targeting a 4.5% natural yield

easyrider11

Hello

I am close to 55 and the point when I can access my pension savings. Rather than draw down I would like to change the investment make up so that I can invest in a variety of ways to provide me with a natural yield of around 4.5% to live on in retirement.

I'm opening up a debate about how many different funds / etf's I need to invest in to be diversified and receive around 4.5%

To start the ball rolling I want to split the funds into 10 equal tranches of 10% each. My first 10% invested is as follows:-

MYI Murray International Investment Trust - Global equities 4.3% yield

Should I look at ETF's, Infrastructure, government bonds? Any advice gratefully received. Thanks

ColdIron

4.50% is quite ambitious but do-able, however I'd manage my expectations regarding much in the way of capital growth at that level of yield. Your capital may even decrease in value but perhaps that is your plan

Prism

There is very little out there which will reliably give you a natural yield of 4.5% and that will also keep up with inflation, assuming you don't want to get poorer as time goes on.

I would aim for a much lower dividend yield - maybe around 2.5% and then sell capital to meet your income requirements. A yield of 4.5% that keeps up with inflation and doesn't eat into your capital is very hard to do, especially when times are tough.

Linton

EATs (European Assets Trust's) stated aim is to provide 6% in dividends.  It manages its investments to achieve this possibly at a cost to total return. Being an IT it is not constrained to only distribute the dividends it receives as is the case with UT/OEICs  There are other ITs that operate in this way, notably City of London Trust.

I agree with Prism that dividend yields greater than say 4.5% are likely not to naturally keep up with inflation over the long term.

My income portfolio strategy targetted broadly at 5-6% is to run it alongside a long term growth portfolio which can be used to top up the income portfolio occasionally if necessary to ensure that income generally increases with inflation.

One point to note is that if you have a dedicated income portfolio the ongoing Yield figure is not important, what matters is to achieve a fairly steady income in £ terms.The Yield figure will jump around in line with the possibly volatile price, the volatility in dividends expressed in £s is likely to be much lower,   Yield is a calculated figure based on current price and the past year's dividend so can be quite misleading.  Actual dividends are expressed in £s per share or unit.

egroeg1980

Complete novice response here - but if thats your target yeild, would equities not do that for you? You havent got the blanket protection of actively managed product, but maybe select 3-4 defensive but yeild paying dividend equities to provide in excess of 4.5% yeild, and then the remainder in funds/trusts/etfs as you'd called out?

Linton

egroeg1980 said:

Complete novice response here - but if thats your target yeild, would equities not do that for you? You havent got the blanket protection of actively managed product, but maybe select 3-4 defensive but yeild paying dividend equities to provide in excess of 4.5% yeild, and then the remainder in funds/trusts/etfs as you'd called out?

Individual equities could do the same thing for you, but for example I cover the whole world plus bonds, private equity, and infrastructure in 10 funds.  To do that by investing in separate sharess would be much more difficult and could require say require 50 shares and an unknown number of bonds to avoid dependency on any one. Even if you can buy the bonds and foreign shares the amount of ongoing research to choose them and check that each is continuing to do its job would I believe make it impractical.

If you are willing to restrict your portfolio to only large company UK equity then running a share based portfolio should be perfectly feasible with say 10 shares.  However I believe diversification is important in investing for income as with any other investment acttivity.

Prism

egroeg1980 said:

Complete novice response here - but if thats your target yeild, would equities not do that for you? You havent got the blanket protection of actively managed product, but maybe select 3-4 defensive but yeild paying dividend equities to provide in excess of 4.5% yeild, and then the remainder in funds/trusts/etfs as you'd called out?

The trouble is that it only works until it doesn't. Lets say that 10 years ago you selected two equities with defensive properties - National Grid and Imperial Brands.

The National Grid investment would have done well for you, paying a yield of around 4.5% during that time and increasing the dividend each year by an average of 2.6%. Not quite keeping up with inflation but pretty close.

However the Imperial Brands investment would have looked great for a few years with a 5% yield and steadily increasing dividends - until they slashed the payouts and didn't bring them back.

