High dividend yield income funds vs capital accumulation funds in retirement drawdown?

GazzaBloom

My wife and I am in pre-retirement accumulation and invested in accumulating index funds in our workplace pension and SIPP. Which we are comfortable with for the accumulation phase.

What are peoples preference and rationale for funds when moving into drawdown. Acc funds or seeking out higher yield dividend income funds?

For example, just for debate, an S&P500 index tracker/Global stocks index tracker accumulating with dividends reinvested, in the 1.5% range, and selling down capital units in drawdown vs switching to a high yield fund and taking the higher dividend as income, for example the Vanguard UK Equity Income Index fund at around 6% dividends negating the need to sell down original capital and using the cash generated from the dividends for drawdown?

My understanding and belief to date, is that the total return is of more relevance and a wider spread index is more diversified (hundreds/thousands of individual company shares) and a potentially a higher total return (via the included growth stocks) vs a high yield fund like the Vanguard fund above being less diversified (108 UK companies) with lower total return but much higher dividends.

So, you either sell down units which are potentially increasing in value at a higher rate vs taking a higher dividend but lower total return, but, it "feels" like you are protecting your original capital.

Thoughts and preferences?  

masonic

GazzaBloom said:

My understanding and belief to date, is that the total return is of more relevance and a wider spread index is more diversified (hundreds/thousands of individual company shares) and a potentially a higher total return (via the included growth stocks) vs a high yield fund like the Vanguard fund above being less diversified (108 UK companies) with lower total return but much higher dividends.

So, you either sell down units which are potentially increasing in value at a higher rate vs taking a higher dividend but lower total return, but, it "feels" like you are protecting your original capital.

Thoughts and preferences?  

I would agree with that. There's no free lunch, either profits are ploughed back into the company, generating growth, which can be drawn down by the investor, or it is paid to them directly in a convenient income stream, which cannot then be used to drive growth. There are differences in tax treatment, potentially differences in risk profile, and differences in transaction charges between each approach, but I'd challenge the view that an individual's asset allocation necessarily needs to change so fundamentally simply because they will start drawing from their investments. Usual caveats about defensive assets and cash buffer apply.

Audaxer

I've got some equity income funds and ITs as well as a couple of multi asset funds. I'm retired and feel much more relaxed about taking dividends as income during a loss year like this, than selling capital from multi asset funds or global growth funds that are showing a loss. 

GazzaBloom

masonic said:

GazzaBloom said:

My understanding and belief to date, is that the total return is of more relevance and a wider spread index is more diversified (hundreds/thousands of individual company shares) and a potentially a higher total return (via the included growth stocks) vs a high yield fund like the Vanguard fund above being less diversified (108 UK companies) with lower total return but much higher dividends.

So, you either sell down units which are potentially increasing in value at a higher rate vs taking a higher dividend but lower total return, but, it "feels" like you are protecting your original capital.

Thoughts and preferences?  

I would agree with that. There's no free lunch, either profits are ploughed back into the company, generating growth, which can be drawn down by the investor, or it is paid to them directly in a convenient income stream, which cannot then be used to drive growth. There are differences in tax treatment, potentially differences in risk profile, and differences in transaction charges between each approach, but I'd challenge the view that an individual's asset allocation necessarily needs to change so fundamentally simply because they will start drawing from their investments. Usual caveats about defensive assets and cash buffer apply.

Thanks @masonic as usual a sensible and balanced opinion, reinforces my thinking

GazzaBloom

Audaxer said:

I've got some equity income funds and ITs as well as a couple of multi asset funds. I'm retired and feel much more relaxed about taking dividends as income during a loss year like this, than selling capital from multi asset funds or global growth funds that are showing a loss. 

Which kind of plays into the it "feels" safer, regardless of the long term maths, especially in a downturn.

I read a huge debate on Bogleheads earlier, which got quite heated from both camps!

NedS

I think it's two completely different styles, that will each out-perform at different stages of the cycle. A couple years ago folks here on this forum were telling me that total return was the way to go and that I was mad (well, not mad but would see a lower return) by pursuing an income based strategy. Two years on, their total return portfolios are crashing and my income portfolio was flying high, then a few months later things reverse again.

Over the very long term, I do not doubt that a globally diversified portfolio of assets (global tracker) will perform best, but that doesn't help me sleep at night in a downturn. What does help me sleep at night is the £15k of dividends that keep rolling in allowing me to pay the bills. I simply don't have the appetite to have to sell assets after a 50% capital loss. My goals were somewhat specific and different from many others - I need to bridge a 10 year gap between early retirement and DB/SP, and didn't want to deplete my capital during that period, so I went with an income portfolio to give me the income I need for that 10 year period, with the hope that I will still have my capital intact at the end, although I accept it may likely be depleted by inflation. Still, if it keeps returning £15k/year with even a small amount of growth, I view it as a reasonable alternative to a fixed annuity where I get to keep my original capital.

Alistair31

£15k rolling in from a portfolio of what value? Invested how? 

NedS

Alistair31 said:

£15k rolling in from a portfolio of what value? Invested how? 

Current value around £249k, down from £277k a few weeks back (before the mini-budget). Currently around 46% dividend paying stocks/ITs, 25% renewable funds, 12% REITs, 11% credit and 6% cash. Currently on a 6.55% forward yield, with predicted annual income of £16,310 for 2022. The portfolio was up 12% YTD until the Truss/Kwarteng mini-budget but has since given back most of those gains. Still, I'm not seeing the losses many are suffering.

masonic

NedS said:

I think it's two completely different styles, that will each out-perform at different stages of the cycle. A couple years ago folks here on this forum were telling me that total return was the way to go and that I was mad (well, not mad but would see a lower return) by pursuing an income based strategy. Two years on, their total return portfolios are crashing and my income portfolio was flying high, then a few months later things reverse again.

I think this conflates growth and total return. Growth is a style, whereas total return is just a metric that considers both capital growth and income. An index fund will sit between growth and value and have holdings that fit into both categories. This will also vary over the market cycle by virtue of the fact a cap-weighted index adjusts to the market value of its constituents. It's a fair point that if your time horizon is relatively short, a passive equities investment is too high risk, and an active strategy with a defensive/capital preservation focus is preferable. That doesn't necessitate all of the returns coming from income, thinking for example of defensive sectors that don't pay a high dividend, or even shortish duration government bonds trading at below par with an attractive total return but low coupon.

Alistair31

NedS said:

Alistair31 said:

£15k rolling in from a portfolio of what value? Invested how? 

Current value around £249k, down from £277k a few weeks back (before the mini-budget). Currently around 46% dividend paying stocks/ITs, 25% renewable funds, 12% REITs, 11% credit and 6% cash. Currently on a 6.55% forward yield, with predicted annual income of £16,310 for 2022. The portfolio was up 12% YTD until the Truss/Kwarteng mini-budget but has since given back most of those gains. Still, I'm not seeing the losses many are suffering.

Interesting, thanks. Sounds like your portfolio is really working for you. Long may it continue.

Linton

As often is the case, the answer to an either/or investment question is both/and leaving an easier problem of deciding the relative proportions.

I hold both a growth portfolio aiming for long term total return  for inflation protection and an income portfolio generating dividends/interest from value equity and from bonds. In recent months both portfolios are significantly down in capital value but the income portfolio continues generating the cash required for ongoing expenditure.