavirus-induced dividend suspensions, nonetheless still congratulate themselves for being ideologically pure.

Me, I hold two (JP Morgan Asia Growth and the JP Morgan Japan Smaller whatever it's called nowadays). Ideal diversification, and it saves the bother of selling shares to generate an "income".

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Re: ITs with %NAV dividend policy

#419414

Postby dundas666 » June 14th, 2021, 10:30 am

For me another important attraction that hasn't been discussed much is how, in the long term, the dividend payout of these Growth ITs paying 4% may increase faster than income ITs invested purely in high yield companies, so after 7 or 8 years the yield on your purchase price may exceed 5% anyway.

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Re: ITs with %NAV dividend policy

#419620

Postby dundas666 » June 15th, 2021, 9:28 am

Another unexpected attraction of these ITs is if you have a long-term strategy of topping up your existing holdings to build your pot, the yield never drops too low.

For example I currently have a 'problem' whereby I want to build up my holdings in Law Debenture LWDB but the share price has risen 20% since January and the yield has fallen from 4.2% to 3.6%, so not nearly so attractive for a top up.

OTOH I always know the current yield of these %NAV dividend ITs will always be 4% (or whatever) and so I can feel comfortable topping up at any time.

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Re: ITs with %NAV dividend policy

#419912

Postby 1nvest » June 16th, 2021, 11:32 am

Itsallaguess wrote:Up until recently the primary option for IT-income has been in relation to IT's that involve themselves mainly with underlying dividend-paying investments, which often moved focus away from the growthier areas of the market, and so if the investment industry find a way to market options where the underlying income-delivery philosophy can be maintained, with managers now looking to generate such yield-based SWR's by working in those more 'growthy' areas of the global market and trading accordingly within those IT-based remits, then all power to their elbows, I say...

I refuse to believe that anyone coming up with a renewed HYP strategy in 2021 would choose to ignore these important and useful developments in the income-based investment arena....

Jumping in with just a sideline observation, this Amortization_based_withdrawal calculator is a useful tool IMO. Review yearly and plug in anticipated return rate, what growth rate (or not) you'd like in income, how much terminal balance you might wish to leave heirs ...etc. and it provides a indicator of how much 'dividend' to pay yourself out of total returns. Best to use real (after inflation) figures when entering values.

65 and project you have 30 years remaining, perhaps £1M of wealth in 500K home and 500K stocks from which you anticipate perhaps a annualised 4% real gain from stocks so set the rate of return to 2%, and where you'd rather leave the home value to the kids so terminal balance of 500K

Image

and out pops the figure of pay a £31,691 dividend.

With taking your own dividends out of total return you still pay whether stocks are up or down. Yes that may mean selling shares when prices are down, but at other times you may be selling shares when they're relatively high also, broadly washes.

Unlike SWR that provides a consistent inflation adjusted income, ABW sees variability in income more in reflection of ongoing circumstances/needs. SWR tends to leave massive amounts available to heirs, ABW is more inclined to you having more to spend upon yourself.

And as you say when dividends are just a part of total return their presence/absence is irrelevant, enabling a wider universe of candidate holdings to be considered as part of the portfolio makeup.

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Re: ITs with %NAV dividend policy

#423848

Postby absolutezero » June 30th, 2021, 10:36 pm

SalvorHardin wrote:
Itsallaguess wrote:I refuse to believe that anyone coming up with a renewed HYP strategy in 2021 would choose to ignore these important and useful developments in the income-based investment arena...

I suspect that many would ignore them. Furthermore they'd report posts on HYP-Practical which mentioned Investment Trusts.

You ain't wrong.
I posted about selling some HYP shares and reinvesting into an IT (HFEL for what it's worth).
Yup. You guessed it.....


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