Natural Yield?

k6chris

enator wrote: »

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.

Unless they are now worth £1.04p each. Well £1.041666, but we're friends....

Thrugelmir

Linton wrote: »

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

What's the correlation between (global) company profitability and (UK) inflation?

An investors complacency is often their own downfall. If an idea is that great why hasn't it been copied before.........

londoninvestor

enator wrote: »

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.

Assume both stocks have had a 0% total return over the last year, and they both started at £1 a year ago. You bought £1000 shares of each.

Then a year later:

Stock A drops from £1 to 96p on its ex-dividend date, and gives you a 4p dividend. So a £1000 investment has turned into £960 of stock and £40 of cash.

Stock B remains at £1. You sell 4%, so you have £960 of stock and £40 of cash.


As long as the two stocks have the same total return (whether it's 0% or +5% or -10%) you'll be in an equivalent position taking the natural yield on the dividend paying stock, or selling the non-dividend paying stock.

Now, if total return was positively correlated to dividend yield, then higher-yield stocks would be a better investment. But that's something which would very much need to be proven rather than assumed.

I wouldn't reject the idea that a carefully chosen portfolio of value stocks can outperform (as we've seen from some "investing factor" research) and that it would have a higher-than-average yield. However, the "factor returns" fluctuate year on year and there's a case for expecting the outperformance to disappear as factor investing becomes more widespread.
https://monevator.com/why-return-premiums-disappoint/

Thrugelmir

londoninvestor wrote: »

Then a year later:

Average life span of a listed company is now only 15 years.

bostonerimus

enator wrote: »

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.

So you have capital growth in there. If you can manage on just dividends that's great, but you'll be hard pressed to get 4% and you'll still be relying on capital growth to keep up with inflation. Even if you go to an Income closed end fund they will be doling out some capital gains. The best approach is to keep things flexible and take your income from the appropriate place at the appropriate time. Take some gains in good times and in bad times rely more on dividends, fixed income and cash.

westv

Thrugelmir wrote: »

Average life span of a listed company is now only 15 years.

Because they get bought out?

Thrugelmir

westv wrote: »

Because they get bought out?

Or delist, go bust etc.

Linton

Thrugelmir wrote: »

What's the correlation between (global) company profitability and (UK) inflation?

.........

The correlation is the value of the £ which will fall should UK inflation be significantly higher than elsewhere and so the value of global companies profits and dividends will rise in £ terms. Currency values tend to balance out such that globally traded goods cost much the same everywhere as do the shares in global companies - for obvious reasons.

Fermion

enator wrote: »

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.

Similar situation with my portfolio, I’ve been in drawdown for about 3.5 years now. The majority of my portfolio are Equity Income funds with maybe 10% of blue chip shares. I haven’t necessarily gone for the highest yield Income funds but i took a view that they all need to deliver at least a 3% yield. The core of my portfolio is 5 big Equity Income funds, including Newton global Income, Newton Asia Income and Troy Trojan Income. I haven’t singnificantly changed this over the 3.5 years.
I started off taking 3.85% Income for the first year, but the funds grew better than expected (mainly due the the £ exchange rate falls) so I’m now taking 4% of the current value. The value of the portfolio has grown 8.3% over the 3.5 years.
If the stock market takes a hit and my portfolio value and yield drops significantly then I will reduce my income. For info I hold about 9 months of drawdown payments in cash.