When to Top Slice

[tjh290633]

You are wrong AiY. Trimming a holding does not prevent further capital gains. A number of my holdings have been trimmed back 3 times in succession. They have also later fallen back and been topped up several times before having to be trimmed back again. Imperial Group is a good example.

Yes, you don't benefit from further gains on the shares sold, but you do get them on the 75% or so retained. For those of us interested in income, the ratcheting effect by reinvesting proceeds in higher yielding shares is beneficial.

Swings and roundabouts do come into play.

TJH

[richfool]

I've recently started investing for (with) my daughter. She's 12. She wanted to think about Primark because she shops in there. We chatted about how she should make her decisions. The first guidance I gave her was to learn about EPS. We're still on that subject

Yes. We should all learn by our mistakes and we should all be allowed to make them. However, I subscribe to a huge caveat therein. I think it's also wise to understand how others have lost their shirts. It's possible to learn from "others" mistakes. And that's cheaper.

In specific response "when to top slice?" I'd caution top slicing too early because it's over-weighting a portfolio. If the stock is on a bull run and has some momentum behind it then top slicing will deny future capital gains. In the particular situation you are reviewing I'd look at the EPS forecasts for JD and watch for Newsflow which may indicate a slowing rate of growth and review the holding on it's own merit. Top slicing could become "churning" if it's not done correctly. And that could be expensive. If you feel the "weighting" within your portfolio is not to your liking I wonder if you should consider purchasing funds which will remove some of the detail needed to invest in specific stocks.

AiYn'U

AIS, I switched myself on to Primark, which is actually part of Associated British Foods (ABF) back when austerity was first announced, about 10 years back. I took the view that clothes shoppers would be moving down to more budget brands. ABF also runs several food brands including Jordan's muesli and Twinings teas and a sugar brand. I participated in some very good growth, but later sold out because of the very low dividend yield, not helped of course by the growing SP.

Getting back to top slicing, I take the point about not selling too soon. I have held Mercantile (MRC) (invests in mid cap stocks) and Standard Life Smaller Coys (SLS) IT's for a couple of years now, through the doldrums post June 2016, and then topped up earlier this year anticipating a post Brexit recovery. They are now doing very nicely. My holdings are up 20% in the case of MRC and 30% in the case of SLS, both from negative positions last year, which then leads me to think should I be selling or top-slicing, or just sit tight through what could be another couple of years of uncertainty after this initial Brexit euphoria wears off and whilst a trade deal is done. As both are currently underweight in my portfolio and I invest for the long term, I am inclined to sit tight. Had my positions been significantly overweight and the gains been much higher, I might have top-sliced.

[Wizard]

I think, based on what you have said, I woukd be tempted to explain to him why you think he should consider top slicing. Answer any questions he has, but let him work through the decision. Unless there is a serious amount of money involved, you said the portfolio was about learning as well as saving, the thought process will IMHO help him learn more than just telling him what approach to follow.

But thank you for posting, makes me think I should do something similar with my kids.

[Alaric]

You might find people who perhaps state that 'dividend investing is a good enough strategy for me', but that's entirely different to the straw-man suggestion that you seem to want to make above...

How do you categorise those who are seemingly impervious to capital losses, being apparently little concerned if their 8% yield comes at the cost of a 8% capital reduction? Those who seem resistant to the notion that investing new money in high yield stocks carries risks of buying into Companies that are on their way out and that an effective filter to exclude the serious dross is necessary.

[ReformedCharacter]

But thank you for posting, makes me think I should do something similar with my kids.

I've been doing something similar for my youngest son. I've written a series of emails which will eventually number about a dozen. I haven't been trying to teach him what I do because that will probably not suit him. What I have tried to do though is give him some background covering topics such as Diversification, Risk, Collective Investments, Costs, Psychology and so forth. Once I have finished I will make some recommendations which will point him in the direction of Vanguard funds. I could have done this to begin with but I wanted to explain to him - and for him to understand - why I am offering that advice.

RC

[Itsallaguess]

You might find people who perhaps state that 'dividend investing is a good enough strategy for me', but that's entirely different to the straw-man suggestion that you seem to want to make above...