Its very difficult to find a defensive company, that does well during a recession and high inflation, that isn't already priced so high as to make the yield less attractive.

NedS

easyrider11 said:

Hello

I am close to 55 and the point when I can access my pension savings. Rather than draw down I would like to change the investment make up so that I can invest in a variety of ways to provide me with a natural yield of around 4.5% to live on in retirement.

I'm about the same age as you, plan to retire shortly and am also invested for income with a plan to draw upon the natural yield until DB's and SP kick in at various ages between 60 and 67 (we also have other income). I have spent the last few years building my portfolio and it's currently on a 6.2% forward yield, so your 4.5% yield is very achievable IMHO. I am probably guilty of chasing higher yields at the expense of any likely capital growth.

My portfolio is split into 4 main sectors: equity income trusts, renewables, property and credit/debt.

Equity Income

My main holding is CTY which I bought cheap during the Covid crisis and is now on a 5.75% forward yield based on my purchase price. I hold HFEL (8.3% yield) for exposure to Asia and some individual shares including a relatively large holding in BATS (also bought cheaply whilst out of favour), on an 8.5% forward yield. Others on my watchlist include LGEN, MNG and NG, although experience has repeatedly taught me I am often better off leaving the stock picking to the fund managers so should probably just stick with CTY (diversification is not to be under-rated).

I do not currently hold any global equity income funds (yields were never that great, but they have growth prospects). Your choice of MYI is fine, others may include JGGI (which pays 4% of annual NAV as a dividend) and BNKR IT's. You could also consider an ETF such as WisdomTree Global Quality Dividend (GGRP) as a passive choice. I was reluctant to add global equities whilst valuations were high.

Renewables

I built relatively large positions in many of the renewables funds (solar, wind and battery) during summer 2021 when they were very much out of favour, mostly at around 7% yields. These have since done remarkably well given the increase in energy prices and inflation (much of their income is inflation linked). I hold BSIF, FSFL, GRID, GSF, JLEN, NESF and UKW, many of which are still yielding 6-7% and top up my holdings on any price weakness (I'm not retired yet so am currently reinvesting all income).

I also hold DGI9 (digital infrastructure fund) on a 7% yield following recent price weakness (the fund managers suddenly left). CORD is the other fund choice in that space.

Property

Property has de-rated massively in the last few months (which means I've lost massively), and there are some appealing yields out there, so now may be the ideal opportunity to build positions. I hold CSH - social housing, it has some issues and consequently on a massive discount to NAV and a juicy 9.5% yield. Despite it's issues, the rent is still (largely) rolling in and there's always the possibility of the discount narrowing. I also own THRL (care homes) and PHP (health centres), all specialist picks where upwardly revised rents are largely underwritten by government or local authorities. CTPT would be my choice for a generic diversified property fund or the ever popular TRY. EPIC is another specialist on my watchlist that owns out of town retail parks that I may buy if things get really bleak in the middle of a recession (target price well below 60p). It also pays out monthly which is nice.

Credit/Debt

My final sector is credit/debt funds. I have been looking for funds with floating rate and short exposure to minimise duration risks and rising rates, but now we are probably nearing peak interest rates, maybe the ideal time to buy. I always look to add in a crisis, especially if spreads widen. I currently hold TFIF and RECI and am comfortable with both. I've previously held GABI, NCYF and SEQI, and RCOI is another on my watchlist.

For me, as someone chasing higher yields, valuation is extremely important. Pay too much, and you can easily lose the first 1-2 years of dividends in share price falls. Conversely, pick up a bargain, and not only do you get a capital gain, but you've also purchased at a higher yield so it's a double win. Looking at current valuations, property is clearly distressed so now may be a good time to pick up some bargains. Credit/debt markets also now look attractive with 7-9% yields on offer. The renewables sector looks fair value having given up much of their gains since the disastrous Sept mini-budget, and yields are still decent at 6-7%. I'm still adding on any price weakness, but am aware NAVs could drop as energy prices come back to earth.

