The days of leaving your investments untouched and living off dividends are over

[moorfield]

So goes a piece in the Sunday Times today. (behind paywall). It's about TR now!

https://www.thetimes.co.uk/article/you- ... -8pdtwhbgm

Don''t tell anyone in the other place lest they start frothing...

[moorfield]

One para in this piece struck a chord for me.

A middle ground — known as dynamic spending — could help. In this method, you set a target for your annual income and adjust it depending on how well your portfolio performs.

This is pretty much how I have been measuring my progress by fixing an overall income target each year, and using this as a "hands-on/hands-off" switch to decide when adjustments need to be made. At the moment I am "hands-off" for the forseeable future, until end-2022 at least.

[88V8]

It's about TR now!

Well I don't 'do' TR, but I'm edging that way.
It's all about tax.....

Not so long ago, CGT was at 40% and divis were untaxed. TR at 40% tax??? Pfft.

Now, divis will be taxed at 33.75%, and if I buy bonds it will be 40%, but CGT is just 20%. Unless of course that gets increased.

So the balance is presently tipped in favour of some TR.

I suppose one has to pay heed to the temporary times.

V8

[kempiejon]

It's about TR now!

Well I don't 'do' TR, but I'm edging that way.
It's all about tax.....

Not so long ago, CGT was at 40% and divis were untaxed. TR at 40% tax??? Pfft.

Now, divis will be taxed at 33.75%, and if I buy bonds it will be 40%, but CGT is just 20%. Unless of course that gets increased.

So the balance is presently tipped in favour of some TR.

I suppose one has to pay heed to the temporary times.

V8

Everyone can do total return, it's just a way of measuring portfolio change and includes capital, returns due to dividends and any other distributions.

[dealtn]

Well I don't 'do' TR

How do you avoid it then?

[simoan]

Well I don't 'do' TR

How do you avoid it then?

I guess if you never sell anything you can maybe claim that you are an income investor, rather than a TR investor? I don't know because I find the idea of investing based on dividend yield bizarre. Personally, I don't see the point of following a losing strategy with my money just to enrich my relatives when I die. If they end up with a large amount of my money I will have failed in my mission i.e. I will have worked for too long before retiring and not giving myself enough time to spend it!

All the best, Si

[Dod101]

As a subscriber I have read the article but there is nothing much new in it. I live off my investments and I find that the natural income generated is more than sufficient for my needs and I think I may spend more than some judging by figures occasionally seen here. I am not a HYP type investor though and in recent years have been much more interested in getting capital growth as well as an income. I understand the sentiments expressed by simoan but the difficulty as always is knowing how long we are going to live.

Dod

[JohnnyCyclops]

Well I don't 'do' TR

How do you avoid it then?

I guess if you never sell anything you can maybe claim that you are an income investor, rather than a TR investor? I don't know because I find the idea of investing based on dividend yield bizarre. Personally, I don't see the point of following a losing strategy with my money just to enrich my relatives when I die. If they end up with a large amount of my money I will have failed in my mission i.e. I will have worked for too long before retiring and not giving myself enough time to spend it!

All the best, Si

That's you and your goals (and possibly similar to mine) but there are many types of investors and many reasons for investing. I know parents of a child who will likely need care and income long after they are gone. Your strategy would not suit their needs. Being narrowly focused on 'self' can be helpful to the individual, but I've often gained most in TLF from some give & take of different positions people find themselves in.

I don't have a Times subscription, and can't begin to guess what data, or even what 'typical' investor they are aiming their piece at (those already in retirement, or a 20-something just starting out in work/investing?). For many investing is about doing something with the money, not banking up wodges of money for the sake of it. I think what we have seen, and will continue to see, is the death knell for annuities (certainly from DC pensions), and the ability of moderately informed people to look at self-investing for income from both capital and dividends, etc.

But, as we're here on a HY shares page, and not the general investing strategies page, I'll say HY direct investing in stocks over the last decade has given me the confidence to take more responsbility for my own finances and wealth, especially as I canter through my early 50s with pensions and non-work income coming to the fore over the next decade.

