Where to invest money primarily for supplemental income

Linton

coyrls said:

NedS said:

Prism said:

NedS said:

Audaxer said:

JohnWinder said:

Thanks. If I’ve got it right, CoL over the period in question paid a dividend which increased each calendar year, but for two successive financial years (4/19 - 1/21, 8 consecutive quarters) the dividend was unchanged.
Back to calendar years: in 2011 the dividend was 13.28p, and in 2012 it was the same. https://www.dividendmax.com/united-kingdom/london-stock-exchange/investment-trusts/city-of-london-investment-trust/dividends

This AIC page for CTY shows more clearly all the dividends going back to the 1970s and the financial year each dividend refers to:
City of London | Dividends | The AIC
For example, it shows that the dividend paid on 30/11/21 was the first dividend for the financial year 2022. I'm not sure I understand why that is, but looking down the list, they appear to be consistently reported that way back to the 1970s. So looking at it that way, they have increased dividends every financial year, albeit following Covid these increases have been minimal.

Indeed. The reason CTY were not only able to continue to pay a dividend, but actually raise it is because as an Investment Trust they are keep a little revenue back in reserve to draw upon in more difficult times and help smooth income for investors (and I know @Audaxer is fully aware of this). CTY had to draw on their revenue reserves during 2020 to continue paying a rising dividend, and moving forward will have a balancing act between trying to grow the dividend in line with inflation whilst at the same time replenishing the revenue reserves ready for the next crisis.

By comparison, investing in an OEIC equity income fund will pay out all income each year, providing bumper income in good years with a severe haircut in times of crisis. This is obviously not great for pensioners reliant on a steady income to pay the bills.

If you bought CTY at knock down prices during Covid, you would have locked in a pretty secure 6.5% dividend yield, which compares very favourably to the oft touted 3.5% SWR for a UK investor. A crisis provides great opportunity for investors.

I think its worth adding that revenue reserves are not the only option available to investment trusts. If they really want to preserve a steady and increasing dividend then they can choose to pay out of capital along side dividends. It completely detaches the dividend income they receive from what they choose to pay. It removes a lot of the accounting that goes into creating revenue reserves. In fact revenue reserves are not actually reserves at all. Its invested just like everything else and all trusts need to work out which shares to sell to fund their next dividend payout.

Yes, and some Investment Trusts do choose to pay regular dividends out of capital rather than revenue (income). Examples of these are EAT, JAGI, JCGI, JGGI etc. However, although CTY has this option (as do all ITs), their strategy predominantly invests in companies that produce an income that can cover the Trusts dividend, whereas the others are paying out (distributing) your own capital as a dividend which is more akin to a total return strategy whereby you sell 4% of your holding per year, except here the trust is doing it for you.

Exactly, it's an implementation of a SWR strategy but with a less strict requirement.  Increasing dividends every year is less demanding than increasing dividends every year by the rate of inflation.

Over the years 2011-2021 City of London increased its dividend from 3.25p/quarter to 4.8p/quarter which represents an average 4% annually, rather more than twice inflatiuon

Broadly and in general over the long term one would expect dividends to increase with inflation since a company's costs, income and hence profits will rise with inflation.

Prism

Linton said:

Prism said:

Audaxer said:

NedS said:

Prism said:

NedS said:

Audaxer said:

JohnWinder said:

Thanks. If I’ve got it right, CoL over the period in question paid a dividend which increased each calendar year, but for two successive financial years (4/19 - 1/21, 8 consecutive quarters) the dividend was unchanged.
Back to calendar years: in 2011 the dividend was 13.28p, and in 2012 it was the same. https://www.dividendmax.com/united-kingdom/london-stock-exchange/investment-trusts/city-of-london-investment-trust/dividends

This AIC page for CTY shows more clearly all the dividends going back to the 1970s and the financial year each dividend refers to:
City of London | Dividends | The AIC
For example, it shows that the dividend paid on 30/11/21 was the first dividend for the financial year 2022. I'm not sure I understand why that is, but looking down the list, they appear to be consistently reported that way back to the 1970s. So looking at it that way, they have increased dividends every financial year, albeit following Covid these increases have been minimal.

