Income Funds within L&G Pension

Linton

AnotherJoe 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.

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.

That is not true in the short term as dividends and bond interest are both paid in £ terms rather than as a % of current capital value and are determined some time in advance. Add in the effect of funds paying dividends/interest perhaps 4 times/year, any distribution being based on the income received in the previous 3 months or more, and any drop in income could take several months to have a noticable effect, whereas share prices can collapse much more quickly.

[Deleted User]

Linton said:

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.

Sure. Although I think a retiree needs more than 20K in a savings account. Like, perhaps, 3 years’ worth of expenditure

Joey_Soap

AnotherJoe said:

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.

Correct, and more to the point, selling 5% family silver at a low point in the market*** is not going to enhance your future total returns one bit. For TR to be sustainable it's in my view, essential to not harvest the capital (the family silver) at market low points. Just draw the dividends and draw from income reserve. ***(I understand it's known as "pound cost ravaging" these days).

Audaxer

Until now I would think that a balanced Income Portfolio will have worked well for many retirees over the years allowing them to take dividends of around 4% increasing with inflation over many years, particularly one including the Investment Trusts that have increased dividends every year for decades. If they have been happy with that level of return in the way of dividends they may not have been that bothered about the volatility of capital. 

It may be that in the current climate an Income portfolio is now not the best approach, but if we have a bear market lasting say 5 few years or more, would it be wise to take income by selling capital from a growth portfolio?  

Prism

Audaxer said:

Until now I would think that a balanced Income Portfolio will have worked well for many retirees over the years allowing them to take dividends of around 4% increasing with inflation over many years, particularly one including the Investment Trusts that have increased dividends every year for decades. If they have been happy with that level of return in the way of dividends they may not have been that bothered about the volatility of capital. 

It may be that in the current climate an Income portfolio is now not the best approach, but if we have a bear market lasting say 5 few years or more, would it be wise to take income by selling capital from a growth portfolio?  

Under the covers most of those trusts that provide a steady and increasing dividend are simply doing the same thing - they are selling capital to provide that income along with whatever company dividends are left after charges. They are being conservative during the good times and reinvesting more than they pay out. They are only doing what you could do yourself but it certainly make things seem a lot simpler and so can see the attraction.

It seems that many of these trusts do not believe that 4% is sustainable and around 3% seems a more typical number for their yield. That would help explain how they achieve it but again, they are not especially invested in high yield companies. I imagine that if you were after 3% you would still be pretty safe with the likes of Witan, Bankers, Scottish American etc

coyrls

Joey_Soap said:

AnotherJoe said:

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.

Correct, and more to the point, selling 5% family silver at a low point in the market*** is not going to enhance your future total returns one bit. For TR to be sustainable it's in my view, essential to not harvest the capital (the family silver) at market low points. Just draw the dividends and draw from income reserve. ***(I understand it's known as "pound cost ravaging" these days).

That is an over simplification.  "Pound cost ravaging" refers to multiple years of consecutive losses, not a low point in the market.

[Deleted User]

Audaxer said:

Until now I would think that a balanced Income Portfolio will have worked well for many retirees over the years allowing them to take dividends of around 4% increasing with inflation over many years, particularly one including the Investment Trusts that have increased dividends every year for decades. If they have been happy with that level of return in the way of dividends they may not have been that bothered about the volatility of capital. 

It may be that in the current climate an Income portfolio is now not the best approach, but if we have a bear market lasting say 5 few years or more, would it be wise to take income by selling capital from a growth portfolio?  

You won’t get a 4% in distributions and interest if you have an internationally diversified balanced portfolio. US companies tend to use profits for buy-backs; most other developed countries other than UK also have low dividends. And quality bonds don’t pay anywhere near 4%. 