How do you categorise those who are seemingly impervious to capital losses, being apparently little concerned if their 8% yield comes at the cost of a 8% capital reduction?

Those who seem resistant to the notion that investing new money in high yield stocks carries risks of buying into Companies that are on their way out and that an effective filter to exclude the serious dross is necessary.

I would put them into exactly the same category as perhaps some 'total return' investors might sit, who might also sometimes see capital losses with their own investments...

That is, of course, if you would agree that 'total return' investors are quite capable of losing money on single investments too Alaric....

Cheers,

Itsallaguess

[tjh290633]

You might find people who perhaps state that 'dividend investing is a good enough strategy for me', but that's entirely different to the straw-man suggestion that you seem to want to make above...

How do you categorise those who are seemingly impervious to capital losses, being apparently little concerned if their 8% yield comes at the cost of a 8% capital reduction? Those who seem resistant to the notion that investing new money in high yield stocks carries risks of buying into Companies that are on the way out.

You are assuming that the high yield is always associated with an equivalent capital loss. One could equally argue that a 2% yield is associated with only a 2% capital gain. Neither postulation is universally true.

The market has its way of sorting out anomalies, and it is not universally a route which leads to disappearance. A good few years ago I realised that IMI was on an anomalously high yield, adding it to my portfolio at something under 300p, 265p in fact in 2009. The yield from the next two dividends came to 7.8%. within a year it had gone overweight and I trimmed back in 2010 at 641p, again in 2011 at 992p, and they had an issue of B- shares in 2014, with a consolidation at 1565p. Subsequently I was able to top up 3 times in 2015 at 974p, in 2016 at 798p and again in 2016 at 804p. In January 2018 it was again overweight and I trimmed back at 1425p. Currently it is at 1180p, yielding 3.5%, and I should add that the dividend has never been cut while I have held it. My IRR is about 45%.

You would never have touched this share if you stand by your reasoning.

TJH

[Alaric]

You are assuming that the high yield is always associated with an equivalent capital loss. One could equally argue that a 2% yield is associated with only a 2% capital gain. Neither postulation is universally true.

The question is whether you expect high yield shares to out perform the "average". If you don't, then the implicit expectation is that the higher dividends will be paid for out of poorer capital performance. If you are an "annuity" investor, seeking lifetime income to live off, that may make sense as well.

But yes, if you have a 2% dividend yield against a FTSE 100 yield of 4.5%, you are expecting or hoping for at least a 2.5% dividend increase and share price growth.

[kempiejon]

Good afternoon wise Lemons.

I have a small portfolio I run with my teenage son to try and help him understand long term investment and saving for his future.

It is a fairly eclectic mix of shares that were chosen by him as companies he was interested in.

One of his picks was JD Sports, he chose it because he spends money in there.

The dividend return is pants (Around 0.2%) but his capital growth has been impressive, currently over 200%. This growth has skewed the balance as it now forms 12% of his savings, I think he needs to diversify.

How do you all approach top slicing? I think the time is ripe to sell off some of the shares and invest in something giving a better dividend return. He is a bit hypnotised by the growth. I think this is a great opportunity to teach him a little more on investment strategies.

Any suggestions on continuing his education greatly appreciated.

Do any of you have any quick and dirty "Rules of Thumb" around top slicing.

This sounds like a teachable moment. You say this is for him to understand long term investing so would never be an OK time to sell? If part of this wealth creation strategy involved selling shouldn't he have always had a plan about when to sell. There is a lot to be said for setting an exit price and time period for any holding when a share is bought - for those that go up in price provided you are minded to sell, similarly should there be a strategy for shares that have fallen. As you said he needs to diversify in which case all you need to have is a maximum percentage of any particular holding and then an amount by which to reduce it, of course any maximum percentage will be influenced by the number of holdings. Or this could be a good time to talk about cheap index investing and how many (most) stock pickers don't consistently beat the market?

[tjh290633]

You are assuming that the high yield is always associated with an equivalent capital loss. One could equally argue that a 2% yield is associated with only a 2% capital gain. Neither postulation is universally true.