Indeed. The reason CTY were not only able to continue to pay a dividend, but actually raise it is because as an Investment Trust they are keep a little revenue back in reserve to draw upon in more difficult times and help smooth income for investors (and I know @Audaxer is fully aware of this). CTY had to draw on their revenue reserves during 2020 to continue paying a rising dividend, and moving forward will have a balancing act between trying to grow the dividend in line with inflation whilst at the same time replenishing the revenue reserves ready for the next crisis.

By comparison, investing in an OEIC equity income fund will pay out all income each year, providing bumper income in good years with a severe haircut in times of crisis. This is obviously not great for pensioners reliant on a steady income to pay the bills.

If you bought CTY at knock down prices during Covid, you would have locked in a pretty secure 6.5% dividend yield, which compares very favourably to the oft touted 3.5% SWR for a UK investor. A crisis provides great opportunity for investors.

I think its worth adding that revenue reserves are not the only option available to investment trusts. If they really want to preserve a steady and increasing dividend then they can choose to pay out of capital along side dividends. It completely detaches the dividend income they receive from what they choose to pay. It removes a lot of the accounting that goes into creating revenue reserves. In fact revenue reserves are not actually reserves at all. Its invested just like everything else and all trusts need to work out which shares to sell to fund their next dividend payout.

Yes, and some Investment Trusts do choose to pay regular dividends out of capital rather than revenue (income). Examples of these are EAT, JAGI, JCGI, JGGI etc. However, although CTY has this option (as do all ITs), their strategy predominantly invests in companies that produce an income that can cover the Trusts dividend, whereas the others are paying out (distributing) your own capital as a dividend which is more akin to a total return strategy whereby you sell 4% of your holding per year, except here the trust is doing it for you.

I think some of these trusts have a policy to pay a fixed percentage of the NAV each year - I think JGGI's is 4% of the NAV, presumably as at a certain date each year? So even although they will be paying some or all of it it out of capital, you won't get an increased dividend in years where the NAV has fallen. I don't think it's a bad policy as I was thinking of adding JGGI to my portfolio.

Surely if you selected any accumulation fund and then sold 1% ever 3 months you would get exactly the same effect but much more choice?

1) Selling 1% every 3 months would require require time, effort, and charges.  Dividends can turn up for free with zero effort/time.
2)  Funds which aim to distribute a steady or fixed % dividend will set up their asset allocation taking into account their dividend strategy.  A randomly chosen Acc fund wont.

Sure, but not that much effort. I imagine that once a year is fine for most people but a number of platforms including Vanguard and Fundsmith offer a free monthly (and possibly 3 monthly) withdrawal service. Some platforms would charge if a fund required some units to be sold - others not.

I'm not sure your second point is a benefit. A trust will need to build up a reasonable cash pot to allow for the payment of the dividend for all holders on the same day. The fund will just need to hold a small amount each day for the difference between buys and sales of the fund. 

In general I would prefer an equity trust not to pay a high dividend at all and I can choose the timing and amounts of the withdrawals. I'm ignoring the different tax treatment that some might want.

Linton

Prism said:

Linton said:

Prism said:

Audaxer said:

NedS said:

Prism said:

NedS said:

Audaxer said:

JohnWinder said:

Thanks. If I’ve got it right, CoL over the period in question paid a dividend which increased each calendar year, but for two successive financial years (4/19 - 1/21, 8 consecutive quarters) the dividend was unchanged.
Back to calendar years: in 2011 the dividend was 13.28p, and in 2012 it was the same. https://www.dividendmax.com/united-kingdom/london-stock-exchange/investment-trusts/city-of-london-investment-trust/dividends

This AIC page for CTY shows more clearly all the dividends going back to the 1970s and the financial year each dividend refers to:
City of London | Dividends | The AIC
For example, it shows that the dividend paid on 30/11/21 was the first dividend for the financial year 2022. I'm not sure I understand why that is, but looking down the list, they appear to be consistently reported that way back to the 1970s. So looking at it that way, they have increased dividends every financial year, albeit following Covid these increases have been minimal.

