Passive / Active investments for income.

Prism

Thrugelmir said:

Audaxer 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.

Selling funds for income is trivial, and allows for more control should that be desired. With an income fund you might have to wait 6 weeks or more for the dividend payment after the price drop. If you sell units you can have them the next day, or immediately if its a trust.

That is true, but in most cases a retiree who relies on income, would be more wary of selling capital from growth funds during an equity crash than continuing to take income from dividends paid automatically.

If a company uses a buy back mechanism to reward shareholders rather than distribute the cash as a dividend. As it's beneficial tax wise. Does that make the company a growth stock? 

This is a good point. BP halved its dividend last year and is very unlikely to bring that level back. Instead it will focus more heavily on share buybacks to go along with a modest dividend. Fundamentally it is the same company so should that have any effect on an investment decision? Does that now mean that BP is a growth company simply due to a few financial acrobatics? In investment should stand on its own two feet, high or low dividend.

ColdIron

AsifM068 said:

When looking at growth charts for an investment trust for example, are dividends reinvested assumed / factored in and how would the axis be labelled to tell if growth includes dividends re-invested or not please? - hope this makes sense.

For ITs it could be either, you need to check. If the axis shows the price (and not a percentage) it will be without dividends reinvested as dividends are paid out

As Linton says,Trustnet will let you select which you want

tebbins

This thread has been answered pretty thoroughly with the conventional wisdom about dividends and growth, so I thought why not throw in some unconventional wisdom.
I have three points to throw in. One is that low yields and/or low dividend payout ratios (the % of profits a company's management decide to pay out as a dividend, you could also say high dividend cover) do not necessarily imply higher ongoing or future earnings growth. For example see https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.researchaffiliates.com/documents/FAJ_Jan_Feb_2003_Surprise_Higher_Dividends_Higher_Earnings_Growth.pdf&ved=2ahUKEwj1_KHn_5T0AhXXiVwKHe3OB-IQFnoECAUQAQ&usg=AOvVaw0YyR4swdqnDa2SkzJUwNaq. This was quoted in Jack Bogle's Battle for the Soul of Capitalism.
Essentially a healthy business should be able to generate sufficient excess cash flow to pay income to its owners.

There's also an argument that certain businesses - e.g. tobacco, newspapers - have limited capital expenditure requirements and so high dividends shouldn't be seen as necessarily high risk. Conversely, limited growth prospects can be disencouraging, however Terry Smith a famous growth/quality investor has a significant holding in Philip Morris International.

Secondly, higher yielding stocks have somewhat outperformed historically, over the very long term but not since the GFC, and not consistently across geographies.

Thirdly - low dividends don't mean low payouts. In the US for example, S&P 500 share buybacks exceed dividends and the combined payout often exceeds profits.

https://forums.moneysavingexpert.com/discussion/comment/78664783/#Comment_78664783

https://forums.moneysavingexpert.com/discussion/comment/78729903/#Comment_78729903

As for relying on dividends, you can see in the tables at the bottom of the Barclays Equity Gilts Study (Google it, you can always find a free version via a link somewhere) for the UK and US (also for the US on multpl.com) that at least at the level of national stock markets, dividends have historically been very reliable and usually at least kept pace with inflation. Cuts are rare and 2020's cut of -23.6% in the FTSE all share's dividend-per-share was the worst we've had since a ~33% cut from 1929-1933.

As has been covered above, a total return approach is considered sensible than relying on dividends and there are more defensive income options including companies and ITs that have long track records of sustained dividend payments and growth.

Thrugelmir

tebbins said:

Thirdly - low dividends don't mean low payouts. In the US for example, S&P 500 share buybacks exceed dividends and the combined payout often exceeds profits.

Corporate US is getting further and further into debt. The end of the cheap money era is going to be a game changer in many many ways. 

eskbanker

Linton said:

AsifM068 said:

As an aside and slightly off tangent are pension annuities really that bad in terms of value? At 60, my DB pension will kick in but will need another 10K p/a to supplement my pension. I should have around 200K to invest within my ISA to invest at 60 purely as a source of income. Any thoughts?

I do not believe that taking a steady £10K annually, inflation linked, from a £200K portfolio is safely sustainable in the long term. Which of those characteristics would you be prepared to sacrifice?

OP - is the idea to use this pot to generate income only to bridge the gap for seven years until the state pension effectively fills it?  Do you have a forecast for that, from https://www.gov.uk/check-state-pension ?

Prism

tebbins said:

This thread has been answered pretty thoroughly with the conventional wisdom about dividends and growth, so I thought why not throw in some unconventional wisdom.
I have three points to throw in. One is that low yields and/or low dividend payout ratios (the % of profits a company's management decide to pay out as a dividend, you could also say high dividend cover) do not necessarily imply higher ongoing or future earnings growth.

