dividend yield vs distribution yield & Choice of acc or inc funds/etf

bargainhunter888

Hi,
was researching some ETFs to diversify my portfolio with some Bonds and came across IGLT mentioned on monevator, so thought id have a look.
https://monevator.com/using-exchange-traded-funds-to-instantly-diversify-your-portfolio/
it suggests 
Why it’s good: You get a regular income, fixed when you buy the fund. For instance, as I type the fund is yielding around 4.7%. That’s less than cash currently, but if Bank of England base rates are slashed, you’ll still get that return. An element of fixed interest can therefore help your portfolio in times of deflation. Still, the low fixed returns mean you’ll typically only want a modest portion of your portfolio in Gilts, unless you’re feeling very bearish. Like bonds, the capital value of Gilts fluctuate as their interest payments become more or less attractive.

looks like the fund has grown 100% since inception, its mentioned that investors like to draw an income from this, but looking at the distribution yield, the value is 1.17%, do i read this as similar logic to dividend yield and would expect 1.17% of income on a bi annual basis? but it mentions the yield is 4.7% is it just because that's a 10 year old article because the bit where he says it's fixed which has me confused.

secondly - for investors with a bit more time to retirement, should we go for acc funds to build up value, then when we get closer to retirement and the value of our investments go up, that's when we switch to income funds to take advantage of the dividends?

thanks for your help.

masonic

Some general factors to consider:

- If investing outside of a tax-sheltered account, would you be willing to calculate the income received on the Acc share class? If the ETF is not UK domiciled there may also be excess reportable income to declare for both share classes.

- if investing within a tax-sheltered account, it is mostly a matter of personal preference. On the one hand, there will be income to reinvest, which might involve transaction costs, but if you are making regular purchases anyway you can lump income in with new money and choose where it is reinvested rather than being limited to it going back into the same fund.

Thrugelmir

Why are you reading 10 year old articles? Suggest you find some better sources of information. 

bargainhunter888

Thrugelmir said:

Why are you reading 10 year old articles? Suggest you find some better sources of information. 

to be fair everyone seems to link me to Monevator which is why i'm reading it with all the spare time i have, hence the original Q, is it because it's a 10yr old article and interest rates have changed significantly despite the article suggesting a fixed income despite changes?
and my initial Q am i reading correct that the distribution yield is similar to dividend yield, but it's a different term used due to the asset?

bargainhunter888

masonic said:

Some general factors to consider:

- If investing outside of a tax-sheltered account, would you be willing to calculate the income received on the Acc share class? If the ETF is not UK domiciled there may also be excess reportable income to declare for both share classes.

- if investing within a tax-sheltered account, it is mostly a matter of personal preference. On the one hand, there will be income to reinvest, which might involve transaction costs, but if you are making regular purchases anyway you can lump income in with new money and choose where it is reinvested rather than being limited to it going back into the same fund.

Currently investing through an S&S ISA

bargainhunter888

could someone explain to me the distribution yield = 1.15 so i would expect 1.15% of the NAV over the next 12 months, however the YTM is only 0.38% so does that mean that in coming years, the yield is expected to be a lot lower than 0.38% per year to average it out?
I'm trying to understand how much income is expected if i invest in a GILT.
https://www.ishares.com/uk/individual/en/products/251806/ishares-uk-gilts-ucits-etf#/
Thanks 

Linton

bargainhunter888 said:

could someone explain to me the distribution yield = 1.15 so i would expect 1.15% of the NAV over the next 12 months, however the YTM is only 0.38% so does that mean that in coming years, the yield is expected to be a lot lower than 0.38% per year to average it out?
I'm trying to understand how much income is expected if i invest in a GILT.
https://www.ishares.com/uk/individual/en/products/251806/ishares-uk-gilts-ucits-etf#/
Thanks 

The distribution yield is interest/current price. So if a particular gilt costs you £150 the annual interest you get at 1.15% is £1.73. But the current price of the bond, in this example £150, is well above the par value of £100, so when the bonds mature you make a £50 loss.  Taking both the interest income and the capital loss on maturity into account gives you an effective annual return of 0.38%.

This is why I am not touching gilts as investments - the price cannot go very much higher before YTM goes negative, but there is plenty of room for falls in capital value.

Audaxer

bargainhunter888 said:

Hi,
was researching some ETFs to diversify my portfolio with some Bonds and came across IGLT mentioned on monevator, so thought id have a look.
https://monevator.com/using-exchange-traded-funds-to-instantly-diversify-your-portfolio/
it suggests 
Why it’s good: You get a regular income, fixed when you buy the fund. For instance, as I type the fund is yielding around 4.7%. That’s less than cash currently, but if Bank of England base rates are slashed, you’ll still get that return. 