Indeed. The reason CTY were not only able to continue to pay a dividend, but actually raise it is because as an Investment Trust they are keep a little revenue back in reserve to draw upon in more difficult times and help smooth income for investors (and I know @Audaxer is fully aware of this). CTY had to draw on their revenue reserves during 2020 to continue paying a rising dividend, and moving forward will have a balancing act between trying to grow the dividend in line with inflation whilst at the same time replenishing the revenue reserves ready for the next crisis.

By comparison, investing in an OEIC equity income fund will pay out all income each year, providing bumper income in good years with a severe haircut in times of crisis. This is obviously not great for pensioners reliant on a steady income to pay the bills.

If you bought CTY at knock down prices during Covid, you would have locked in a pretty secure 6.5% dividend yield, which compares very favourably to the oft touted 3.5% SWR for a UK investor. A crisis provides great opportunity for investors.

I think its worth adding that revenue reserves are not the only option available to investment trusts. If they really want to preserve a steady and increasing dividend then they can choose to pay out of capital along side dividends. It completely detaches the dividend income they receive from what they choose to pay. It removes a lot of the accounting that goes into creating revenue reserves. In fact revenue reserves are not actually reserves at all. Its invested just like everything else and all trusts need to work out which shares to sell to fund their next dividend payout.

Yes, and some Investment Trusts do choose to pay regular dividends out of capital rather than revenue (income). Examples of these are EAT, JAGI, JCGI, JGGI etc. However, although CTY has this option (as do all ITs), their strategy predominantly invests in companies that produce an income that can cover the Trusts dividend, whereas the others are paying out (distributing) your own capital as a dividend which is more akin to a total return strategy whereby you sell 4% of your holding per year, except here the trust is doing it for you.

I think some of these trusts have a policy to pay a fixed percentage of the NAV each year - I think JGGI's is 4% of the NAV, presumably as at a certain date each year? So even although they will be paying some or all of it it out of capital, you won't get an increased dividend in years where the NAV has fallen. I don't think it's a bad policy as I was thinking of adding JGGI to my portfolio.

Surely if you selected any accumulation fund and then sold 1% ever 3 months you would get exactly the same effect but much more choice?

1) Selling 1% every 3 months would require require time, effort, and charges.  Dividends can turn up for free with zero effort/time.
2)  Funds which aim to distribute a steady or fixed % dividend will set up their asset allocation taking into account their dividend strategy.  A randomly chosen Acc fund wont.

Sure, but not that much effort. I imagine that once a year is fine for most people but a number of platforms including Vanguard and Fundsmith offer a free monthly (and possibly 3 monthly) withdrawal service. Some platforms would charge if a fund required some units to be sold - others not.

I'm not sure your second point is a benefit. A trust will need to build up a reasonable cash pot to allow for the payment of the dividend for all holders on the same day. The fund will just need to hold a small amount each day for the difference between buys and sales of the fund. 

In general I would prefer an equity trust not to pay a high dividend at all and I can choose the timing and amounts of the withdrawals. I'm ignoring the different tax treatment that some might want.

I do both - dividends/interest alongside guaranteed income to cover day to day needs and one-off withdrawals for major items/rebalancing. 

NedS

Prism said:

Linton said:

Prism said:

Audaxer said:

NedS said:

Prism said:

NedS said:

Audaxer said:

JohnWinder said:

Thanks. If I’ve got it right, CoL over the period in question paid a dividend which increased each calendar year, but for two successive financial years (4/19 - 1/21, 8 consecutive quarters) the dividend was unchanged.
Back to calendar years: in 2011 the dividend was 13.28p, and in 2012 it was the same. https://www.dividendmax.com/united-kingdom/london-stock-exchange/investment-trusts/city-of-london-investment-trust/dividends

This AIC page for CTY shows more clearly all the dividends going back to the 1970s and the financial year each dividend refers to:
City of London | Dividends | The AIC
For example, it shows that the dividend paid on 30/11/21 was the first dividend for the financial year 2022. I'm not sure I understand why that is, but looking down the list, they appear to be consistently reported that way back to the 1970s. So looking at it that way, they have increased dividends every financial year, albeit following Covid these increases have been minimal.