The question is whether you expect high yield shares to out perform the "average". If you don't, then the implicit expectation is that the higher dividends will be paid for out of poorer capital performance. If you are an "annuity" investor, seeking lifetime income to live off, that may make sense as well.

But yes, if you have a 2% dividend yield against a FTSE 100 yield of 4.5%, you are expecting or hoping for at least a 2.5% dividend increase and share price growth.

I think that you mean an increase in the dividend of 125%.

TJH

[Alaric]

I think that you mean an increase in the dividend of 125%.

If you buy at 100, get a dividend of 2.0 and the price increases to 102.5, that's an asset value of 104.5. If the dividend yield remained at 2%, the dividend would have to have gone up by 2.5% as well.

When prices and dividends increase at the same rate, dividend yields remain the same.

[tjh290633]

I think that you mean an increase in the dividend of 125%.

If you buy at 100, get a dividend of 2.0 and the price increases to 102.5, that's an asset value of 104.5. If the dividend yield remained at 2%, the dividend would have to have gone up by 2.5% as well.

When prices and dividends increase at the same rate, dividend yields remain the same.

That is not what you said.

if you have a 2% dividend yield against a FTSE 100 yield of 4.5%, you are expecting or hoping for at least a 2.5% dividend increase and share price growth.

If you want your dividend to rise to give the same yield as the FTSE100, it has to increase by 125%. Your share price then has to remain the same. Alternatively your share price rises by 4.5% and the dividend remains the same.

Think about it.

TJH

[Alaric]

If you want your dividend to rise to give the same yield as the FTSE100,

You misunderstand my point. If you want the same total return as the FTSE 100 , then making the simplifying assumption that the FTSE 100 index doesn't change in capital terms, you need 2.5% growth in the share price to get to the 4.5% FTSE 100 Return if your dividend is 2%. A 2.5% dividend increase should deliver a 2.5% share price increase if the yield stays at 2%.

[AsleepInYorkshire]

You are wrong AiY. Trimming a holding does not prevent further capital gains.
TJH

Nope ... you got me there?

Original stock = 100 shares at £1.00 (Value = £100)
Option A retain stock & value increases by 10% (Value = £110)
Option B top slice 10% (Value = £109 - including balance of cash)

Overall a loss of £1 (not including the costs of selling).

If I may point out what I said in my post please

If the stock is on a bull run and has some momentum behind it then top slicing will deny future capital gains.

Clearly a caveated response

Furthermore there were plenty of other contextual comments within my response to the original poster making it clear that this was only one consideration. I'm confused that you should say that my comments were wrong. I wonder if I am missing something? I hasten to add I agree that "buying and selling" over lows and highs has advantages but I am not entirely sure that makes my comment "wrong".

Merry Xmas

AiYn'U

[Itsallaguess]

If I may point out what I said in my post please

If the stock is on a bull run and has some momentum behind it then top slicing will deny future capital gains.

Clearly a caveated response

Furthermore there were plenty of other contextual comments within my response to the original poster making it clear that this was only one consideration. I'm confused that you should say that my comments were wrong.

I wonder if I am missing something?

I think it's just that future capital gains are clearly not 'denied' on any remaining holdings, and that they would only be 'denied' on that portion of a holding that is actually top-sliced...

Your figures given in the previous post clearly cover that fact, but the detail of it wasn't conveyed as clearly in your statement that 'future capital gains would be denied', that's all....

If you'd said 'top-slicing may reduce future capital gains' rather than 'top-slicing will deny future capital gains', then I think it would have covered this particular point in a clearer way.

As an aside, and as someone who has been known to top-slice some holdings in the past, it's clearly possible to see both sides of this debate from a logical point of view, but we're emotional beings on the whole, and as someone who places a great deal of importance on that side of investing, and trying to find a strategy (and methods within that strategy..) that suits me personally as an individual investor, then I can definitely say that where large capital gains occur, I do see the benefit in the use of top-slicing as part of my investment-strategy.