I thought there was some of mistake there when it said the 4.7% yield is less than cash currently, until I clicked on the link and saw it was actually from a 12 year old article. I had almost forgotten interest rates were so good at that time. I wonder if savings rates will ever get to that sort of level again!

bargainhunter888

Linton said:

bargainhunter888 said:

could someone explain to me the distribution yield = 1.15 so i would expect 1.15% of the NAV over the next 12 months, however the YTM is only 0.38% so does that mean that in coming years, the yield is expected to be a lot lower than 0.38% per year to average it out?
I'm trying to understand how much income is expected if i invest in a GILT.
https://www.ishares.com/uk/individual/en/products/251806/ishares-uk-gilts-ucits-etf#/
Thanks 

The distribution yield is interest/current price. So if a particular gilt costs you £150 the annual interest you get at 1.15% is £1.73. But the current price of the bond, in this example £150, is well above the par value of £100, so when the bonds mature you make a £50 loss.  Taking both the interest income and the capital loss on maturity into account gives you an effective annual return of 0.38%.

This is why I am not touching gilts as investments - the price cannot go very much higher before YTM goes negative, but there is plenty of room for falls in capital value.

Thanks @Linton I think that make sense, however when purchasing ETF gilts surely the ETF is constantly just buying gilts so it would never get to a stage where I get the redemption value? Finally is the reason why the cost is pushed up due to recent interest rates dropping so people are locking in a return early? The annualised returns for historical years is circa 5% so even holding gilts would be a good long term investment no? Rather than just holding for the dividend payout 

masonic

bargainhunter888 said:

Linton said:

bargainhunter888 said:

could someone explain to me the distribution yield = 1.15 so i would expect 1.15% of the NAV over the next 12 months, however the YTM is only 0.38% so does that mean that in coming years, the yield is expected to be a lot lower than 0.38% per year to average it out?
I'm trying to understand how much income is expected if i invest in a GILT.
https://www.ishares.com/uk/individual/en/products/251806/ishares-uk-gilts-ucits-etf#/
Thanks 

The distribution yield is interest/current price. So if a particular gilt costs you £150 the annual interest you get at 1.15% is £1.73. But the current price of the bond, in this example £150, is well above the par value of £100, so when the bonds mature you make a £50 loss.  Taking both the interest income and the capital loss on maturity into account gives you an effective annual return of 0.38%.

This is why I am not touching gilts as investments - the price cannot go very much higher before YTM goes negative, but there is plenty of room for falls in capital value.

Thanks @Linton I think that make sense, however when purchasing ETF gilts surely the ETF is constantly just buying gilts so it would never get to a stage where I get the redemption value?

The ETF will either hold the gilts to maturity, in which case it will take the full capital loss when the gilts repay at par, or it will sell them before they reach maturity avoiding some of the capital loss. Bonds will fall in capital value as they get closer to maturity, because nobody is going to buy an investment that subjects them to a guaranteed loss.

Linton

bargainhunter888 said:

Linton said:

bargainhunter888 said:

could someone explain to me the distribution yield = 1.15 so i would expect 1.15% of the NAV over the next 12 months, however the YTM is only 0.38% so does that mean that in coming years, the yield is expected to be a lot lower than 0.38% per year to average it out?
I'm trying to understand how much income is expected if i invest in a GILT.
https://www.ishares.com/uk/individual/en/products/251806/ishares-uk-gilts-ucits-etf#/
Thanks 

The distribution yield is interest/current price. So if a particular gilt costs you £150 the annual interest you get at 1.15% is £1.73. But the current price of the bond, in this example £150, is well above the par value of £100, so when the bonds mature you make a £50 loss.  Taking both the interest income and the capital loss on maturity into account gives you an effective annual return of 0.38%.

This is why I am not touching gilts as investments - the price cannot go very much higher before YTM goes negative, but there is plenty of room for falls in capital value.

Thanks @Linton I think that make sense, however when purchasing ETF gilts surely the ETF is constantly just buying gilts so it would never get to a stage where I get the redemption value? Finally is the reason why the cost is pushed up due to recent interest rates dropping so people are locking in a return early? The annualised returns for historical years is circa 5% so even holding gilts would be a good long term investment no? Rather than just holding for the dividend payout 

Wrong way around.  People buy government bonds because they are safe in troubled times so the price goes up.  Also the price has risen over the past 10 years because of QE - the central banks buying bonds in the market. But bonds pay a fixed % of the original par value so the effective interest rate falls. The interest from government bonds drives other rates as it represents the best risk-free return available, at least for serious amounts of money.

The high annualised returns of government bonds over the past 10 years are largely due to rises in capital value and so are illusory in the long term because of the loss at redemption.  This level of increase in capital value cannot continue indefinitely as the YTM will turn negative -  the loss at redemption will not be covered by the interest received.