Indeed. The reason CTY were not only able to continue to pay a dividend, but actually raise it is because as an Investment Trust they are keep a little revenue back in reserve to draw upon in more difficult times and help smooth income for investors (and I know @Audaxer is fully aware of this). CTY had to draw on their revenue reserves during 2020 to continue paying a rising dividend, and moving forward will have a balancing act between trying to grow the dividend in line with inflation whilst at the same time replenishing the revenue reserves ready for the next crisis.

By comparison, investing in an OEIC equity income fund will pay out all income each year, providing bumper income in good years with a severe haircut in times of crisis. This is obviously not great for pensioners reliant on a steady income to pay the bills.

If you bought CTY at knock down prices during Covid, you would have locked in a pretty secure 6.5% dividend yield, which compares very favourably to the oft touted 3.5% SWR for a UK investor. A crisis provides great opportunity for investors.

I think its worth adding that revenue reserves are not the only option available to investment trusts. If they really want to preserve a steady and increasing dividend then they can choose to pay out of capital along side dividends. It completely detaches the dividend income they receive from what they choose to pay. It removes a lot of the accounting that goes into creating revenue reserves. In fact revenue reserves are not actually reserves at all. Its invested just like everything else and all trusts need to work out which shares to sell to fund their next dividend payout.

Yes, and some Investment Trusts do choose to pay regular dividends out of capital rather than revenue (income). Examples of these are EAT, JAGI, JCGI, JGGI etc. However, although CTY has this option (as do all ITs), their strategy predominantly invests in companies that produce an income that can cover the Trusts dividend, whereas the others are paying out (distributing) your own capital as a dividend which is more akin to a total return strategy whereby you sell 4% of your holding per year, except here the trust is doing it for you.

I think some of these trusts have a policy to pay a fixed percentage of the NAV each year - I think JGGI's is 4% of the NAV, presumably as at a certain date each year? So even although they will be paying some or all of it it out of capital, you won't get an increased dividend in years where the NAV has fallen. I don't think it's a bad policy as I was thinking of adding JGGI to my portfolio.

Surely if you selected any accumulation fund and then sold 1% ever 3 months you would get exactly the same effect but much more choice?

1) Selling 1% every 3 months would require require time, effort, and charges.  Dividends can turn up for free with zero effort/time.
2)  Funds which aim to distribute a steady or fixed % dividend will set up their asset allocation taking into account their dividend strategy.  A randomly chosen Acc fund wont.

Sure, but not that much effort. I imagine that once a year is fine for most people but a number of platforms including Vanguard and Fundsmith offer a free monthly (and possibly 3 monthly) withdrawal service. Some platforms would charge if a fund required some units to be sold - others not.

I'm not sure your second point is a benefit. A trust will need to build up a reasonable cash pot to allow for the payment of the dividend for all holders on the same day. The fund will just need to hold a small amount each day for the difference between buys and sales of the fund. 

In general I would prefer an equity trust not to pay a high dividend at all and I can choose the timing and amounts of the withdrawals. I'm ignoring the different tax treatment that some might want.

I accept it's pretty easy for most people to just sell some holdings one a quarter/year for drawdown income, but what happens when you get older? There will (hopefully) come a time when you are no longer capable of doing this, no matter how simple it may seem now. Maybe you will have just sold everything and bought an annuity by the time that happens, but what about those who want to keep their pot to pass on to beneficiaries. I see the likes of JGGI as great funds to hold in old age to help simplify things in drawdown.