[simoan]

How do you avoid it then?

I guess if you never sell anything you can maybe claim that you are an income investor, rather than a TR investor? I don't know because I find the idea of investing based on dividend yield bizarre. Personally, I don't see the point of following a losing strategy with my money just to enrich my relatives when I die. If they end up with a large amount of my money I will have failed in my mission i.e. I will have worked for too long before retiring and not giving myself enough time to spend it!

All the best, Si

That's you and your goals (and possibly similar to mine) but there are many types of investors and many reasons for investing. I know parents of a child who will likely need care and income long after they are gone. Your strategy would not suit their needs. Being narrowly focused on 'self' can be helpful to the individual, but I've often gained most in TLF from some give & take of different positions people find themselves in.

Absolutely! Everyone has a different goal and many people will want to leave their capital to others, but I would suggest that given the importance of generating reliable income for a child needing care your friends should choose something other than high yield equities to meet this requirement. Many shares have a high yield for a reason and the yield is actually a risk warning in itself, and as we have seen several times over the years, the income can quickly take a large hit. TBH they would be better in selling their HY shares and putting the money into Fundsmith T class or a World tracker ETF and selling enough units each year to take care of the care costs... but that's TR.

All the best, Si

[dealtn]

I understand the sentiments expressed by simoan but the difficulty as always is knowing how long we are going to live.

Dod

Agreed. So presumably the issue is knowing how much capital to release, and when, to avoid the otherwise unavoidable problem of leaving all that capital for others, and not yourself, to enjoy once you die. Or are those income only investors happy with such an outcome?

[simoan]

I understand the sentiments expressed by simoan but the difficulty as always is knowing how long we are going to live.

Dod

Agreed. So presumably the issue is knowing how much capital to release, and when, to avoid the otherwise unavoidable problem of leaving all that capital for others, and not yourself, to enjoy once you die. Or are those income only investors happy with such an outcome?

No-one said it was simple However, I don't know a single well-known successful investor who follows an income only approach. Name me one who isn't just a BB contributor? All I know is, I wouldn't be in a position to retire in my mid 50's if I had followed a HY approach.

All the best, Si

[JohnB]

1) Not touching anything for too long is a bad idea, but then so is monthly fiddling

2) If you chose to focus on either dividends or capital growth, not only do you cut yourself out of segments of the market, but you also open yourself to missing out on tax-free allowances and differential tax rates.

I mentally think of markets returning 3% dividends and 1% capital gain over inflation to get me a 4% "return", inflation proofed. With 2% inflation included, then the personal and cg allowances cover roughly the same amount, and the tax rates are similar too. So I want gains to come in both forms.

[Dod101]

I understand the sentiments expressed by simoan but the difficulty as always is knowing how long we are going to live.

Dod

Agreed. So presumably the issue is knowing how much capital to release, and when, to avoid the otherwise unavoidable problem of leaving all that capital for others, and not yourself, to enjoy once you die. Or are those income only investors happy with such an outcome?

I don't know about income only investors, but I am not unhappy about such an outcome. However, it is not a priority for me. I will live as well as I want to whilst I still have my faculties and energy to do so, prioritising my needs and wants. I do not live a very expensive life though but can afford to do pretty much all that I want without touching much of my capital. I have given money to my kids and am ready to help my grandchildren if necessary, probably from capital.

I just though do not accept the premise of the highlighted article, certainly not from an investment point of view.

I see that JohnB has outlined my thoughts pretty well.

Dod

[Lootman]

I mentally think of markets returning 3% dividends and 1% capital gain over inflation to get me a 4% "return", inflation proofed. With 2% inflation included, then . . . .

Out of curiosity why do you decrement the capital gain number by the inflation rate but not the dividend number? That makes it look like dividends represent a bigger component of your return when, for me at least, the opposite is true.

What you are really describing there is a 6% average annual return, of which 3% is capital gain and 3% is dividends. Then of that 6%, you take off 2% to get the real return of 4% a year.

