Natural Yield?

enator

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.

The SIPP is around 30% of my income (I have tax free income from VCTs and ISAs that make up the rest plus a cash buffer), so inflation or a crash are not a major concern.


Also, I am so old that the SP is payable within a number of years giving another £20k for us both and that's index linked to a degree.


So, for me personally the yield strategy works and gives me slightly less stress in my old age.

Prism

Linton wrote: »

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.

I agree with you that a diversified approach is best. I just think trying to do it from yield alone (which surely must include high yield corporate and EM bonds, a range of cyclical company dividends and REITS) sounds risky to me.

Prism

enator wrote: »

The SIPP is around 30% of my income (I have tax free income from VCTs and ISAs that make up the rest plus a cash buffer), so inflation or a crash are not a major concern.


Also, I am so old that the SP is payable within a number of years giving another £20k for us both and that's index linked to a degree.


So, for me personally the yield strategy works and gives me slightly less stress in my old age.

Ah that makes sense. I think the OP is referring to a much higher allocation to yield. Using yield as a top up sounds good. Living of yield feels to unbalanced to me

k6chris

Thanks for all the replies. I think the idea of 'Natural Yield' is very seductive emotionally as it allows you to believe the half-truth that you are never eating into your capital, even if inflation is to some extent doing that for you. I also like the whispered promise that you don't have to decide a draw-down percentage, the investment faeries do that for you! Actually my potential use for it was as a way of adding an additional revenue stream to a mainly DB funded retirement, certainly in the early years whilst I get my head and emotions around a better way of drawing down, rather than saving up! I am not trying to chase a HYP

Thanks again and keep the insights coming.

AnotherJoe

I looked at it but overall it seems it would reduce the amount I can take and it's not that complicated to sell some funds now and again.

bostonerimus

The difficulty with using just dividends is that you are at the mercy of inflation. If you have a stock with little to no capital growth, but pays a 4% dividend and you need 4% starting income and you have 3% inflation then you will immediately start spending your capital and run out of money in 30 years. Certainly dividends are nice, but you should also look to have some capital growth. Don't put all your eggs in one financial strategy.

londoninvestor

Linton wrote: »

Overall and in the long term dividend payments can be expected to rise with inflation just as much as capital growth.

I think that's true when you look at the dividend payments from the market as a whole.

The potential risk with "natural yield" strategies though is that rather than having a market-representative portfolio, you skew towards stocks which have a high yield now. So compared to the market as a whole, you get higher current dividends, but less future growth potential.

londoninvestor

k6chris wrote: »

it allows you to believe the half-truth that you are never eating into your capital, even if inflation is to some extent doing that for you.

Yes, and spending the dividend from a stock that yields 4% has just the same impact on your capital as annually selling 4% of your holding in a stock that yields 0%.

I agree the former feels intuitively more comfortable though!

enator

bostonerimus wrote: »

The difficulty with using just dividends is that you are at the mercy of inflation. If you have a stock with little to no capital growth, but pays a 4% dividend and you need 4% starting income and you have 3% inflation then you will immediately start spending your capital and run out of money in 30 years. Certainly dividends are nice, but you should also look to have some capital growth. Don't put all your eggs in one financial strategy.

It's not necessarily so that a yield based portfolio negates capital growth - my SIPP growth percentages for the last five years are;


2015 9.01%
2016 19.25%
2017 9.91%
2018 -6.12%
2019 5.22%


And the dividends have grown every year as well. The portfolio hasn't been touched for at least seven years, no tinkering and no rebalancing either. The FTSE in that time has moved from 6915 to 7229 today.

enator

londoninvestor wrote: »

Yes, and spending the dividend from a stock that yields 4% has just the same impact on your capital as annually selling 4% of your holding in a stock that yields 0%.

I agree the former feels intuitively more comfortable though!

Not sure that's right - if you had 100 £1 shares and the yield is 4%, then you still have £100 in shares.

If you sell four to give the income then you only have £96 in shares.