Income Portfolio's

Audaxer

Thrugelmir wrote: »

Banks following the financial crisis of 2007/08 are good examples. In the years before mainstays of UK based income portfolios. As regarded as highly dependable. Which of course they weren't. With the likes of Northern Rock completely going from hero to zero in a matter of days.

A good reason not to invest in individual shares, but I think from what I hear and read, that good diversified funds and ITs can keep paying dividends at a much less volatile rate than capital values during downturns.

coastline

username12345678 wrote: »

Googling the question seems to suggest that a market collapse due to systemic reasons does not often impact the dividend stream from an otherwise profitable company.

Indeed, there are many companies that have continued to maintain (and raise) dividends for decades through multiple economic cycles.

Perhaps this is the pool where the IT's with outstanding records fish!

a handy link..

http://dividendchampions.uk/

MK62

Thrugelmir wrote: »

How many times have CTY used retained income reserves to cover any shortfall in that period? In essence smoothing the distribution. Yes you would have received an increased divided in cash. However in buying the shares you paid for this dividend as was already priced into NAV.

....but not necessarily priced into the shares!!

Audaxer

I think the point I'm trying to make about dividends from ITs like CTY or similar equity income funds, is that if you have say £100k invested and you need to generate income of £4,000 per year, rising with inflation, from that investment throughout a long retirement, you have less chance of running out of money than if you were to draw £4,000 plus inflation every year from a £100k growth portfolio with fluctuating capital values. If you have a bad sequence of returns in the first few years of retirement, surely there is more chance of eventually running out of money if you are drawing £4,000 per year, increasing to cover inflation, by selling capital at a loss from a growth portfolio?

coyrls

username12345678 wrote: »

At what point do you take 50 years of rising dividends as a reasonable indicator of future performance? I get that the smoothing effect means you don't always receive the dividends you would have in good years with the corollary that those profits retained by the IT will be paid out in bad.
I'm still not quite seeing where the flaw is in creating an income based pf using these long-standing IT's as long as the yield is meeting your requirements.
Where is the risk compared to using the total return option which seems to be subject the vagaries of share price movement?
I hope i'm not coming across as argumentative for the sake of it here, i'm genuinely interested.

Two points:


If the investment was as safe and predictable as you suggest, there would be no risk premium over returns on cash for making the investment. If, in fact, the returns exceed that on cash, there will be an associated risk.


In the case of City of London IT, it strikes me that you are paying City of London to deliver you a safe withdrawal rate from a total return portfolio. The management of the portfolio takes place behind the curtains and what you see is income but that income is not the “natural” yield of the underlying investments.



(You are not coming across as argumentative!).

Thrugelmir

Audaxer wrote: »

A good reason not to invest in individual shares, but I think from what I hear and read, that good diversified funds and ITs can keep paying dividends at a much less volatile rate than capital values during downturns.

Horses for courses as the saying goes. With a sizable portfolio. No reason not to hold individual shares if they themselves form a diversified sub set portfolio. One could even mirror CTY if one wanted to.

Omitted to say earlier that IT's can use capital reserves, not just income to maintain payouts. Worth reading the annual accounts of anything you invest in. Never take numbers at face value.

Thrugelmir

username12345678 wrote: »

Googling the question seems to suggest that a market collapse due to systemic reasons does not often impact the dividend stream from an otherwise profitable company.

Markets are a reflection of supply and demand. An individual compay's dividends isn't guaranteed to rise indefinately. Companies fortunes rise and fall over time.

green_man

username12345678 wrote: »

At what point do you take 50 years of rising dividends as a reasonable indicator of future performance? I get that the smoothing effect means you don't always receive the dividends you would have in good years with the corollary that those profits retained by the IT will be paid out in bad.

I'm still not quite seeing where the flaw is in creating an income based pf using these long-standing IT's as long as the yield is meeting your requirements.

Where is the risk compared to using the total return option which seems to be subject the vagaries of share price movement?

I hope i'm not coming across as argumentative for the sake of it here, i'm genuinely interested.

Indeed, of course the past might not be a true reflection of the future so it’s always possible that a global meltdown might affect these dividends. But any such total return strategy of your own would likely be affected even more.

It is somewhat liberating not to be too concerned about stock swings as long as your income stream is maintained. I think a self run total return approach would be more stressful (for me at least).

Thrugelmir

MK62 wrote: »

....but not necessarily priced into the shares!!

CTY trades at a premium to NAV. This includes cash and accrued dividends due to the Trust.

Iain_For

Audaxer wrote: »

I think the point I'm trying to make about dividends from ITs like CTY or similar equity income funds, is that if you have say £100k invested and you need to generate income of £4,000 per year, rising with inflation, from that investment throughout a long retirement, you have less chance of running out of money than if you were to draw £4,000 plus inflation every year from a £100k growth portfolio with fluctuating capital values. If you have a bad sequence of returns in the first few years of retirement, surely there is more chance of eventually running out of money if you are drawing £4,000 per year, increasing to cover inflation, by selling capital at a loss from a growth portfolio?

Not to negate the importance of sequence return risk, but chasing yield may well result in a less diversified, higher risk portfolio. UK equity income fell 47% in the financial crisis relative to global equities falling 37%.