Natural Yield?

k6chris

Has anyone set up their drawdown pension provision by setting up a SIPP / ISA with a portfolio of 'distribution' funds and is simply living off the natural yield that they produce? Somehow treating your portfolios as 'black boxes' that just keep paying out dividends (etc) feels emotionally easier to cope with than watching the capital value move up and down? Many funds would pay a yield of 4%+ (FTSE 100 tracker etc) so achieving the mythical 4% DD seems possible? This may not be financially o[FONT=&quot][/FONT]ptimal but does seem to fit the way I can deal with risk. What am I missing??!

Fermion

That’s exactly what I did - much easier to keep a track of yield if you have income funds and also avoids the need to continually sell units

Prism

You would still see the capital value move up or down. You can't be sure that the yield will increase with inflation. Then during a crash you would typically see dividends being cut and your yield drop. It all sounds like a very uncontrolled way of living of your investments.

Besides, other strategies quite often support higher withdrawal rates over time - in the 6-8% range

FatherAbraham

If you have a limited risk tolerance, then consider buying an annuity for the lifetime income which you require, and enjoy investing the remainder of your capital as entertainment. That remainder will do better without the load of regular withdrawals being imposed upon it.

Terms such as "natural yield" utterly beg the question of what the mythical safe-withdrawal rate is. Someone, somewhere in your asset stack has decided what level of dividend to pay to investors, and it's certain that they weren't taking your long-term needs into account when they did that.

Investors need to be careful not to be seduced by childish or inappropriate language such as "natural yield" or "safe-withdrawal rate" or "safe investment". These are silly fairy-tales told to each other by internet bloggers and fantasists who cannot deal with the grimness of financial reality.

An investor's task is to match his assets with his liabilities, as far as possible.

enator

That's how I set up my SIPP. The natural yield is 5.1% (mixture of bonds, shares, IT's and funds), and the dividends have risen every year for the five years I have been withdrawing money.


No buying or selling is necessary and the capital is not a concern as it will pass to my family eventually, and will be worth what it's worth.

ams25

https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/

The above link to an article on using natural yield to minimise sequence risk may be of interest. I can see the attraction myself from a simplicity perspective but it does seem to even less optimal than might be expected. To a degree has to depend on how hard you Need and Want your money to work.

dunstonh

Natural yield is not that common to use. It can mean compromising investments as you go hunting for yield. Plus, it gives you an uneven income and most retired people do not want that. However, having the yield paid into the cash account and then drawing a fixed regular amount that is marginally less than the average yield is a way to avoid that.

Somehow treating your portfolios as 'black boxes' that just keep paying out dividends (etc) feels emotionally easier to cope with than watching the capital value move up and down?

Going for yield doesnt reduce the volatility. Indeed, it can increase it if a market event occurs that hits yielding shares. HYP is all the rage with DIY investors pre-credit crunch. They all went quiet after the credit crunch wiped out the bulk of their high yielding assets. Setting a sustainable draw rate from other investment methods can achieve a more balanced approach.

enator

https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/



Yes, all very American However, my personal preference is that I am not spending my retirement stressing out and fretting over stock choices, sequence risk, Guyton-Klinger etc, etc., so a natural yield strategy works for me.


Just saw Dunstonh's reply, and that is what I do - all dividends paid into cash account and I then withdraw 90% and the delta gets re-invested.

Prism

enator wrote: »

https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/



Yes, all very American However, my personal preference is that I am not spending my retirement stressing out and fretting over stock choices, sequence risk, Guyton-Klinger etc, etc., so a natural yield strategy works for me.
.

It works so far for your five years retirement in a growing market. Are you not concerned about what happens during the next crash? Or if inflation comes along to start eroding the yield.

Linton

As always it pays to diversify. I use natural high yield investments to cover about 25% of our normal expenditiure. This provides a less volatile income than would occur if one relied totally on capital growth but is more lucrative than fixed rates or annuities. It is also minimal effort since all dividends are automatically paid into my current account. The income fund is backed up and sometimes replenished by a growth portfolio which also provides cash lump sums annually as required. These are managed within the annual rebalance and so do not involve continual decisions as to what to sell.

Linton

Prism wrote: »

It works so far for your five years retirement in a growing market. Are you not concerned about what happens during the next crash? Or if inflation comes along to start eroding the yield.

Dividend income is a lot more stable than sustainably creaming off capital growth. Share prices can and do vary a lot without any change to the cash dividend. Overall and in the long term dividend payments can be expected to rise with inflation just as much as capital growth.