5% Yield Target on Inheritance

MichelleN

My husband and I are very fortunate to have inherited £620K and will have the funds very soon to invest. We do not require our inheritance for income as I am still working and we have no mortgage or debt and good savings, ISA's and SIPP's of our own.

We do not want to put this money into fixed interest savings accounts because interest is so low, however a yield of 5% per annum would be more than enough for us. What is the best way of achieving a return of 5% per annum? We were thinking of investing it in a wide range of high dividend investment trusts to achieve this return such as some of the following:-

Henderson Far East Income
City of London
Invesco Perpetual Enhanced Income
European Assets Trust
Standard Life Investments Property Income
Merchants Trust

However, we are very open to idea's/suggestions especially from more experienced forum members than we are on how to achieve this type of return from our inheritance. Thanks.

Audaxer

These sort of investment trusts look fairly good for income seekers, but just wondering why you are targeting yield when you do not require the inheritance to provide income. Would you not be better looking at a growth portfolio with an equity percentage appropriate to your risk level? With that amount of inheritance it might be worth considering an IFA?

ColdIron

Don't confuse yield (dividends) with return (a mixture of dividends and share price growth). High yielding ITs are useful for those that require a high level of dividend income from their pot where the capital value is of a lesser concern. The dividends are less likely to suffer the same hit in a downturn than the share price, which can be important if you need a consistent income to pay the bills

This doesn't sound like you as you say you are still working. Some of those ITs are at the higher end of the risk scale, have limited scope for growth and have high OCFs. IPE, SLI and MRCH are quite highly geared which can magnify losses in a downturn. I'd have a rethink of your strategy and focus on growth via total return and lower ongoing charges with perhaps some consideration to wealth preservation for a portion of it

I have three of those ITs in my income portfolio but they would have no place in my growth one

Thrugelmir

5% return before or after charges and inflation?

MichelleN

Thrugelmir wrote: »

5% return before or after charges and inflation?

We'd be happy with after inflation is taken into account.

SonOf

As mentioned by Audaxer, is there any reason why you have targetted high yield and not looked at total return instead?

Whilst a high yield strategy is a valid one for investing. It is also one that can be quite volatile. HYP fell out of fashion after the credit crunch as portfolio values dropped significantly. Mainly due to banks being good dividend payers and they made up a good chunk of the overall spreads.

Most growth investors invest for a combination of yield and total return (growth in unit prices). And in most cases, the total return is the larger of the two components.

Have you perhaps mixed up yield with total return?

You dont say what your allocation is with those funds but its a high risk spread above the level of the typical UK consumer. It is unusual for a new investor with limited knowledge and experience to go so high up the risk scale at the start. Although that is a common error for new DIY investors.

Malthusian

MichelleN wrote: »

We'd be happy with after inflation.

Then you'll need to take a high level of risk and be comfortable with the possibility that you don't meet your target. Pessimists would dismiss an expected return of 5% above inflation and charges as downright unrealistic, given that moderate sages are talking about a low-growth environment and more extreme ones are ranting about climate emergencies and post-growth economics.

I wouldn't necessarily agree with them, because economics is so unpredictable that even pessimists are frequently wrong, but that's the kind of future scenario you have to make peace with in advance.

The FCA's illustration rules consider 5% above inflation to be at the "high" end at least. (They define a "medium" growth rate as 2.5% above inflation and "high" as 5.5% above; add on charges and you are targeting 5.5% above inflation at minimum for a DIY investment, 6 - 6.5% for an expensive DIY investment or an average advised investment).

This is inconsistent with a high yield strategy. High risk means high growth, low yield sectors like smaller companies and emerging markets.

You haven't said why you think you need a return of 5% per year above inflation to meet your (unspecified) goals.

MichelleN

Malthusian wrote: »

Then you'll need to take a high level of risk and be comfortable with the possibility that you don't meet your target. Pessimists would dismiss an expected return of 5% above inflation and charges as downright unrealistic, given that moderate sages are talking about a low-growth environment and more extreme ones are ranting about climate emergencies and post-growth economics.