These days I ignore inflation because it is fairly low, and focus instead on the nominal return, which I would assess as closer to 8% a year (5% gains and 3% dividends). That said my withdrawal rate is much less than 8% so my net worth goes up most years. I like dividends but do not place an undue emphasis on them, and withdrawals may come opportunistically from either dividends or gains, depending on tax and other issues.

[Alaric]

What you are really describing there is a 6% average annual return, of which 3% is capital gain and 3% is dividends. Then of that 6%, you take off 2% to get the real return of 4% a year.

Another way of looking at that is to expect the dividend yield to remain fairly constant at around 3%, but the cash dividend and thus the market price to increase by 3% a year, 1% above inflation. Money based total return is then 6%.

[1nvest]

1) Not touching anything for too long is a bad idea, but then so is monthly fiddling

2) If you chose to focus on either dividends or capital growth, not only do you cut yourself out of segments of the market, but you also open yourself to missing out on tax-free allowances and differential tax rates.

I mentally think of markets returning 3% dividends and 1% capital gain over inflation to get me a 4% "return", inflation proofed. With 2% inflation included, then the personal and cg allowances cover roughly the same amount, and the tax rates are similar too. So I want gains to come in both forms.

'Want' and getting are two different things. Consider a UK historic bad 20 year case ...

... and that's before costs/taxes.

A factor with SWR/total returns is that the focus is upon a withdrawal method/amount for getting investors through to 30 years of consistent inflation adjusted income production, including periods that include the above.

Some assume that dividends tend to hold up well, but as that chart indicates the real value of dividends can be hit even harder than real share price declines.

[88V8]

Well I don't 'do' TR...

How do you avoid it then?

By not needing to.
Our divi/coupon interest more than suffices for our needs & wants and funds two full annual ISA subs.
So I don't, in practice. do TR. Other than using the annual limit.

But as I said previously, one should not ignore tax rates. Indeed, it's downright foolish to ignore tax, the pound that the govt takes from your pocket. Last year we were 70% unsheltered.
An investment strategy that worked at nil divi tax and 40% CGT is not such a good strategy when divi tax is 33.75% and CGT 20%.

So nowadays it would be logical to pay a little more attention to TR.
But then that brings us to 'selling your winners'.....

V8

[tjh290633]

'Want' and getting are two different things. Consider a UK historic bad 20 year case ...

I am puzzled. Do the numbers in the horizontal axis refer to years this century? Or are they from some time past?

If they are for this century then they are a totally misleading set of data. Which stock index is it? Presumably they have adjusted by RPI or CPI? Are the annualised figures after withdrawing some money or before?

Could you perhaps provide a link to the document and the page concerned, because to me it looks like a total travesty of the real situation.

TJH

[scrumpyjack]

Well I certainly don’t invest for dividends but they happen to be far more than I need so that’s fine. I do generally default to doing nothing with my investments and only make major changes when forced to (takeovers etc) or selling some to use the CGT allowances. Doing nothing (is that ‘passive’ investing?) is a perfectly reasonable strategy because doing something implies that you think you know better than the market. After all the market price of any share at any point in time reflects the balance of market opinion, so what makes you think you know better than Mr Market? When I am forced to do something (eg large slug of cash from a takeover), then I think very carefully and very long term – that has worked well so far.

[simoan]

Well I don't 'do' TR...

How do you avoid it then?

By not needing to.
Our divi/coupon interest more than suffices for our needs & wants and funds two full annual ISA subs.
So I don't, in practice. do TR. Other than using the annual limit.

This is interesting and is at the root of my issue with the income only approach i.e. it only works for someone if they start out with a very large pot of money in the first place. It is a really bad way to grow wealth through equity investment for those with smaller pots and less wealth. If you can put £40k into ISA's and maybe generate another £30-40K for living expenses just through dividends received then you are looking at a pot of £2m or so.

That's fine and works for very wealthy individuals, but to propose an equity income only strategy to those with much smaller investment pots who may be just starting out on their investment journey is just plain wrong. I'd go further, it's dangerous, because investing in high yield equities offers poor risk/reward for the vast majority of investors.

All the best, Si