Income Funds within L&G Pension

LHW99

Prism said:

Joey_Soap said:

dunstonh said:

Value = dividends and growth minus dividends paid out vs
Value = dividends and growth minus regular withdrawal paid out.

Dividend only restricts choice.   Total return does not.

Dangerous statement. That only applies when total return is positive. In a negative total return year, in order to not deplete future total return, then you must fall back on income reserves.

The logic still applies during a negative period even if you must sell some of the shares rather than take a dividend. All things being equal income paying funds drop more during those down periods than accumulation ones. 

Although frequently the % drop in dividends returned may be less than the % drop in capital value.

Then when recovery comes, an initial 50% drop in capital needs a 100% recovery before you are back where you were. Dividends may well have recovered well before the capital value (no guarantees of course). Hence I would tend to a mixture of approaches, rather than be too tied to one.

We currently have around a 2-3 year income requirement in cash, although not drawing. Dividends get retained in the cash account. When that gets to 3 x income requirement we add to existing holdings with a view to rebalancing, to bring the amount back to around 2x

Joey_Soap

Audaxer said:

dunstonh said:

Joey_Soap said:

dunstonh said:

Value = dividends and growth minus dividends paid out vs
Value = dividends and growth minus regular withdrawal paid out.

Dividend only restricts choice.   Total return does not.

Dangerous statement. That only applies when total return is positive. In a negative total return year, in order to not deplete future total return, then you must fall back on income reserves.

That is what the cash float would be for.   

I definitely agree with having a cash float, but do you still think 18 months to 24 months cash is enough? I'm not sure that would ensure that you didn't need to sell at a loss?

I would advocate a minimum 24 months income cash float.

coyrls

Audaxer said:

dunstonh said:

Joey_Soap said:

dunstonh said:

Value = dividends and growth minus dividends paid out vs
Value = dividends and growth minus regular withdrawal paid out.

Dividend only restricts choice.   Total return does not.

Dangerous statement. That only applies when total return is positive. In a negative total return year, in order to not deplete future total return, then you must fall back on income reserves.

That is what the cash float would be for.   

I definitely agree with having a cash float, but do you still think 18 months to 24 months cash is enough? I'm not sure that would ensure that you didn't need to sell at a loss?

A total return approach doesn't mean that you should never sell at a loss.

Prism

Joey_Soap said:

Prism said:

Joey_Soap said:

dunstonh said:

Value = dividends and growth minus dividends paid out vs
Value = dividends and growth minus regular withdrawal paid out.

Dividend only restricts choice.   Total return does not.

Dangerous statement. That only applies when total return is positive. In a negative total return year, in order to not deplete future total return, then you must fall back on income reserves.

The logic still applies during a negative period even if you must sell some of the shares rather than take a dividend. All things being equal income paying funds drop more during those down periods than accumulation ones. 

You have to accept that if, say you sell 5% of your share holdings in a down year (likely at a lowish price) then you only have 95% of your portfolio available to harvest future total returns from. I fully support a total return approach but you have to be very, very careful selling the family silver. I advocate a minumum of 24 months income cash float. That would basically cover the drop and recovery in the majority of stock market cycles in living memory.

Yes if you sell 5% of your portfolio (lets say its an accumulation fund) then you will have 95% of it left. Meanwhile the income fund pays you a 5% dividend, which drops the value of the fund by 5%. With the income option you retain the same amount of units in that fund but the units are each worth 5% less. 

Go and compare the performance of an income and accumulation fund over a period of time - its pretty much exactly the same.

AnotherJoe

Linton said:

AnotherJoe said:

Linton said:

Deleted_User said:

As others have said, you will end up with a less diversified portfolio. Not a good thing. There is no meaningful difference in how you take money out: by selling shares or taking dividends. 

If you are correct and there is no difference financially between selling shares and taking dividends then surely the logical conclusion is that taking dividends is preferable as it requires much less effort.  The money just appears in one's current account automatically for free with no need for a monthly decision or payment of transaction costs.

Broken reasoning. You fastened on "effort to take out" and made that your goal,(the amount of effort) rather than "get more income" .

Yes, its easier to take income (say, 3%) out of a declining amount, (which will also end up a declining income), than it is to take (say) 5% out of a growing amount as a mixture of income and sales. 

Your choice.

It has been stated, rightly or wrongly, that taking a dividend is the same financially as selling for income.  If that is the case then criteria other than financial reward become more important.

Yep, taking the dividend is the same.

But the portfolios will be completely different, and lead to lower income overall from the income account, something the poster missed since they thought that "taking a dividend is the same financially" = "Same portfolios and return from both"

Which it does not.

Linton

Prism said:

Joey_Soap said:

Prism said:

Joey_Soap said:

dunstonh said:

Value = dividends and growth minus dividends paid out vs
Value = dividends and growth minus regular withdrawal paid out.

Dividend only restricts choice.   Total return does not.

Dangerous statement. That only applies when total return is positive. In a negative total return year, in order to not deplete future total return, then you must fall back on income reserves.