I wouldn't necessarily agree with them, because economics is so unpredictable that even pessimists are frequently wrong, but that's the kind of future scenario you have to make peace with in advance.

The FCA's illustration rules consider 5% above inflation to be at the "high" end at least. (They define a "medium" growth rate as 2.5% above inflation and "high" as 5.5% above; add on charges and you are targeting 5.5% above inflation at minimum for a DIY investment, 6 - 6.5% for an expensive DIY investment or an average advised investment).

This is inconsistent with a high yield strategy. High risk means high growth, low yield sectors like smaller companies and emerging markets.

You haven't said why you think you need a return of 5% per year above inflation to meet your (unspecified) goals.

Really sorry, I used the wrong wording, I meant the 5% return should also take into account (include) the cost of inflation. So if inflation was a 2% then 5% is our aim.

MichelleN

ColdIron wrote: »

Don't confuse yield (dividends) with return (a mixture of dividends and share price growth). High yielding ITs are useful for those that require a high level of dividend income from their pot where the capital value is of a lesser concern. The dividends are less likely to suffer the same hit in a downturn than the share price, which can be important if you need a consistent income to pay the bills

This doesn't sound like you as you say you are still working. Some of those ITs are at the higher end of the risk scale, have limited scope for growth and have high OCFs. IPE, SLI and MRCH are quite highly geared which can magnify losses in a downturn. I'd have a rethink of your strategy and focus on growth via total return and lower ongoing charges with perhaps some consideration to wealth preservation for a portion of it

I have three of those ITs in my income portfolio but they would have no place in my growth one

Thank you, your post has helped us to consider things differently. We were initially suggesting some consistent high dividend IT's mainly because we would have the inheritance in a separate portfolio and because the share price would be immaterial to us so we could make a decent interest/return and re-invest the dividends.

However, we agree it appears that we need to look at this from another perspective and have more of a growth style portfolio mixed in with some WP type of funds or IT's. We will concentrate on low cost options and re-invest the dividends. Maybe we should come up with our proposed portfolio for some more comments or suggestions. Thanks again.

aroominyork

MichelleN wrote: »

Thank you, your post has helped us to consider things differently. We were initially suggesting some consistent high dividend IT's mainly because we would have the inheritance in a separate portfolio and because the share price would be immaterial to us so we could make a decent interest/return and re-invest the dividends.

However, we agree it appears that we need to look at this from another perspective and have more of a growth style portfolio mixed in with some WP type of funds or IT's. We will concentrate on low cost options and re-invest the dividends. Maybe we should come up with our proposed portfolio for some more comments or suggestions. Thanks again.

That sounds sensible, and I'd suggest you take your time. I started a thread in November about some changes I was thinking of making to my portfolio and I only finally implemented them this week. I find it's useful to let changes sit for a while and let my brain do some background ruminating - when I come back to the plan after a week or two I usually have a clearer picture in my mind of whether it makes good sense.

SonOf

However, we agree it appears that we need to look at this from another perspective and have more of a growth style portfolio mixed in with some WP type of funds or IT's.

What do you mean by WP? (Hopefully, you are not suggesting With-Profits).

Also, why investment trusts and not OEICs/UTs? Nothing wrong with investment trusts at all but most consumers use UT/OEICs as ITs need a greater amount of knowledge and are often a risk level higher than their equivalent UT/OEIC.

We will concentrate on low cost options and re-invest the dividends.

Cost is a secondary concern to where you are actually investing. For example, there is little point being pleased about saving 0.2% p.a. if your spread is likely to cost you more than 1% a year in returns due to lack of structure and poor research.

Have you considered what tax wrappers you are going to use? will you use bed & ISA/bed & pension? How will high dividends in unwrapped ITs impact on your total income and tax?
How frequently will you rebalance and purchase new units and how will the dealing costs of these stack up compared to UT/OEICs that do not have dealing costs?