For me, there are often two specific benefits -

1. Where an income-investment share-price sometimes rises to the point where it's clearly outstripped any subsequent rise in dividend payouts, such that what used to be an investment with a beneficial yield often becomes a lower-yielding share in relation to it's peers, then rotating at least a portion of such investments (and sometimes all of..) into a higher-yielding alternative often gives a really useful boost to overall portfolio income.

2. Where a share has seen a capital-gain that results in it becoming too large a holding in terms of my portfolio capital-diversity, I sometimes look to use top-slicing as a method to re-balance. Doing so whilst taking the above Point 1 into account usually allows me to rebalance my portfolio in a more diversified way at the same time as seeing a rise in overall portfolio income...

I personally see the benefits of being able to take advantage of two income-portfolio management processes using a single 'top-slice' as being a big benefit of the process. It might seem that twitchy fingers could lead to a lot of that going on, but so long as I use trigger-points (in terms of low-yield for Point 1 or capital-imbalances for Point 2) that are wide enough, I find in practice that top-slicing actions themselves are really quite rare, so when I see people putting forward the argument that such top-slicing might lead to over-trading, I personally don't see that happening at all, and that's over many years now...

I also note that one of the other arguments against top-slicing is the one you raise here, which states that 'future capital gains would be denied' on those holdings top-sliced. Whilst that's clearly true, for me it misses the point entirely, as it hinges on the assumption that price-movements are a one-way-street...

Whilst generally we might assume that over time share prices are likely to rise, in these specific cases we're already talking about shares that have often outstripped the price-momentum being seen in other areas of a portfolio, and all we're looking to do is to lock in a portion of such gains, in a way that might minimise the impact of any potential price-reduction in the future, which brings me personally back full-circle to the 'emotional beings' aspect of investment, because as someone who's been investing long enough to have experienced both side of this coin a number of times now, I can without a shadow of a doubt say that I have more problems with seeing a stock lose value that I've not top-sliced in a far greater way than I have seeing a stock continue to rise in value where I have carried out a top-slice process on it....

The longer I go on as an individual investor, the more I appreciate that time itself does the vast majority of the heavy lifting in terms of overall performance. For me, that means that the single best thing I can do as an individual investor is to find a strategy, and methods within that strategy, that enable me to be as 'comfortable as possible' whilst on that ride, and given the above, I personally find top-slicing in some circumstances to be much more about 'ride comfort' than about specific (potential...) technical performance....

If that 'comfort' comes at a 'technical cost', over a potential 'alternative-route' that might feel a lot bumpier but could deliver a 'technical benefit', then as an individual investor I really am quite prepared to pay a (potential) price for such 'comfort', so long as it means that I can continue the ride itself for longer, and more enjoyably....

Cheers,

Itsallaguess

[Bubblesofearth]

I'd suggest that the only 'silly notion' in the above is that you can find anyone who might actually state that 'dividends are better than capital growth'.

The second response to the OP contained the following;

"TJH's aims, I believe, are different to yours. Broadly, his methodology is to ratchet up annual income in terms of dividends by selling, in part, a share that has done well recently and then to recycle the money into a share that is "on a downer" but which offers a higher yield.

In the case of your son and saving for the future, I would be tempted to top slice 100% JD Sports and invest in a couple of investment trusts such as FGT, FCIT, WTAN, BNKR. In this way you are diversifying in both quantity of holdings (reducing risk) and obtaining a higher yield than 0.2%."

There are a lot of what are at best misleading, and at worst plain wrong, notions on the high yield boards. The idea that recycling money into higher yielding shares can give anything other than an immediately higher yield is one. We also had one chap repeatedly claiming that 90% of returns come from dividends, completely ignoring the fraction of this return that comes from capital gain on reinvested dividends. Some of these points are quite subtle but could easily lead investors into the erroneous belief that chasing dividend yield is somehow better than capital growth. It's also always worth noting that every top-slicing action will carry an approx 1% transaction cost (more for smaller companies). Something that should IMO only be carried out if there is a serious portfolio imbalance. Something which, I might add, usually smacks of inadequate initial diversification. Holding only 8 shares is such an example IMO.

