Tracker fund yield - is higher better?

[Deleted User] · 6 December 2017 at 11:47PM

Hi

I've been researching tracker funds which include dividends. I appreciate the basic priciple behind yield, and the fact that higher means more dividend paid, but if this is the case then is higher always better? If not, why? I appreciate charges are a big factor with trackers, as well as risk appetite and diversification, but is yield just as important when making comparisons between funds even if it's being reinvested rather than used as income?

Thanks

dunstonh · 7 December 2017 at 12:03AM

but if this is the case then is higher always better

No. Yield is just almost an irrelevance when it comes to choosing investments unless you are looking at taking natural income (the old fashioned way of income investing).

If not, why?

Total return is what matters.

bostonerimus · 7 December 2017 at 12:15AM

Reinvested dividends and capital gains are both important in as much as they combine to give the Total Return....as dunstonh says Total Return is the important metric to track for anyone wanting to grow a pension pot.

[Deleted User] · 7 December 2017 at 7:33AM

So for example on the h&l website the charts and performance section and 'annual return' are the key figures then?

Audaxer · 7 December 2017 at 9:59AM

dunstonh wrote: »

No. Yield is just almost an irrelevance when it comes to choosing investments unless you are looking at taking natural income (the old fashioned way of income investing).

dunstonh, do you advise retired clients to leave their investments in growth funds and drawdown from capital gains rather choosing income funds and taking natural income? I thought a taking natural income might still be the preferred way as dividends would still keep coming in years when markets have crashed, rather than having to sell capital at a loss?

le_loup · 7 December 2017 at 10:24AM

I would have thought that natural income for people who want income must be the best way. No work, no fees, no worry. That's a comfortable retirement.
To have to sell small amounts every month/year gives work, fees, worry.

Linton · 7 December 2017 at 10:38AM

As (almost) always in investing, I believe the choice between capital drawdown and natural income is best answered by "both". In my case a sizeable amount is taken as dividends and also an annual drawdown lump sum is taken sufficient to just keep within the current tax band. This is done as part of the annual review/rebalance and so involves little extra effort.

To answer the OP as to whether a high dividend is better than a low one: "better" should mean "most appropriate for your objectives". So it depends on your objectives. If you want income, a tracker fund is unlikely to be the best way of getting it. If you dont want income, dont chase it.

Fund performance reports are based on total return - income+capital growth. Yield determines the relative proportions.

Audaxer · 7 December 2017 at 10:56AM

Linton wrote: »

As (almost) always in investing, I believe the choice between capital drawdown and natural income is best answered by "both". In my case a sizeable amount is taken as dividends and also an annual drawdown lump sum is taken sufficient to just keep within the current tax band.

Linton, interested to know if you take your annual drawdown sum from your growth/100% equities portfolio?

Linton · 7 December 2017 at 11:06AM

Audaxer wrote: »

Linton, interested to know if you take your annual drawdown sum from your growth/100% equities portfolio?

It is done as part of rebalancing so it could be either from the growth or wealth preservation portfolios which have funds in both our SIPPs and our S&S ISAs. Excess drawdown is reinvested in S&S ISAs, so again this provides opportunity for rebalancing between all 3 portfolios, growth, WP, and income.

ColdIron · 7 December 2017 at 11:23AM

Audaxer wrote: »

dunstonh, do you advise retired clients to leave their investments in growth funds and drawdown from capital gains rather choosing income funds and taking natural income? I thought a taking natural income might still be the preferred way as dividends would still keep coming in years when markets have crashed, rather than having to sell capital at a loss?

I would echo the 'both' strategy where possible. I have several pots, some growth, some income. I take the natural yield from the income ones and have no plans to sell capital beyond rebalancing and reviews. I intend to sell tranches of the growth ones when it makes sense to top up the income ones or for a new kitchen, splurge holiday etc. The notion of selling down regardless of market conditions would give me sleepless nights, I want a pleasant retirement. Not everybody may be in the position to do this due to pot size so a total return/capital sale strategy maybe the only one open to them. Many people may have only one pot such as a SIPP so may be employing both strategies in one, I prefer to keep them separate. Horses for courses

EdSwippet · 7 December 2017 at 11:27AM

le_loup wrote: »

I would have thought that natural income for people who want income must be the best way. No work, no fees, no worry. That's a comfortable retirement. To have to sell small amounts every month/year gives work, fees, worry.

From a FinalytiQ article, Natural yield: a totally bonkers retirement income strategy:

The implication of all this is that a natural yield approach is a bonkers retirement income strategy for virtually all but very wealthy retirees, who mostly rely on other sources of steady income.

Discuss :-)

Tracker fund yield - is higher better?

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