UK equity income looks overpriced to me whilst the FTSE is at an all time high. The problem as I see it is the FTSE100 currently sits on a 3.5% yield whilst BoE base rate is 4%. Why on earth would anyone put capital at risk for a yield lower or the same as available by taking zero risk, in a market renowned for a high yield and limited growth prospects. Which means the yield has to rise for the FTSE100 to be an attractive proposition - for that to happen, either earnings have to grow significantly to pay higher dividends (seems unlikely) or prices have to fall for yields to increase, which seems more likely to me. I've actually recently dumped my compete holding in CTY and moved into cash at near 4% whilst waiting for the price to drop before I re-enter at a more attractive price.

Asia looks more attractive for equity to me, so some of the more popular Asian income funds may be worth considering as you already have your global equity income fund in place. And you can hold cash at near 4% whilst you wait for opportunities to present themselves.

For reference, my current weightings are around 50% equity income, 25% renewables, 13% property and 12% debt. (Edit: that 50% equity includes 30% holding in CTY which is currently in cash, not CTY - so I'm actually 20% equity and 30% cash, but normally would be 50% equity)

None of this is advice, and I wouldn't recommend anyone do or copy what I do - for discussion value only.

cwep2

NedS - very helpful and informative reply.

Would just add that I looked in detail at a lot of the UK equity income funds a couple of years back, most charged 0.5% as a fee but they publish their top holdings, and almost all of them had a pick of 10 from the same 13-14 different stocks in their top 10s. So you can just use them as a guide for what to invest as a portfolio of a dozen single stocks to give reasonable market spread and some diversity.

It won't be as diverse as these funds, but you save the fees. Also as with NedS I tend to trade in and out of some of them when they get 'cheap' or 'expensive' and have done very well picking up out of favour stocks for a 7-10% yield and flipping them for 20%+ gain 3-6 months later (~3yrs of yield) and only a couple of times did I regret selling out, often you get to buy back lower again.

It's worth pointing out that these stocks are often from a few sectors, are overweight 'sin' stocks (tobacco, oil) and because they tend to be well established businesses, with good yields, they are not growth stocks so you are unlikely to see Tesla style capital gains, and they can fall out of favour for long periods, but they still pay out dividends. I have about 25% of my portfolio in UK income stocks, partly as a defensive play, and another chunk which I allocate to more speculative, but higher chance of big growth. Then I have more global exposure (mostly tracker funds, some region specific though) and other asset classes (commodities/property). 

easyrider11

NedS said:

easyrider11 said:

Hello

I am close to 55 and the point when I can access my pension savings. Rather than draw down I would like to change the investment make up so that I can invest in a variety of ways to provide me with a natural yield of around 4.5% to live on in retirement.

I'm about the same age as you, plan to retire shortly and am also invested for income with a plan to draw upon the natural yield until DB's and SP kick in at various ages between 60 and 67 (we also have other income). I have spent the last few years building my portfolio and it's currently on a 6.2% forward yield, so your 4.5% yield is very achievable IMHO. I am probably guilty of chasing higher yields at the expense of any likely capital growth.

My portfolio is split into 4 main sectors: equity income trusts, renewables, property and credit/debt.

Equity Income

My main holding is CTY which I bought cheap during the Covid crisis and is now on a 5.75% forward yield based on my purchase price. I hold HFEL (8.3% yield) for exposure to Asia and some individual shares including a relatively large holding in BATS (also bought cheaply whilst out of favour), on an 8.5% forward yield. Others on my watchlist include LGEN, MNG and NG, although experience has repeatedly taught me I am often better off leaving the stock picking to the fund managers so should probably just stick with CTY (diversification is not to be under-rated).

I do not currently hold any global equity income funds (yields were never that great, but they have growth prospects). Your choice of MYI is fine, others may include JGGI (which pays 4% of annual NAV as a dividend) and BNKR IT's. You could also consider an ETF such as WisdomTree Global Quality Dividend (GGRP) as a passive choice. I was reluctant to add global equities whilst valuations were high.

