Tracker fund yield - is higher better?

Linton

EdSwippet wrote: »

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

Discuss :-)

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

......... and with income generating ITs the dividends tend to increase at slightly more than inflation. And there are many "hero" trusts out there.

EdSwippet

Linton wrote: »

Directors are highly motivated to not reduce dividends in £ terms - shareholders hate dividend cuts.

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

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

le_loup

EdSwippet wrote: »

From this academic paper, The Dividend Disconnect:
Discuss :-)

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

Deleted_User wrote: »

but is yield just as important when making comparisons between funds even if it's being reinvested rather than used as income?

Worth investigating how the yield is being generated. If it's out of line with comparable funds.

[Deleted User]

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

Deleted_User wrote: »

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

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

Deleted_User wrote: »

So I'm still not entirely clear why a higher yield isn't always more desirable than a lower yield.

Yield reflects underlying risk, potential capital return and future expectations of growth.

bostonerimus

Deleted_User wrote: »

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

You need to look at the investment and understand why it is high, or low, yielding. eg you can have a highish dividend fund that concentrates on large well established companies that might not have the best prospects for capital growth but is pretty low risk......or a high dividend fund that concentrates on risky companies where the dividend is used to entice investment.