Investing during Brexit

economic

TheTracker wrote: »

Creating separate income and growth portfolios is one popular approach. Some people just don't like the overhead - fees, memory, and psychology - of selling to create income, or have a tax situation that makes dividends more favourable.

But if doing so means you have to take on extra home bias - to the extent of 58% of your portfolio being UK - that seems an extraordinary manoeuvre to make to enjoy the benefits of trading less often or reducing dividend tax. And of course you need to actively manage that income portfolio on the flip side.

As a reminder, in theory the dividend policy of a stock is irrelevant to the return of the stock. In practise, the popular desirability of dividend paying stocks creates a demand that in effect reduces its total return. You pay to told a dividend yielding stock.

In uncertain markets, such as you are predicting, a history of paying dividends can be harmful. Any drop in forecast dividend is seen as a sign of weakness and there may be a sell off, or the company may try to cover the shortfall by selling some assets that it should not otherwise have had to sell. You get the dividend, but your capital is worth less.

Understanding all these factors is key in deciding the drawdown strategy you'll take.

The only reason for the decision between a dividend stock vs a non-dividend stock is the tax situation. Otherwise it should not matter, simply put the best stock should be bought. You can always sell part or all of a stock if you need cash. Of course this ignores transactions costs as well but these are likely to be irrelevant compared to the size.

My current portfolio yields about 1.5%, most of which is automatically reinvested. This is similar to a globally diversified fund.

Eco_Miser

economic wrote: »

You can always sell part or all of a stock if you need cash.

True, but the price you sell at may be lower than what you paid for it.
Dividends tend to be less volatile than stock prices.

TheTracker

Eco_Miser wrote: »

True, but the price you sell at may be lower than what you paid for it.
Dividends tend to be less volatile than stock prices.

The volatility of the total return of a dividend paying stock is no different than the volatility of a non-dividend paying stock, all else being equal. That a company chooses to put its return into 'a' and 'b' buckets of say 4% and 3% versus 7% and 0% is a post-return management decision unrelated to volatility of total return. The volatility of 'b' tells you very little about 'a+b'.

Audaxer

sixpence. wrote: »

Yup. That's exactly the issue mate. I am looking to average 2.25-3.5% income.

Artemis Monthly Distribution Fund I is worth considering as it's a globally diversified multi asset fund with a yield of just over 4% and only a small amount of UK equity.

economic

Eco_Miser wrote: »

True, but the price you sell at may be lower than what you paid for it.
Dividends tend to be less volatile than stock prices.

This is a pure decision between a dividend paying stock and a non-dividend paying stock. You are making a decision based on which is more likely to outperform in terms of total return. If you sell to get income on a non dividend paying stock after its fallen, the dividend paying stock would have fallen more.

In reality you dont sell immediately after you bought as if you need income, you would have either a job or cash buffer etc. So lets say you start drawing income from a stock portfolio after a few years. Sure stocks could have fallen and you may need to sell at a lower price. at least that stock outperformed the dividend paying stock which has fallen more. I know which one i would chose.

In the above situation, using dividends as income maybe psychologically better as you are not selling a stock that is losing money. But in reality it would have been better to just buy the one which had outperformed in terms of total return.

economic

Audaxer wrote: »

Artemis Monthly Distribution Fund I is worth considering as it's a globally diversified multi asset fund with a yield of just over 4% and only a small amount of UK equity.

Sounds very risky. Half of it is in bonds and the other half in stocks. OCF fee is nearly 1% so the current yield of 4% would drop to 3% after the fee. Whats the point?

It has underperformed vs say the vanguard LS 100%.

AnotherJoe

To go back to basics, I think you would have far too much in the U.K.

dividendhero

Linton wrote: »

. Solid UK companies have paid good dividends from Victorian times.

Unilever is one such olde worlde dividend machine - but it's an open secret they're going to delist from London and have just one listing in Holland. While it will of course be possible to still trade shares in ULVR - trackers and some pension funds will have to drop their holding

Audaxer

economic wrote: »

Sounds very risky. Half of it is in bonds and the other half in stocks.

Why does that make it sound risky? It's a multi asset fund and much less risky than a fund with 100% equities.

OCF fee is nearly 1% so the current yield of 4% would drop to 3% after the fee.

The OCF doesn't come off the yield. The total return averaged over the last 5 years is 10.27% which is pretty good for a fund with only 44% equities.

It has underperformed vs say the vanguard LS 100%.

You wouldn't expect it to have as good returns as a 100% equity fund, but as VLS100 average total returns over the last 5 years is 11.71%, it is not that far behind it.

ValiantSon

sixpence. wrote: »

2. My growth portfolio will essentially be a VLS 60 (to make up about 70% of the portfolio) and then a few other funds to diversify/spice it up a bit. It's the VLS that weighs it to the UK, unfortunately. I like it because its a good fund though...

I'd agree about VLS60, but if the UK over-weighting is a concern then it might be worth considering an alternative like HSBC Global Strategy Balanced, which is only 3.3% UK equities, compared to 14.9% in VLS 60.

sixpence. wrote: »

I am consoling myself the fact that the UK is still one of the largest economy in the world so stuff is unlikely to go completely to pot...

Who knows what the result of Brexit will be. I'm relatively pessimistic about it, but it isn't stopping me from investing in UK equities.