Passive / Active investments for income.

Prism

AsifM068 said:

Dividends come mainly from value stocks, is this correct?

It depends. A high dividend today that doesn't grow much? A medium dividend that grows above inflation? No dividend today but one that will appear soon? Fundamentally a dividend is not related to the value of a company, although healthy lower valued companies tend to have a higher yield due to  their lower share price.

Then as I mention above you can get trusts that receive decent dividends but don't pay them all out, or trusts that receive low dividends but then sell holdings to give you a higher one.

AsifM068

Say at 60 I put my 200K in say the Vanguard Global All Cap Index fund and takes its annual growth as income vs investing that 200K into an Investment Trust like the CTY with around 5% yield - what would be the pros and cons of the two strategies or any obvious pitfalls please?

Linton

Prism said:

Thrugelmir said:

Prism said:

Thrugelmir said:

Prism said:

Linton said:

Prism said:

Alexland said:

I wouldn't touch a passive income fund with a barge pole as you risk just sucking up a load of poor quality high yield companies.
There are investment trusts that get a good balance of yield and capital growth while still investing in good quality companies if you are willing to spend the time on selecting and monitoring them. The costs are a bit higher but that is generally covered by the enhanced return they achieve by using a conservative amount of gearing.

I'll take that one step further and say that I wouldn't touch any equity income fund with a barge pole. I'll take the standard dividends from a fund but no more. I can get income from other places like savings, bonds and property.

Equity income funds are in my view helpful in retirement unless you want to adopt an unbalanced 100% Growth investment strategy - something I would not dare do. Their advantage is that they are an efficient use of assets as they meet 2 objectives from a single investment.  Equity income funds add "Value" to balance the "Growth" investments and produce an income which can be transfered automatically to one's current account with zero effort.  It would seem far more logical and more easily implemented to do that than the reverse of taking income from selling Growth whilst reinvesting the dividends from Value.

 Europeans Assets Trust is a growth fund that pays a 6% dividend. 

EAT returns capital. European shares are generally low dividend payers. A consequence of the high tax treatment of dividends in many countries. 

I know, that was my point. It is entirely possible to have a growth oriented trust that sells shares to pay a high dividend and a value oriented trust that keeps some of its dividends and reinvests them as growth, paying less out along the way.

 Wish more IT's would follow the same principle. 

The EAT way? Most of my investments are in a tax wrapper so it makes no difference to me if I get a dividend or manufacture my own by selling some shares. 

If it makes no difference to you financially whether you take dividend/ interest or sell the shares/funds then surely the convenience of dividends/interest wins as you get can the money transferred directly into your current account with zero effort, thought or cost.

Linton

AsifM068 said:

Say at 60 I put my 200K in say the Vanguard Global All Cap Index fund and takes its annual growth as income vs investing that 200K into an Investment Trust like the CTY with around 5% yield - what would be the pros and cons of the two strategies or any obvious pitfalls please?

The downside of totally relying on an income fund is two fold. Firstly the income fund will be much less diversified than the index tracker resulting in lower returns and secondly it could have difficulty maintaining an inflation link in the short/medium term.

The main pitfall of just holding the all cap index is what do you do if the value goes down. CTY will probably continue paying much the same dividend.

Another pitfall is that it is inefficient to sell the all cap index fund and transfer the proceeds up to 12 times a year. The usual alternative is rebalancing once a year and holding all your income needs as cash which provides virtually zero return.

In investing there are many either/or questions.  In my experience the best answer is usually “both”.  This is the income strategy I have followed since I retired.

Prism

Linton said:

Prism said:

Thrugelmir said:

Prism said:

Thrugelmir said:

Prism said:

Linton said:

Prism said:

Alexland said:

I wouldn't touch a passive income fund with a barge pole as you risk just sucking up a load of poor quality high yield companies.
There are investment trusts that get a good balance of yield and capital growth while still investing in good quality companies if you are willing to spend the time on selecting and monitoring them. The costs are a bit higher but that is generally covered by the enhanced return they achieve by using a conservative amount of gearing.

I'll take that one step further and say that I wouldn't touch any equity income fund with a barge pole. I'll take the standard dividends from a fund but no more. I can get income from other places like savings, bonds and property.

Equity income funds are in my view helpful in retirement unless you want to adopt an unbalanced 100% Growth investment strategy - something I would not dare do. Their advantage is that they are an efficient use of assets as they meet 2 objectives from a single investment.  Equity income funds add "Value" to balance the "Growth" investments and produce an income which can be transfered automatically to one's current account with zero effort.  It would seem far more logical and more easily implemented to do that than the reverse of taking income from selling Growth whilst reinvesting the dividends from Value.

 Europeans Assets Trust is a growth fund that pays a 6% dividend. 

EAT returns capital. European shares are generally low dividend payers. A consequence of the high tax treatment of dividends in many countries. 

I know, that was my point. It is entirely possible to have a growth oriented trust that sells shares to pay a high dividend and a value oriented trust that keeps some of its dividends and reinvests them as growth, paying less out along the way.

 Wish more IT's would follow the same principle. 

The EAT way? Most of my investments are in a tax wrapper so it makes no difference to me if I get a dividend or manufacture my own by selling some shares. 

If it makes no difference to you financially whether you take dividend/ interest or sell the shares/funds then surely the convenience of dividends/interest wins as you get can the money transferred directly into your current account with zero effort, thought or cost.

Maybe, however its only a minor convenience and wouldn't be a factor as to fund selection. I would select an income version of a fund over accumulation but would specifically select a fund or trust in the equity income category just because of that yield. If one of those funds is good on its own merits then thats different. 

Sea_Shell

As a side question...on the maths of ACC v INC...

If one holds an ACC version of a fund, and an INC version is available, how can you work out what income that fund would have actually provided you with over a given period?   

I know the re-invested dividends are reflected in the unit price of the ACC fund, but how do you calculate that in hard £££, if you'd held the INC version.

Take, for example, the 7IM AAP Balanced C.

Is it as simple as ACC price less INC price from, say 12 months ago, v. current prices x units held?

ACC - Nov 20 = 177p
ACC - Nov 21 = 194p
Increase 17p pu

INC - Nov 20 = 144p
INC - Nov 21 = 156p
Increase of 12p pu

A difference of a year of 5p pu.    So if you held 70,000 units of the INC fund, would you have had income of £3,500?

AsifM068

When investing in the CTY for example and dividend yield aside, how much depreciation on my capital per annum can I expect at present with a 200k investment please?

ColdIron

If you hold it unwrapped your annual Tax Certificate will tell you. If it's in an ISA or SIPP does it really matter?

Linton

AsifM068 said:

Dividends come mainly from value stocks, is this correct?

Generally yes. High growth stocks need to reinvest their profits, if any, in order to continue their growth, this is what their shareholders want.  Value stocks may well generate more cash than they can sensibly use. Companies that try to expand outside their area of expertise frequently fail.  So their shareholders want the income.

AsifM068

Can someone look up CTY please and tell me what the capital depreciation on 200k is in the last year please as I'm still learning about all the numbers / metrics - apologies.

And what is the figure referred to for capital growth or depreciation for a given year when looking at a fund on HL for example.

Sorry gang but we all got to start someplace...🙂🤞