Tracker fund yield - is higher better?

Prism

Linton wrote: »

a dividend investor will be investing preferentially in defensive companies which have a relatively safe income stream whereas someone focussed on long term growth wont.

My problem with income and dividends is that I don't actually see those high dividend companies as being actually that safe at all. I mean if we take some of the top FTSE yield payers we would be invested in oil, construction and telecoms (amongst others). Are these industries really where you want to risk your money during a downturn? Oil doesn't have the future it had 10 years ago, construction is always hit during a crash and telecoms providers around the world are losing out to new global players.

I know they could keep paying a dividend during those times but I'm not convinced those big companies will be all that big in the near future. The technology changes happening right now are huge

Linton

Prism wrote: »

My problem with income and dividends is that I don't actually see those high dividend companies as being actually that safe at all. I mean if we take some of the top FTSE yield payers we would be invested in oil, construction and telecoms (amongst others). Are these industries really where you want to risk your money during a downturn? Oil doesn't have the future it had 10 years ago, construction is always hit during a crash and telecoms providers around the world are losing out to new global players.

I know they could keep paying a dividend during those times but I'm not convinced those big companies will be all that big in the near future. The technology changes happening right now are huge

Nothing is guaranteed - even more so if you are investing for growth than if you are investing for income. That is why you need broad diversification however you invest.

Putting the point another way...

I am pretty sure of the value of my next year's dividend/interest income within say 10% barring some global economic calamity when all bets are off for any investment. I dont need to worry about getting the income, not do any work to make it appear in my bank account month after month. How confident are you on your next year's capital return? You cant even be that sure that the return will be positive.

Prism

Linton wrote: »

How confident are you on your next year's capital return? You cant even be that sure that the return will be positive.

Oh, absolutely no idea but I am not planning to touch my savings/pension for 15 years so I am aware I am in a different situation. However I am starting to think about my future options for income as my situation could change and I want to be somewhat prepared. My main worries though are that most of the higest yield payers I see are companies I don't currently typically invest in party because I see them as struggling companies with difficult futures. I'm not convinced that investing for income will ever be my thing but open to all ideas.

Linton

Prism wrote: »

Oh, absolutely no idea but I am not planning to touch my savings/pension for 15 years so I am aware I am in a different situation. However I am starting to think about my future options for income as my situation could change and I want to be somewhat prepared. My main worries though are that most of the higest yield payers I see are companies I don't currently typically invest in party because I see them as struggling companies with difficult futures. I'm not convinced that investing for income will ever be my thing but open to all ideas.

I agree that if you dont need income there is no point in going for dividends.

It is a good point that there are companies with high published yields that may be struggling. This arises for two main reasons...

1) Yields may be high because they are calculated as the previous year's dividend as a % of today's price. If the price has collapsed in the meantime the yield will be a poor guide to investment choice.

2) Company's are committed to paying a dividend expressed in £ (or p) per share many months in advance possibly when circumstances were much better. For example Carillion paid its highest dividend for many years in June this year.

The answer is to research the company before you buy, dont simply go on Yield. Look at consistency of dividend payments over the past few years. EPS (earnings per share) compared with the dividend/share is a useful measure as it indicates whether the company can really well afford to pay the dividend. Look at the company's net assets and profitability.

Audaxer

Thrugelmir wrote: »

The long term average (of equities) is inclusive of the reinvestment of dividend income. Not a question of income or growth. The cake cannot be eaten twice.

For my income portfolio, I've gone for income generating funds that produce around 4% annual dividends and they are funds aimed at income and capital growth rather than just income. Some investors going purely for income have a portfolio of funds generating 6% annual dividends, but I think these funds would be less likely to grow capital as well so I've not chosen these funds.

Accordingly I think around 4% annual dividend income from a portfolio of funds (or ITs) with capital values fluctuating but increasing over time roughly in line with inflation, is achievable with a medium risk income portfolio, or am I being too optimistic?

Linton

Audaxer wrote: »

For my income portfolio, I've gone for income generating funds that produce around 4% annual dividends and they are funds aimed at income and capital growth rather than just income. Some investors going purely for income have a portfolio of funds generating 6% annual dividends, but I think these funds would be less likely to grow capital as well so I've not chosen these funds.

Accordingly I think around 4% annual dividend income from a portfolio of funds (or ITs) with capital values fluctuating but increasing over time roughly in line with inflation, is achievable with a medium risk income portfolio, or am I being too optimistic?

Either are reasonable in my view for planning purposes. In reality your drawdown will presumably be based on your assessment of the circumstances at the time - if in your annual review your investments have increased in real value over the year you could consider drawing down more since you would have 1 year less of risk. Or you could reduce your drawdown if you weren't spending it and intended to leave a maximum pot for your relatives/descendents/charities.

Which assumption you use depends on your attitude to planning. You could plan on the investments peforming well, or at least in line with long term averages and intend to muddle through if they dont. Or you could take a moderately pessimistic view to cover at least the essentials and hope for good luck to add the icing to the cake. In my planning I used a more pessimistic assumption of 3% return above inflation drawing down whatever was needed to meet the rather high planned income requirement, so pessimism on all fronts.

Differentiating between dividends and capital drawdown is really a tactical matter rather than one of high level planning. As I hold separate income and growth portfolios my income investments are targetted to achieve 5-6% dividends all of which are paid out. Any decrease in the income portfolio capital can be covered from the growth portfolio as part of the annual rebalancing.

bostonerimus

Dividends can be less volatile that stock price, but there is no guarantee. Look at GE in the US, it's had a tough few years and just cut it's dividend in half. It's the classic established large cap dividend stock that is relied on by retirees and pension funds for dividends. Overnight it was reduced from $0.96/share to $0.48/share and went from a dividend yield of 4.75% to 2.3%.

I haven't changed my strategy much in retirement...other than taking on a bit more risk with a slightly higher equity allocation and having a bigger cash buffer. I want to keep fees to a minimum and I think that's more important than ever as they can be a considerable fraction of your income. I still want capital growth to take care of inflation and a base of fairly stable income. I get all that from a broad cap weighted index equity and bond portfolio. I'm happy to use just 3 funds for the vast majority of my portfolio. I'm still reinvesting the 2% yield and capital gains, and from a 60/40 allocation I'd expect an annualized average gain of around 5%. If I was taking income I'd withdraw no more than 3.5% annually with quarterly withdrawals and rebalancing.

Audaxer

bostonerimus wrote: »

Dividends can be less volatile that stock price, but there is no guarantee. Look at GE in the US, it's had a tough few years and just cut it's dividend in half. It's the classic established large cap dividend stock that is relied on by retirees and pension funds for dividends. Overnight it was reduced from $0.96/share to $0.48/share and went from a dividend yield of 4.75% to 2.3%.

That's why I would only invest in funds rather than individual shares.

Audaxer

Linton wrote: »

Either are reasonable in my view for planning purposes. In reality your drawdown will presumably be based on your assessment of the circumstances at the time - if in your annual review your investments have increased in real value over the year you could consider drawing down more since you would have 1 year less of risk.

Thanks Linton. If you drawdown more than dividends in an income portfolio, would that not mean lower dividends in future years as you would be selling units/shares? I'm not sure what you mean by 1 year less of risk?

Linton

Audaxer wrote: »

Thanks Linton. If you drawdown more than dividends in an income portfolio, would that not mean lower dividends in future years as you would be selling units/shares? I'm not sure what you mean by 1 year less of risk?

1) I dont drawdown anything other than dividends from the income portfolio, I drawdown some capital from the Growth portfolio.

2) One year nearer death so a slightly smaller chance of a crashes in the meantime so you need less contingency money