Yes, and you can apply that theory for trusts too. If we take two from the same fund house City of London and Bankers. For the last 20 years Bankers typically has just over half the yield of City of London - average around 2.2% vs around 4%. However due to a more global and blended approach Bankers has grown its dividend at a higher rate and paid out more overall while also having a better capital growth. A starting yield doesn't tell you an awful lot about the future and is not any safer.

Thrugelmir

Prism said:

tebbins said:

This thread has been answered pretty thoroughly with the conventional wisdom about dividends and growth, so I thought why not throw in some unconventional wisdom.
I have three points to throw in. One is that low yields and/or low dividend payout ratios (the % of profits a company's management decide to pay out as a dividend, you could also say high dividend cover) do not necessarily imply higher ongoing or future earnings growth.

Yes, and you can apply that theory for trusts too. If we take two from the same fund house City of London and Bankers. For the last 20 years Bankers typically has just over half the yield of City of London - average around 2.2% vs around 4%. However due to a more global and blended approach Bankers has grown its dividend at a higher rate and paid out more overall while also having a better capital growth. A starting yield doesn't tell you an awful lot about the future and is not any safer.

Alternatively you could have opted for the SMT route. Totally revised the investment remit of the trust and transformed itself from a global generalist to a stellar specialist over the past the past decade. 

Alexland

Prism said:

Yes, and you can apply that theory for trusts too. If we take two from the same fund house City of London and Bankers. For the last 20 years Bankers typically has just over half the yield of City of London - average around 2.2% vs around 4%. However due to a more global and blended approach Bankers has grown its dividend at a higher rate and paid out more overall while also having a better capital growth. A starting yield doesn't tell you an awful lot about the future and is not any safer.

Yes if you ignore the differences in geography I would argue that Bankers has been running a better strategy than City although they have both beaten their respective benchmarks over the past few decades. City has generally been trading at a slight premium but I would argue that Dunedin or Murray Income are better prospects for UK income despite their lower yields. Still there might one day be a sustained resurgence of value investing but those re not the companies I would want to concentrate my money into as I like to see a portfolio that has a positive future outlook not just spitting out cash as they decline.

Thrugelmir

Alexland said:

Prism said:

Yes, and you can apply that theory for trusts too. If we take two from the same fund house City of London and Bankers. For the last 20 years Bankers typically has just over half the yield of City of London - average around 2.2% vs around 4%. However due to a more global and blended approach Bankers has grown its dividend at a higher rate and paid out more overall while also having a better capital growth. A starting yield doesn't tell you an awful lot about the future and is not any safer.

Yes if you ignore the differences in geography I would argue that Bankers has been running a better strategy than City although they have both beaten their respective benchmarks over the past few decades. City has generally been trading at a slight premium but I would argue that Dunedin or Murray Income are better prospects for UK income despite their lower yields. Still there might one day be a sustained resurgence of value investing but those re not the companies I would want to concentrate my money into as I like to see a portfolio that has a positive future outlook not just spitting out cash as they decline.

Suggesting that the oil companies (for example) are in decline is somewhat premature. Orsted morphed out of the Danish Oil and Gas Company to become the renewable entity it is today. On a free cashflow basis both Shell and BP spew out a vast amount more. Transformation is well within their grasp. Higher oil and gas prices as new exploration is curtailed only adds to their armoury. I've been following Total for some 3 years now. There's a lot that is happening that maybe small scale but eventually is going to add up to create formidable energy companies of the future. 

AsifM068

eskbanker said:

Linton said:

AsifM068 said:

As an aside and slightly off tangent are pension annuities really that bad in terms of value? At 60, my DB pension will kick in but will need another 10K p/a to supplement my pension. I should have around 200K to invest within my ISA to invest at 60 purely as a source of income. Any thoughts?

I do not believe that taking a steady £10K annually, inflation linked, from a £200K portfolio is safely sustainable in the long term. Which of those characteristics would you be prepared to sacrifice?

OP - is the idea to use this pot to generate income only to bridge the gap for seven years until the state pension effectively fills it?  Do you have a forecast for that, from https://www.gov.uk/check-state-pension ?

No. For the next seven years until I am 60, my current investments will continue to grow through a mixture of the Vanguard Global ALL Cap Index Fund and 3 Royal London Equity funds all held within an ISA. When I am 60, I will receive my Civil Service Defined Benefit Pension which is valued at 10k p/a plus a 24K lump sum payment. This 10K I hope to supplement with a further 10k from an income generating investment from a lump sum of about 200K depending how my ISAs continue to perform for the next 7 years.  

I am still at the scoping out stage, but I am looking for a dividend yield of 5% from the 200k when 60.