The logic still applies during a negative period even if you must sell some of the shares rather than take a dividend. All things being equal income paying funds drop more during those down periods than accumulation ones. 

You have to accept that if, say you sell 5% of your share holdings in a down year (likely at a lowish price) then you only have 95% of your portfolio available to harvest future total returns from. I fully support a total return approach but you have to be very, very careful selling the family silver. I advocate a minumum of 24 months income cash float. That would basically cover the drop and recovery in the majority of stock market cycles in living memory.

Yes if you sell 5% of your portfolio (lets say its an accumulation fund) then you will have 95% of it left. Meanwhile the income fund pays you a 5% dividend, which drops the value of the fund by 5%. With the income option you retain the same amount of units in that fund but the units are each worth 5% less. 

Go and compare the performance of an income and accumulation fund over a period of time - its pretty much exactly the same.

Of course, looking at things at the highest level taking dividends is the same as selling assets.  But in that case why advocate one rather than the other?

However if you look at bit deeper there are significant practical differences:
1) Investments that return significant dividends/interest are different in character to those that dont.  Diversification requires a balance between the two.
2) Dividends and interest in the short term are a lot more stable than capital values, which makes them appropriate for providing a stable ongoing income.  For example my income portfolio is currently generating, if anything, slightly higher income than this time last year. And the reverse applies in that the only way of taking a significant lump sum is by selling assets, preferably as part of a rebalance.
3) Taking dividends from an ISA is zero effort beyond the normal annual rebalance. Taking monthly payments of any type from a SIPP is a hassle in that you need to have the cash available in the SIPP well before the payment date and any changes need to be notified by snail mail (at least with the platforms I use) which may incur a charge.

So my conclusion is that the optimal strategy is to use dividends/interest for ongoing income and selling whilst rebalancing for lump sums.

[Deleted User]

Linton said:

Deleted_User said:

As others have said, you will end up with a less diversified portfolio. Not a good thing. There is no meaningful difference in how you take money out: by selling shares or taking dividends. 

If you are correct and there is no difference financially between selling shares and taking dividends then surely the logical conclusion is that taking dividends is preferable as it requires much less effort.  The money just appears in one's current account automatically for free with no need for a monthly decision or payment of transaction costs.

I am not sure an annual action of selling stock and transferrIng money is too much effort. The problem with trying to live on dividends is that most people are not rich enough to live on an average dividend. They start picking countries and industries with higher dividends, resulting in lower diversification which is a bad thing for one’s portfolio. 

AnotherJoe

Joey_Soap said:

Prism said:

Joey_Soap said:

dunstonh said:

Value = dividends and growth minus dividends paid out vs
Value = dividends and growth minus regular withdrawal paid out.

Dividend only restricts choice.   Total return does not.

Dangerous statement. That only applies when total return is positive. In a negative total return year, in order to not deplete future total return, then you must fall back on income reserves.

The logic still applies during a negative period even if you must sell some of the shares rather than take a dividend. All things being equal income paying funds drop more during those down periods than accumulation ones. 

You have to accept that if, say you sell 5% of your share holdings in a down year (likely at a lowish price) then you only have 95% of your portfolio available to harvest future total returns from. I fully support a total return approach but you have to be very, very careful selling the family silver. I advocate a minumum of 24 months income cash float. That would basically cover the drop and recovery in the majority of stock market cycles in living memory.

As said this is why a cash float, but the situation is likely that if you had to sell 5% of your growth portfolio, then a dividend portfolio (that say previously returned 5%) has equally dropped, both in terms of total amount and dividend return.

dunstonh

Dont forget that a diversified portfolio invested for total return with regular withdrawals (and cash float) would also pay dividends.  Often not far off what a high yield portfolio would be.    So, a 18-24 month cash float could in reality end up being 24-36 months or more. (a total return portfolio can easily generate 2% yield.   A yielding bias portfolio would be around 4%.

 And you just have to look at the way HYPs were decimated in the credit crunch and many failed to recover their losses as the high dividend payers were some of the worst affected.

Linton

Deleted_User said:

Linton said:

Deleted_User said:

As others have said, you will end up with a less diversified portfolio. Not a good thing. There is no meaningful difference in how you take money out: by selling shares or taking dividends. 

If you are correct and there is no difference financially between selling shares and taking dividends then surely the logical conclusion is that taking dividends is preferable as it requires much less effort.  The money just appears in one's current account automatically for free with no need for a monthly decision or payment of transaction costs.

I am not sure an annual action of selling stock and transferrIng money is too much effort. The problem with trying to live on dividends is that most people are not rich enough to live on an average dividend. They start picking countries and industries with higher dividends, resulting in lower diversification which is a bad thing for one’s portfolio. 

An annual action of selling stock if required is very sensible, I do it myself.  But there are advantages in also taking a monthly income in that you keep the rest invested whilst ensuring that your total income can at least match your basic expenditure.  It avoids having say £20K just sitting around in your current account.
I agree allocating all your investments for dividends/interest in retirement would be foolish.  But then this is equally so for allocating them all for high growth.  The right balance is essential.