City of London Investment Trust (CTY)

NedS

Linton said:

My income portfolio naturally generates around 6% all of which I take use for day to day spending.  A significant problem for an income portfolio is inflation matching.  Were that not to be required 5%-6% withdrawal rates may be OK.  The only way of achieving inflation matching income is to have better than inflation matching investments, which at the moment means  growth equity.  So yes, in my view it would be very risky to use the whole of your pension pot on dividend/interest focussed investments.

@Linton are you able to share what you hold in your income portfolio? It sounds like it has been quite successful during Covid-19.

Linton

NedS said:

Linton said:

My income portfolio naturally generates around 6% all of which I take use for day to day spending.  A significant problem for an income portfolio is inflation matching.  Were that not to be required 5%-6% withdrawal rates may be OK.  The only way of achieving inflation matching income is to have better than inflation matching investments, which at the moment means  growth equity.  So yes, in my view it would be very risky to use the whole of your pension pot on dividend/interest focussed investments.

@Linton are you able to share what you hold in your income portfolio? It sounds like it has been quite successful during Covid-19.

Schroder High Yield Opportunities - 16%
Premier Global Infrastructure - 13%
Man GLG UK Income - 12%
Janus Henderson Asian Dividend Income - 10%
Threadneeedle EM Bond - 10%
European Assets Trust - 9%
L&G High Income - 8%
GCP Infrastructure Trust - 8%
Princess Private Equity Trust - 8%
Blackrock Energy & Resources Trust - 5%

Morningstar Asset allocations:
Equity: 46%
 - UK: 12%
 - Other Europe: 13%
 - Americas 10%
 - Asia 11%
Bonds etc:32%
 - Government 6%
 - Corporate 22%
 - Other 4%
Other: 22%

The success has been to generate a steadyish income of about 6% throughout the year from a very diversified portfolio.  Total return over the past year has been negative because most income investment capital values have not yet fully recovered from the COVID crash.

cloud_dog

NedS said:.

@Linton are you able to share what you hold in your income portfolio? It sounds like it has been quite successful during Covid-19.

Ned, have you come across @JohnRo  thread on building an income portfolio?  Fabulous insight in to the planing, execution, monitoring, and progression.

Linton

itwasntme001 said:

Linton said:

westy22 said:

I can fully understand the attraction of dividend income streams in the days when selling shares was both time consuming and expensive but today, when selling shares is instantaneous and usually costs less than £10, I'm far less convinced. Total Return is certainly my target.

If you are after long term growth than obviously Total Return makes sense.  However if you need regular income for your day to day expenditure focusing on Total Return has the risk of over-dependence on Growth as opposed to Defensive shares as Growth is currently proving a better Total Return though that has not always been the case. Because of their greater volatility Growth investments seem less appropriate for providing a steady income.

Selling shares each time you want some income involves effort and decision-making as to which fund(s) to sell or possibly during a crash whether to use cash reserves.  My highly diversified income portfolio provides a steady income with zero monthly effort on my part - all dividends/interest received by the platform is paid directly into my current account.  So far the effect of Covid on my income has been indistinguishable from the normal monthly variation.

There are no hard and fast rules to say defensive stocks are less risky/volatile than growth stocks.  Under certain circumstances they could be, in others not at all.

I agree that dividends makes things easier when drawing an income, as there are no decisions to be made on when and what to sell.  However, that should not be confused with the risks you are taking and how much wealth can be generated over the long term.  If you do want income, there are better and more secure ways to achieve this (e.g. annuities).

Yes I get how annuity rates are so low, but how do you know that in the end, buying an annuity wouldn't have been better than that portfolio of dividend stocks?  You don't and that's the whole point.

Annuities currently have too many disadvantages in my view....
1) Inflexibility - one's capital is completely lost. With investments you can adjust your allocations according to changing needs. Also annuities tend to be more practicable when taken from pensions, 70% of our investments are now in S&S ISAs.
2) Requires more capital than investments if taken when relatively young.  WIth coordinated income and growth portfolios I am confident I can achieve a higher inflation linked income than available from an annuity.  For an annuity you are paying for 100% security - I dont need that.
3) Tax - all my dividends are tax free thanks to S&S ISAs.  

However by the time I am 85 then annuities could well be attractive since the returns would be higher, flexibility less important and I may have less ability to manage an investment portfolio.

Reaper

itwasntme001 said:

Seems like a very poor trust to select as part of your asset allocation.  Comparing it to the FTSE100 index tracker, it does not seem to have even beaten that over the last 5 years.

I'm a bit late to this thread but I think some of the negative responses slightly miss the point. This IT offers smoothing. It will inevitably underperform in rising markets because they add to the reserves. The yield will then outperform others during a recession/crash because they call on those reserves. The aim to to provide a degree of certainty for income seekers and to my mind a recession like this is when it shines.

