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

Kim1965

NedS said:

Kim1965 said:

So are we saying there is less need for a cash buffer in an income/dividend portfolio to guard against sequence of return risk? 

Looking at it simplistically, if the purpose of a cash buffer is to avoid having to sell any assets in a downturn for X years, then if you have no income producing assets, you would need to hold the full amount in cash to achieve that objective. If you have some income producing assets, you can reduce the amount of cash you hold accordingly to achieve the same goal. If your assets produce enough income such that you never need to sell any assets, the need to hold cash to avoid selling assets is completely diminished, but there may now be a new set of risks to consider such as drops in dividend income etc.

Understood, thankyou. 

Audaxer

Kim1965 said:

So are we saying there is less need for a cash buffer in an income/dividend portfolio to guard against sequence of return risk? 

It depends on your risk profile, but I think there is less need for a big cash buffer. For example, I have a few equity income ITs that have produced increasing dividends every year for many decades. I am less concerned about the volatility of capital values of those ITs than if I would be if I was needing to sell capital from growth funds or ITs for income in falling markets.

Kim1965

Ok, thanks for the reply. I have one sipp of 135k producing approx 6k yr dividends, reinvested as im accumulating. I think all the etfs, its have a proven record of maintain Ing dividends through tough years. My other smaller sipp 60k is for growth apparantly.
 A bit like NedS, im trying to fill the gap before sp and db, but will work as long as my back holds out.
 I did at one point nearly go down the btl route but seemed this approach less hassle. 

MK62

Audaxer said:

Kim1965 said:

So are we saying there is less need for a cash buffer in an income/dividend portfolio to guard against sequence of return risk? 

It depends on your risk profile, but I think there is less need for a big cash buffer. For example, I have a few equity income ITs that have produced increasing dividends every year for many decades. I am less concerned about the volatility of capital values of those ITs than if I would be if I was needing to sell capital from growth funds or ITs for income in falling markets.

You have to account for inflation too, especially at the current time......increasing the dividend every year is good, but if that increase fails to match inflation...........
.

NedS

Deleted_User said:

Dividends can always be cut, though. And then you either have to draw from your cash buffer (if you have one), or sell investments. (Investment trusts can do the latter for you, by paying an uncovered dividend, which may be more convenient or reassuring.)

You can get more secure income from fixed-rate savings accounts, or gilts, or other bonds with low risk of default. That includes funds investing in gilts or investment-grade bonds. Though without any expectation that the income will, in the longer term, rise to keep up with inflation - which you can hope for with dividends (despite temporary setbacks).

My investment income does appear to cover my spending, but I also have a cash buffer of approximately 2 years' spending. The income is mostly from dividends, with much less fixed-interest.

Absolutely, and Covid must have come as a shock to any unprepared income investor. I now use that as a metric when selecting income paying investments - how did they hold up during Covid - did they maintain their dividend. Undoubtedly that is where IT's such as CTY have an edge in being able to continue to pay a rising dividend during Covid, supplemented from reserves as required, thus smoothing out any large variations in dividend cover.
As with anything, diversification helps and there are a lot of diverse sources of regular income.

MK62

Deleted_User said:

NedS said:

I now use that as a metric when selecting income paying investments - how did they hold up during Covid - did they maintain their dividend. Undoubtedly that is where IT's such as CTY have an edge in being able to continue to pay a rising dividend during Covid, supplemented from reserves as required, thus smoothing out any large variations in dividend cover.

My more substantive point is that all ITs with revenue reserves can do, when the dividends they receive fall, and they want to maintain payouts, are the same 2 things an investor could do by themselves: 

......however, "could" is not the same as "would".....

bostonerimus

Moderation in all things! So I like broad, cap. weighted index funds because you'll get a couple of percent in dividends and, hopefully, long term growth. I would not emphasize either growth or income/dividends.

bostonerimus

MK62 said:

Deleted_User said:

NedS said:

I now use that as a metric when selecting income paying investments - how did they hold up during Covid - did they maintain their dividend. Undoubtedly that is where IT's such as CTY have an edge in being able to continue to pay a rising dividend during Covid, supplemented from reserves as required, thus smoothing out any large variations in dividend cover.

My more substantive point is that all ITs with revenue reserves can do, when the dividends they receive fall, and they want to maintain payouts, are the same 2 things an investor could do by themselves: 

......however, "could" is not the same as "would".....

Conditional statements have no place in investing. It's what you actually do that matters, not what you should, could, or would have done.

Linton

bostonerimus said:

Moderation in all things! So I like broad, cap. weighted index funds because you'll get a couple of percent in dividends and, hopefully, long term growth. I would not emphasize either growth or income/dividends.

The extent to which you need growth or income depends on your circumstances. Some level of growth is essential to keep up with long term inflation. Beyond that level your wealth could more usefully be spent in providing a steady income. 

The chances of your needs being optimally satisfied by the average allocations of every other investor in the world seem pretty low.

Basing your allocations on your objectives seems a more rational approach. It requires more effort in designing and maintaining your portfolio but avoids continual decisions on what, when  and how much to sell or whether to change your expenditure.

By automatically paying dividend and interest income into your current account you can avoid any effort whatsoever beyond an annual review.

MK62

bostonerimus said:

MK62 said:

Deleted_User said:

NedS said:

I now use that as a metric when selecting income paying investments - how did they hold up during Covid - did they maintain their dividend. Undoubtedly that is where IT's such as CTY have an edge in being able to continue to pay a rising dividend during Covid, supplemented from reserves as required, thus smoothing out any large variations in dividend cover.

My more substantive point is that all ITs with revenue reserves can do, when the dividends they receive fall, and they want to maintain payouts, are the same 2 things an investor could do by themselves: 

......however, "could" is not the same as "would".....

Conditional statements have no place in investing. It's what you actually do that matters, not what you should, could, or would have done.

Merely commenting that although investors could withhold say 15% of their dividends in good years, to smooth out lower dividends in bad years, just like ITs do, it's probably unlikely they would, even if they perhaps should.
I fully agree that it's what you actually do that matters in the end, but not sure I agree that "conditional statements" have no place in investing......most drawdown plans are really built around "if, then, else" type conditional statements.