Renewables

I built relatively large positions in many of the renewables funds (solar, wind and battery) during summer 2021 when they were very much out of favour, mostly at around 7% yields. These have since done remarkably well given the increase in energy prices and inflation (much of their income is inflation linked). I hold BSIF, FSFL, GRID, GSF, JLEN, NESF and UKW, many of which are still yielding 6-7% and top up my holdings on any price weakness (I'm not retired yet so am currently reinvesting all income).

I also hold DGI9 (digital infrastructure fund) on a 7% yield following recent price weakness (the fund managers suddenly left). CORD is the other fund choice in that space.

Property

Property has de-rated massively in the last few months (which means I've lost massively), and there are some appealing yields out there, so now may be the ideal opportunity to build positions. I hold CSH - social housing, it has some issues and consequently on a massive discount to NAV and a juicy 9.5% yield. Despite it's issues, the rent is still (largely) rolling in and there's always the possibility of the discount narrowing. I also own THRL (care homes) and PHP (health centres), all specialist picks where upwardly revised rents are largely underwritten by government or local authorities. CTPT would be my choice for a generic diversified property fund or the ever popular TRY. EPIC is another specialist on my watchlist that owns out of town retail parks that I may buy if things get really bleak in the middle of a recession (target price well below 60p). It also pays out monthly which is nice.

Credit/Debt

My final sector is credit/debt funds. I have been looking for funds with floating rate and short exposure to minimise duration risks and rising rates, but now we are probably nearing peak interest rates, maybe the ideal time to buy. I always look to add in a crisis, especially if spreads widen. I currently hold TFIF and RECI and am comfortable with both. I've previously held GABI, NCYF and SEQI, and RCOI is another on my watchlist.

For me, as someone chasing higher yields, valuation is extremely important. Pay too much, and you can easily lose the first 1-2 years of dividends in share price falls. Conversely, pick up a bargain, and not only do you get a capital gain, but you've also purchased at a higher yield so it's a double win. Looking at current valuations, property is clearly distressed so now may be a good time to pick up some bargains. Credit/debt markets also now look attractive with 7-9% yields on offer. The renewables sector looks fair value having given up much of their gains since the disastrous Sept mini-budget, and yields are still decent at 6-7%. I'm still adding on any price weakness, but am aware NAVs could drop as energy prices come back to earth.

UK equity income looks overpriced to me whilst the FTSE is at an all time high. The problem as I see it is the FTSE100 currently sits on a 3.5% yield whilst BoE base rate is 4%. Why on earth would anyone put capital at risk for a yield lower or the same as available by taking zero risk, in a market renowned for a high yield and limited growth prospects. Which means the yield has to rise for the FTSE100 to be an attractive proposition - for that to happen, either earnings have to grow significantly to pay higher dividends (seems unlikely) or prices have to fall for yields to increase, which seems more likely to me. I've actually recently dumped my compete holding in CTY and moved into cash at near 4% whilst waiting for the price to drop before I re-enter at a more attractive price.

Asia looks more attractive for equity to me, so some of the more popular Asian income funds may be worth considering as you already have your global equity income fund in place. And you can hold cash at near 4% whilst you wait for opportunities to present themselves.

For reference, my current weightings are around 50% equity income, 25% renewables, 13% property and 12% debt. (Edit: that 50% equity includes 30% holding in CTY which is currently in cash, not CTY - so I'm actually 20% equity and 30% cash, but normally would be 50% equity)

None of this is advice, and I wouldn't recommend anyone do or copy what I do - for discussion value only.

Thanks - really useful. I will be looking for as wide a diversification as possible without overlaps. I also like infrastrucure.

jimjames

IF you're looking for a low fee fund for the UK aspect then Vanguard have a UK Income index fund at 0.14% with current yield 5.24%. As per comments above it might not keep pace with inflation but could be a low cost way to get income for part of the UK allocation

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-uk-equity-income-index-fund-gbp-acc/overview