Tracker fund yield - is higher better?

Audaxer

Eco_Miser wrote: »

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.

I think that's true in theory, but I think the only way it would happen in practise would be if it was a poor performing fund and you were drawing out more each year than the value at which the fund was increasing. If the fund increased at 5% each year and you sold 4% of capital each year, the value of your fund would still have increased after 30 or more years even although you would have fewer shares.

firestone

dunstonh wrote: »

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.



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.

Assuming they have a big enough pot do you not get many retired people still wanting to follow the plan popular with some money sites & newspapers of investing it all in dividend paying shares/trusts & almost saying forget the capital for now (not sure its popular with their kids:))

dunstonh

Assuming they have a big enough pot do you not get many retired people still wanting to follow the plan popular with some money sites & newspapers of investing it all in dividend paying shares/trusts & almost saying forget the capital for now (not sure its popular with their kids)

Never have an issue and I don't consider it popular. I cannot recall any investor ever tell me the investment style they wanted to follow. And historically, natural yield has always been a minority option used by those looking for income. Mainly for tax reasons.

You do need to be wary of media and websites. High yield portfolios were often fashionable pre-credit crunch and they almost became a religion on websites and media. After falling out of favour big time during the credit crunch, they barely get a mention nowadays.

Audaxer

dunstonh wrote: »

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).

Thanks. So for a retired client would you say 4% is a safe withdrawal rate on a balanced portfolio with say 60% equities?

firestone

dunstonh wrote: »

Never have an issue and I don't consider it popular. I cannot recall any investor ever tell me the investment style they wanted to follow. And historically, natural yield has always been a minority option used by those looking for income. Mainly for tax reasons.

You do need to be wary of media and websites. High yield portfolios were often fashionable pre-credit crunch and they almost became a religion on websites and media. After falling out of favour big time during the credit crunch, they barely get a mention nowadays.

Thanks-you still see features in Money Observer magazine among others on how to get(or hope) a set figure per year i.e £10,000 or £15,000 by almost giving up on much growth so was thinking it was popular

bowlhead99

Audaxer wrote: »

Thanks. So for a retired client would you say 4% is a safe withdrawal rate on a balanced portfolio with say 60% equities?

It probably depends on what you mean by "safe", for what objective. If you mean can you take a fixed £ amount of whatever is 4% of today's value, out of your investments for the rest of your life, while still preserving your capital amount in real terms until the point you die (which could be ten years or maybe thirty years or more) - then no, I don't think that's a safe assumption. It would be easy to deplete capital in that situation if you have some bad years and nothing years for a decade or so before any decent gains came along and you might be well down on your objective by the end, whenever the end comes.

If you mean could you take out 4% each year of whatever the balance is at the start of each of those years, until you die, with no requirement to have anything substantial left at the end - then yes that seems OK; but recognise that your income will fluctuate and not always in the direction you want...

dunstonh

Thanks. So for a retired client would you say 4% is a safe withdrawal rate on a balanced portfolio with say 60% equities?

I like 3.5% to begin with. Some investors cannot help themselves but to make the occasional - or rather all too frequent - ad-hoc withdrawal. Once the investor has proven themselves not to be that sort, I would have no problem with 4%. I have some people with decades of 5% p.a. and values are higher.

i personally, try to avoid the term "safe" when talking withdrawal rates. It is not safe. It is a word that could lead me to regulatory trouble. i.e. "you told me my income was safe". Reasonable draw rates are a term I would prefer to use. Often thrown in with a reasonable expectation that drawing 3.5% should be sustainable. Although can never be guaranteed.

bostonerimus

Audaxer wrote: »

Thanks. So for a retired client would you say 4% is a safe withdrawal rate on a balanced portfolio with say 60% equities?

"Safe" withdrawal rates are going through a revision right now because of the historically low returns from fixed income, so 3.5% is probably a better number to start with. With a diversified 60/40 portfolio you should have a better than 95% chance for funding a 30 year retirement and will probably die with a significantly larger pot that when you retired. But you need a contingency to avoid the 5% and that might be reducing spending in a downturn. The danger comes when people desire an income larger than can be reasonably provided by their pot and they use a too risky withdrawal rate. There are market conditions where 5% drawdown is doable, but also plenty where it would deplete the pot too quickly.......its all a game of probability and weighing risk.

Audaxer

bowlhead99 wrote: »

If you mean could you take out 4% each year of whatever the balance is at the start of each of those years, until you die, with no requirement to have anything substantial left at the end - then yes that seems OK; but recognise that your income will fluctuate and not always in the direction you want...

But could that not be an argument for taking natural income? A lot of retirees seem to go for a portfolio of buy and hold Investment Trusts with a history of decades of increasing dividends that yield 4% or more on their original investments. Nothing is for certain but if that sequence continues, is that not a better way of ensuring increasing income, irrespective of a fluctuating capital balance?

bostonerimus

Audaxer wrote: »

But could that not be an argument for taking natural income? A lot of retirees seem to go for a portfolio of buy and hold Investment Trusts with a history of decades of increasing dividends that yield 4% or more on their original investments. Nothing is for certain but if that sequence continues, is that not a better way of ensuring increasing income, irrespective of a fluctuating capital balance?

The classic "safe withdrawal rate" increases with inflation so if you start at 4%, after 10 years with 3% inflation you are then withdrawing 5.4%. Even if you can get your income from dividends that are decoupled from the actual share price ie your dividend is so much per share, you are probably going to have to sell something eventually and if you ignore capital growth you could be in trouble. Historically the sweet spot for retirement income generation has been a 60/40 portfolio so if you are using ITs I would understand their asset allocation first, rather than just going for yield.