Audaxer

Deleted_User said:

Audaxer said:

Until now I would think that a balanced Income Portfolio will have worked well for many retirees over the years allowing them to take dividends of around 4% increasing with inflation over many years, particularly one including the Investment Trusts that have increased dividends every year for decades. If they have been happy with that level of return in the way of dividends they may not have been that bothered about the volatility of capital. 

It may be that in the current climate an Income portfolio is now not the best approach, but if we have a bear market lasting say 5 few years or more, would it be wise to take income by selling capital from a growth portfolio?  

You won’t get a 4% in distributions and interest if you have an internationally diversified balanced portfolio. US companies tend to use profits for buy-backs; most other developed countries other than UK also have low dividends. And quality bonds don’t pay anywhere near 4%. 

I know you won't be able to get the same level of diversification. Income portfolios usually include UK Equity Income, Global Equity Income, Asian Equity Income funds as well as various bond funds. You have been able to get 4% in distributions up until now, but no guarantee that will continue going forward.  However I'm also not sure that more diversified growth portfolios will be any safer as regards selling capital for income in the next few years.

[Deleted User]

Audaxer said:

Deleted_User said:

Audaxer said:

Until now I would think that a balanced Income Portfolio will have worked well for many retirees over the years allowing them to take dividends of around 4% increasing with inflation over many years, particularly one including the Investment Trusts that have increased dividends every year for decades. If they have been happy with that level of return in the way of dividends they may not have been that bothered about the volatility of capital. 

It may be that in the current climate an Income portfolio is now not the best approach, but if we have a bear market lasting say 5 few years or more, would it be wise to take income by selling capital from a growth portfolio?  

You won’t get a 4% in distributions and interest if you have an internationally diversified balanced portfolio. US companies tend to use profits for buy-backs; most other developed countries other than UK also have low dividends. And quality bonds don’t pay anywhere near 4%. 

I know you won't be able to get the same level of diversification. Income portfolios usually include UK Equity Income, Global Equity Income, Asian Equity Income funds as well as various bond funds. You have been able to get 4% in distributions up until now, but no guarantee that will continue going forward.  However I'm also not sure that more diversified growth portfolios will be any safer as regards selling capital for income in the next few years.

“Safer” has to be defined and I am not getting into predictions.

What is clear though is that by concentrating on Income funds, you would be picking lots of financial, real estate, energy, consumer staples  and utility stocks to the detriment of such important sectors as technology, healthcare and industrials.  Its like giving up the free lunch. 

Audaxer

Deleted_User said:

Audaxer said:

Deleted_User said:

Audaxer said:

Until now I would think that a balanced Income Portfolio will have worked well for many retirees over the years allowing them to take dividends of around 4% increasing with inflation over many years, particularly one including the Investment Trusts that have increased dividends every year for decades. If they have been happy with that level of return in the way of dividends they may not have been that bothered about the volatility of capital. 

It may be that in the current climate an Income portfolio is now not the best approach, but if we have a bear market lasting say 5 few years or more, would it be wise to take income by selling capital from a growth portfolio?  

You won’t get a 4% in distributions and interest if you have an internationally diversified balanced portfolio. US companies tend to use profits for buy-backs; most other developed countries other than UK also have low dividends. And quality bonds don’t pay anywhere near 4%. 

I know you won't be able to get the same level of diversification. Income portfolios usually include UK Equity Income, Global Equity Income, Asian Equity Income funds as well as various bond funds. You have been able to get 4% in distributions up until now, but no guarantee that will continue going forward.  However I'm also not sure that more diversified growth portfolios will be any safer as regards selling capital for income in the next few years.

“Safer” has to be defined and I am not getting into predictions.

What is clear though is that by concentrating on Income funds, you would be picking lots of financial, real estate, energy, consumer staples  and utility stocks to the detriment of such important sectors as technology, healthcare and industrials.  Its like giving up the free lunch. 

I'm just saying that Income Portfolios have up until now produced enough natural income to meet the needs of retirees who have them, but I agree that might not been the case going forward.