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    • griffin79
    • By griffin79 6th Dec 17, 10:47 PM
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    griffin79
    Tracker fund yield - is higher better?
    • #1
    • 6th Dec 17, 10:47 PM
    Tracker fund yield - is higher better? 6th Dec 17 at 10:47 PM
    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
Page 1
    • dunstonh
    • By dunstonh 6th Dec 17, 11:03 PM
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    dunstonh
    • #2
    • 6th Dec 17, 11:03 PM
    • #2
    • 6th Dec 17, 11:03 PM
    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.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • bostonerimus
    • By bostonerimus 6th Dec 17, 11:15 PM
    • 1,211 Posts
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    bostonerimus
    • #3
    • 6th Dec 17, 11:15 PM
    • #3
    • 6th Dec 17, 11:15 PM
    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.
    Misanthrope in search of similar for mutual loathing
    • griffin79
    • By griffin79 7th Dec 17, 6:33 AM
    • 46 Posts
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    griffin79
    • #4
    • 7th Dec 17, 6:33 AM
    • #4
    • 7th Dec 17, 6:33 AM
    So for example on the h&l website the charts and performance section and 'annual return' are the key figures then?
    • Audaxer
    • By Audaxer 7th Dec 17, 8:59 AM
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    Audaxer
    • #5
    • 7th Dec 17, 8:59 AM
    • #5
    • 7th Dec 17, 8:59 AM
    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).
    Originally posted by dunstonh
    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
    • By le loup 7th Dec 17, 9:24 AM
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    le loup
    • #6
    • 7th Dec 17, 9:24 AM
    • #6
    • 7th Dec 17, 9:24 AM
    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
    • By Linton 7th Dec 17, 9:38 AM
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    Linton
    • #7
    • 7th Dec 17, 9:38 AM
    • #7
    • 7th Dec 17, 9:38 AM
    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.
    Last edited by Linton; 07-12-2017 at 9:44 AM.
    • Audaxer
    • By Audaxer 7th Dec 17, 9:56 AM
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    Audaxer
    • #8
    • 7th Dec 17, 9:56 AM
    • #8
    • 7th Dec 17, 9:56 AM
    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.
    Originally posted by Linton
    Linton, interested to know if you take your annual drawdown sum from your growth/100% equities portfolio?
    • Linton
    • By Linton 7th Dec 17, 10:06 AM
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    Linton
    • #9
    • 7th Dec 17, 10:06 AM
    • #9
    • 7th Dec 17, 10:06 AM
    Linton, interested to know if you take your annual drawdown sum from your growth/100% equities portfolio?
    Originally posted by Audaxer
    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
    • By ColdIron 7th Dec 17, 10:23 AM
    • 3,653 Posts
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    ColdIron
    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?
    Originally posted by Audaxer
    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
    • By EdSwippet 7th Dec 17, 10:27 AM
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    EdSwippet
    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.
    Originally posted by le loup
    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 :-)
    • Linton
    • By Linton 7th Dec 17, 10:42 AM
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    Linton
    Originally posted by EdSwippet
    I see fundamental errors in that link

    Dividend and bond yields fluctuate significantly over time. This means that a retiree’s income will change significantly from year to year. This creates an unacceptable level of volatility in their income and makes budgeting nearly impossible.

    Even if yield appear stable in percentage terms, the income received in £ terms will still be calculated in relation to the outstanding capital, which invariably fluctuates over the retirement period.
    Bonds return a constant amount that is unaffected by transient capital values - so holdings in long term bonds provide a very constant income. Company dividends are actually defined as £/share so again unless the directors change the dividend it will remain constant whilst the yield changes inversely with the capital value. Directors are highly motivated to not reduce dividends in £ terms - shareholders hate dividend cuts.
    • le loup
    • By le loup 7th Dec 17, 11:49 AM
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    le loup
    ......... and with income generating ITs the dividends tend to increase at slightly more than inflation. And there are many "hero" trusts out there.
    • EdSwippet
    • By EdSwippet 7th Dec 17, 12:19 PM
    • 617 Posts
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    EdSwippet
    Directors are highly motivated to not reduce dividends in £ terms - shareholders hate dividend cuts.
    Originally posted by Linton
    From this academic paper, The Dividend Disconnect:
    We show that many individual investors, mutual funds and institutions trade as if dividends and capital gains are separate disconnected attributes, not fully appreciating that dividends come at the expense of price decreases. Behavioral trading patterns (e.g. the disposition effect) are driven by price changes excluding dividends. Investors treat dividends as a separate stable income stream, holding high dividend-yield stocks longer and displaying less sensitivity to their price changes. We term this mistake the free dividends fallacy.
    Discuss :-)
    • bostonerimus
    • By bostonerimus 7th Dec 17, 1:31 PM
    • 1,211 Posts
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    bostonerimus
    I say "Strive for moderation and balance......Grasshopper"

    My equity index trackers currently throw off 2% or 3% annual dividends which can either be reinvested or taken as income. Capital gains can also either be taken for income or rebalanced between asset classes. It's a dynamic process where tax planning is important. I keep a small intermediate bond index allocation as a buffer against stock market volatility and as a place to "bank" equity capital gains, although I haven't rebalanced in a while. They also provide stable income
    Last edited by bostonerimus; 07-12-2017 at 1:34 PM.
    Misanthrope in search of similar for mutual loathing
    • le loup
    • By le loup 7th Dec 17, 1:54 PM
    • 3,656 Posts
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    le loup
    From this academic paper, The Dividend Disconnect:
    Discuss :-)
    Originally posted by EdSwippet
    If the guy - talking about an American situation - needs 60 pages to get his theory across, then a simple person - like myself - needs no more than I've posed above.
    • Thrugelmir
    • By Thrugelmir 7th Dec 17, 2:23 PM
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    Thrugelmir
    but is yield just as important when making comparisons between funds even if it's being reinvested rather than used as income?
    Originally posted by griffin79
    Worth investigating how the yield is being generated. If it's out of line with comparable funds.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • griffin79
    • By griffin79 7th Dec 17, 2:24 PM
    • 46 Posts
    • 6 Thanks
    griffin79
    So I'm still not entirely clear why a higher yield isn't always more desirable than a lower yield. Can someone explain the benefits and drawbacks please or provide a clear example?

    Thanks
    • ColdIron
    • By ColdIron 7th Dec 17, 2:41 PM
    • 3,653 Posts
    • 4,396 Thanks
    ColdIron
    So I'm still not entirely clear why a higher yield isn't always more desirable than a lower yield. Can someone explain the benefits and drawbacks please or provide a clear example?

    Thanks
    Originally posted by griffin79
    Very simplistically your return can come from two sources, increase in share price (growth) and income (dividends or interest expressed as yield). A high yield fund will have to restrict its horizons to those instruments that offer that income. A lower yield fund has a wider choice in the investment universe and will often provide a better total return
    • Thrugelmir
    • By Thrugelmir 7th Dec 17, 2:49 PM
    • 56,181 Posts
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    Thrugelmir
    So I'm still not entirely clear why a higher yield isn't always more desirable than a lower yield.
    Originally posted by griffin79
    Yield reflects underlying risk, potential capital return and future expectations of growth.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
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