Of course there are a lot of investors that adopt high yield as a strategy for income and are fully aware that it doesn't mean higher total return. There may be good tax reasons or simply a desire not to want the hassle of selling shares. But I have seen too often the implied or direct assertion that high yield is a market beating strategy to see my point as a straw-man.

Maybe we have different experiences or read posts through a different prism.

BoE

[Itsallaguess]

But I have seen too often the implied or direct assertion that high yield is a market beating strategy to see my point as a straw-man.

Maybe we have different experiences or read posts through a different prism.

Well, quite...

You're trying to say that someone suggesting spreading capital around a number of investment trusts to gain increased diversification, whilst at the same time increasing the natural yield of the capital by such diversification, is shouting from the roof-tops that 'high yield is a market-beating strategy'....

Can I ask if you actually looked at the yield of the investment trusts monabri was suggesting in the post that you've quoted?

Here they are to save you the trouble -

Finsbury Growth & Income (FGT) (https://www.sharecast.com/equity/Finsbu ... come_Trust) - 1.8% Yield

F&C Investment Trust (FCIT) (https://www.sharecast.com/equity/FC_Investment_Trust) - 1.4% Yield

Witan Investment Trust (WTAN) (https://www.sharecast.com/equity/Witan_Inv_Trust-13715) - 2% Yield

Bankers Investment Trust (BNKR) (https://www.sharecast.com/equity/Bankers_Inv_Trust) - 2% Yield

Some prism...

Cheers,

Itsallaguess

[Bubblesofearth]

Well, quite...

You're trying to say that someone suggesting spreading capital around a number of investment trusts to gain increased diversification, whilst at the same time increasing the natural yield of the capital by such diversification, is shouting from the roof-tops that 'high yield is a market-beating strategy'....

Can I ask if you actually looked at the yield of the investment trusts monabri was suggesting in the post that you've quoted?

Here they are to save you the trouble -

Finsbury Growth & Income (FGT) (https://www.sharecast.com/equity/Finsbu ... come_Trust) - 1.8% Yield

F&C Investment Trust (FCIT) (https://www.sharecast.com/equity/FC_Investment_Trust) - 1.4% Yield

Witan Investment Trust (WTAN) (https://www.sharecast.com/equity/Witan_Inv_Trust-13715) - 2% Yield

Bankers Investment Trust (BNKR) (https://www.sharecast.com/equity/Bankers_Inv_Trust) - 2% Yield

Some prism...

Cheers,

Itsallaguess

You are missing the point. It's not about forensic analysis of yields, it's about the directional nature of advice. Just as when someone advocates recycling money into higher yielding shares the implication is that this is a good thing, otherwise why advocate it? The underlying message is there, whether shouted or not.

I advocate equal weight on purchase, diversification and long term buy and hold because I believe them to be a good strategies.

I do not advocate a focus on high yield or recycling to chase higher yields because I do not think they are good strategies.

Those are my opinions and I am happy to state or imply them.

If someone states some other strategy then the assumption has to be it is because they believe it to be sound.

BoE

[Alaric]

I do not advocate a focus on high yield or recycling to chase higher yields because I do not think they are good strategies.

Those are my opinions and I am happy to state or imply them.

There's one board on this site where such views are distinctly unwelcome.

[Dod101]

I do not advocate a focus on high yield or recycling to chase higher yields because I do not think they are good strategies.

Those are my opinions and I am happy to state or imply them.

It of course depends entirely on what your aims are. If you are living off your dividends then focussing on high yield might very well be the best strategy. If you are seeking total return, it might not so, as usual, I think that categorically advocating one strategy or the other is wrong.

Personally I do not chase high yields although I live off my dividends. As I think I have said, I top slice if a share is getting too big for the portfolio and will recycle the proceeds into a share that I like at the time. It night be a high yielder or might not. In fact I am reaching that stage with Scottish Mortgage right now. I may top slice it and recycle the proceeds into Diageo. I am perfectly happy to do that because I am still building up my position in Diageo, having been a very latecomer to that particular party.

We all have our own ideas and I do not think any of us should be black or white about them. For me, having achieved an adequate income to live off, my focus is now I guess much more flexible than it once was.

Dod