For income investors the capital value of the fund is irrelevant UNLESS you think things are so bad they won't be able to keep paying the current high yield. However given its track record of increasing its dividends every year without fail for the last 56 years through booms and busts I'm not particularly concerned. I hold some City of London and am more likely to top up than sell.

NedS

Reaper said:

itwasntme001 said:

Seems like a very poor trust to select as part of your asset allocation.  Comparing it to the FTSE100 index tracker, it does not seem to have even beaten that over the last 5 years.

I'm a bit late to this thread but I think some of the negative responses slightly miss the point. This IT offers smoothing. It will inevitably underperform in rising markets because they add to the reserves. The yield will then outperform others during a recession/crash because they call on those reserves. The aim to to provide a degree of certainty for income seekers and to my mind a recession like this is when it shines.

For income investors the capital value of the fund is irrelevant UNLESS you think things are so bad they won't be able to keep paying the current high yield. However given its track record of increasing its dividends every year without fail for the last 56 years through booms and busts I'm not particularly concerned. I hold some City of London and am more likely to top up than sell.

That pretty much sums up where I'm at. As I approach retirement, I'm thinking about how I will make the switch from accumulation to de-accumulation and what changes, if any, are required. One (currently popular) approach is to stick with an all out growth portfolio, with a cash buffer of 3-5 years to smooth out the volatility, and sell assets to top up the cash buffer avoiding selling during any obvious market crashes (e.g, Covid-19). Conventional wisdom dictates a safe withdraw rate of around 3.5% rising with inflation.

Compare that to an income strategy based on CTY. Over the last 5-10 years, one can normally buy CTY shares at a yield of around 4-5%. Currently due to price drops, that yield has risen to 6%. So in theory one gets a 6% yield that has historically outperformed inflation whilst not touching the capital at all. The capital has the opportunity to continue to grow over the 30-40 year drawdown period. That strategy appears to beat a conventional 3.5% drawdown strategy by almost 2-fold.

Maybe CTY will be unable to continue to increase the dividend yield for a few years - not the end of the world if it's still paying out a 6% yield. Worst case scenario they can not maintain the dividend and have to cut it - a 20% cut would still yield 4.8% at today's prices. The next few years will be the ultimate stress test for the CTY/IT approach. Only time will tell if they weather the storm and emerge the other side with their dividend record intact with revenue reserves still in place.

Will I put all my eggs in CTY's basket come retirement? - probably not. I will probably hedge my bets and go with a good chunk of globally diversified equity (global tracker) as well. I'm fortunate not to be totally dependent on my DC pot as I will have DB and state pension income to meet my essential costs, but the proposition of a steady smoothed 6% income stream in retirement without ever needing to sell any capital seems too good to be true (I probably said that before about RDSB!)

NedS

cloud_dog said:

NedS said:.

@Linton are you able to share what you hold in your income portfolio? It sounds like it has been quite successful during Covid-19.

Ned, have you come across @JohnRo  thread on building an income portfolio?  Fabulous insight in to the planing, execution, monitoring, and progression.

I haven't, no, and I couldn't find it from looking at John's profile page. Are you able to provide a link? Thank you.
EDIT - found it - thank you. Looks like an enjoyable (and lengthy) read.

coyrls

The SWR approach is not being described correctly.  It is not taking a fixed % out of your portfolio every year.  The first withdrawal is a set percentage, in subsequent years the initial withdrawal is increased by inflation, there is no reference to a percentage of the portfolio.  When comparing a SWR approach with a dividend approach the question should be will the initial value of dividends taken increase by inflation each year or not?  If not then it is not equivalent to a SWR approach.

Thrugelmir

NedS said:

Reaper said:

itwasntme001 said:

Seems like a very poor trust to select as part of your asset allocation.  Comparing it to the FTSE100 index tracker, it does not seem to have even beaten that over the last 5 years.

I'm a bit late to this thread but I think some of the negative responses slightly miss the point. This IT offers smoothing. It will inevitably underperform in rising markets because they add to the reserves. The yield will then outperform others during a recession/crash because they call on those reserves. The aim to to provide a degree of certainty for income seekers and to my mind a recession like this is when it shines.

For income investors the capital value of the fund is irrelevant UNLESS you think things are so bad they won't be able to keep paying the current high yield. However given its track record of increasing its dividends every year without fail for the last 56 years through booms and busts I'm not particularly concerned. I hold some City of London and am more likely to top up than sell.

 Currently due to price drops, that yield has risen to 6%. So in theory one gets a 6% yield that has historically outperformed inflation whilst not touching the capital at all. 

You are being repaid your own capital. If the underlying investments don't generate sufficient cash to cover the dividend declared. As some of the investments will be sold to meet the cash shortfall.  There aren't separate buckets to be drawn on. 

ColdIron

A useful read from a few days ago

https://citywire.co.uk/investment-trust-insider/news/gavatar-what-are-investment-trust-revenue-reserves/a1406007