Tracker fund yield - is higher better?

phillw

EdSwippet wrote: »

... Meir Statman writes, “a dollar labeled dividends is as green as a dollar labeled capital, so rational investors are indifferent between the two.”

Rational investors would look at any tax differences between the two. One would be income, the other a capital gain.

Most experts will advise you to buy and hold the stock and never sell it, because they want you to drive the price up so their can sell theirs. If all the muggles sell then the experts will never make any money.

bostonerimus

phillw wrote: »

Rational investors would look at any tax differences between the two. One would be income, the other a capital gain.

Most people will advise you to buy and hold the stock and never sell it, because they want you to drive the price up so their can sell theirs.

This won't be an issue for many investors with the vast majority of their money in ISAs, SIPPs etc. sales are either tax free or the proceeds are income.

Audaxer

firestone wrote: »

but the idea of selling shares/units that have gained will be followed by the thought what happens if the market goes down for the next 1 or 5 or 10 years you will have less shares to carry on with,take longer to make up your loss and may even need to sell more so in someways not all Dollars are as Green

But if the market goes down after you have sold some shares/units, I would think that you would be glad you had sold some when they the price was high? If you had made say a 10% gain on a fund during the year, I don't see anything wrong by selling say 4% for income, or if you didn't need the income you may want to sell a small percentage anyway to rebalance your portfolio.

firestone

Audaxer wrote: »

But if the market goes down after you have sold some shares/units, I would think that you would be glad you had sold some when they the price was high? If you had made say a 10% gain on a fund during the year, I don't see anything wrong by selling say 4% for income, or if you didn't need the income you may want to sell a small percentage anyway to rebalance your portfolio.

Would agree and the idea of taking profit can be compelling so if you have been in say Bio tech over the last 5 years it may make sense.But my point was that some people look at it as sitting on their shares or trust as it could be that the 10% gain for 1 year is a 50% loss over the next 5 with no guarantee of getting it back and if they have sold they now have less shares to earn div's on.
Off track but my big worry with trackers is (and i own trackers & etf's ) that if the people i work with are any guide to go by..When my company started a pension a few years back i heard the likes of "i know nothing of investing or shares but these trackers look good they have gone up lots of late"so it may not be a case of explaining yield more like explaining they could go down to the average person sold them by the likes of banks & BS

firestone

Audaxer wrote: »

I agree with the above, but if equity income funds continue to pay dividends during an equity crash, and these dividends are not reinvested, would these funds generally drop in value more than similar growth funds?

Think its that mental accounting idea and what peoples investment plan is.But if you start with 10,000 shares at the start of the crash and you end it with 10,000 shares and you have had income you have spent or reinvested then you don't feel worse off.
It may be an illusion as mentioned when a company depletes its capital to pay income but its not as noticeable as when you deplete your capital which is what i think worries people

bostonerimus

firestone wrote: »

Would agree and the idea of taking profit can be compelling so if you have been in say Bio tech over the last 5 years it may make sense.But my point was that some people look at it as sitting on their shares or trust as it could be that the 10% gain for 1 year is a 50% loss over the next 5 with no guarantee of getting it back and if they have sold they now have less shares to earn div's on.

Retirement income has to be generated for perhaps 30 (even 40) years. Most people don't have a pension pot large enough to rely on just dividends, yield, interests etc and so they are going to have to sell something to make up the difference. This can be difficult if you concentrate on the short term and act tactically rather than strategically. Many people that use trackers do so because they feel they can use the statistics of past markets to make pretty good assumptions about performance over the next 30 years. They will have understood the principles of asset allocation, safe withdrawal rates, sequence of return, the probability of success and the necessity to apply a total return approach if they cannot generate their income solely from fixed income sources.

Eco_Miser

EdSwippet wrote: »

... Meir Statman writes, “a dollar labeled dividends is as green as a dollar labeled capital, so rational investors are indifferent between the two.”

However selling growth shares (or units) leaves me with less shares, worth more each, than taking an equal income from the dividends of income shares. Eventually there will be no shares left. Or before that point, the value of a single share is more than the amount I want to take.

Although I suspect that for dividend generating shares with the same total return, I'd have the original number of shares but a depleted value.

firestone

bostonerimus wrote: »

Retirement income has to be generated for perhaps 30 (even 40) years. Most people don't have a pension pot large enough to rely on just dividends, yield, interests etc and so they are going to have to sell something to make up the difference. This can be difficult if you concentrate on the short term and act tactically rather than strategically. Many people that use trackers do so because they feel they can use the statistics of past markets to make pretty good assumptions about performance over the next 30 years. They will have understood the principles of asset allocation, safe withdrawal rates, sequence of return, the probability of success and the necessity to apply a total return approach if they cannot generate their income solely from fixed income sources.

Not sure the average person who has not invested before but has moved into trackers because they have been told they are easy and a good way to step on the investment ladder will be as up on the principles as you think but hope so.And hopefully a mix of income and growth would be ideal & selling for income if needed is not wrong.But not sure i agree on it being a clear cut investment plan(or can see why it troubles people)to say a Dollar gain can be treated as a Dollar dividend when that seems like all your eggs in one basket needing that gain

ColdIron

Audaxer wrote: »

I agree with the above, but if equity income funds continue to pay dividends during an equity crash, and these dividends are not reinvested, would these funds generally drop in value more than similar growth funds?

Obviously a fund that pays out dividends will be at a disadvantage regardless of conditions but I'd say that it depends very much on the fund and the nature of the 'crash'. I suppose you could say that they tend to have big cash rich companies so might perform better than mid or small caps, fags and pharma will differ from miners and financials. As ever diversification is your friend here so you don't need to make too many of these judgements

dunstonh

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 don't have a hard and fast rule as it will depend on the objective. Sometimes I will look for yield. Sometimes total return. The different tax wrappers used can come into play as well.

However, I can count the number of people i have with natural yield in one hand. The dominant method is fixed monthly withdrawal. Cash account holds around 12 months of income but the yield is paid into the cash account and the cash account rebalanced at review (i.e. excess reinvested or shortfall topped up by sale of units).

This way you get consistency of "income" and are not necessarily reliant on yield but can use some of the total return which may be the better method in some investment sectors. Plus, it allows you to use funds with different yield frequencies.

To have to sell small amounts every month/year gives work, fees, worry.

It doenst cost any different. It doesnt create any extra work assuming you review your portfolio at least annually. Which you should be doing anyway.