targeting a 4.5% natural yield

Prism

jimjames said:

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

This is a great example of the ups and downs of investing for yield. On the face of it the current yield is great at over 5% and the cost is low. However if we check the dividend history here ...

FTSE U.K. Equity Income Index Fund - Income (vanguardinvestor.co.uk)

... we can see that when times get tough, during any type of recession, the dividend payments drop off very quickly. For example in 2017 the payments had crept up to £4.4 but were then lower for the next two years. In 2019 they got back to nearly £5 but then halved and have not recovered since.

The businesses that pay higher dividends tend to be those that cut them aggressively when needed. I would say a much more modest 2-3% is required to give it more chance of being sustainable. 

bostonerimus

Chasing dividends is as dangerous as chasing capital gain - it can severely bias the asset allocation in a portfolio. Why not target something like 2% dividends and a bit of capital gain as you can get that from a Total Return balanced portfolio.

easyrider11

I also looked at Ishares IUKD, a UK income ETF with the top 350 dividend payers on the UK index. It pays out a hefty 6% at the moment but I am concerned rising costs will eat into this. Still - should give 5% long term. 

Linton

Prism said:

jimjames said:

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

This is a great example of the ups and downs of investing for yield. On the face of it the current yield is great at over 5% and the cost is low. However if we check the dividend history here ...

FTSE U.K. Equity Income Index Fund - Income (vanguardinvestor.co.uk)

... we can see that when times get tough, during any type of recession, the dividend payments drop off very quickly. For example in 2017 the payments had crept up to £4.4 but were then lower for the next two years. In 2019 they got back to nearly £5 but then halved and have not recovered since.

The businesses that pay higher dividends tend to be those that cut them aggressively when needed. I would say a much more modest 2-3% is required to give it more chance of being sustainable. 

I dont know where you got the data for 

 " In 2019 they got back to nearly £5 but then halved and have not recovered since.".

Note that dividends are paid 6 monthly.  In 2022 there were 2 distributions, one of £4.3375 and another of £43584 giving a total of £8.7. In 2021 the total was £8.4 and similar totals prior to the 1.5 year disruption during and immediately after COVID.  In reality one would not rely on a single UK index fund.  An income portfolio should include equity funds from across the world, bond funds, and specialist niche areas like infratrsucture or property.

The problem with targetting 2-3% is that for an income of £10K you need £400K of potfolio.  By aiming for a higher natural income you can have £200K in a separate and very different set of investments targeted say for high growth.  This makes one's multi-tasked portfolio simpler to manage with precisely chosen investments and also could provide a diversifying income stream.

In my £400K pot/£10K income example, if it was all in one portfolio how would you increase the income to say £12K?  By having the portfolios separate it becomes simply a matter of moving money from one portfolio to the other with no changes in the individualholdings or allocations.

Prism

Linton said:

Prism said:

jimjames said:

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

This is a great example of the ups and downs of investing for yield. On the face of it the current yield is great at over 5% and the cost is low. However if we check the dividend history here ...

FTSE U.K. Equity Income Index Fund - Income (vanguardinvestor.co.uk)

... we can see that when times get tough, during any type of recession, the dividend payments drop off very quickly. For example in 2017 the payments had crept up to £4.4 but were then lower for the next two years. In 2019 they got back to nearly £5 but then halved and have not recovered since.

The businesses that pay higher dividends tend to be those that cut them aggressively when needed. I would say a much more modest 2-3% is required to give it more chance of being sustainable. 

I dont know where you got the data for 

 " In 2019 they got back to nearly £5 but then halved and have not recovered since.".

Note that dividends are paid 6 monthly.  In 2022 there were 2 distributions, one of £4.3375 and another of £43584 giving a total of £8.7. In 2021 the total was £8.4 and similar totals prior to the 1.5 year disruption during and immediately after COVID.  In reality one would not rely on a single UK index fund.  An income portfolio should include equity funds from across the world, bond funds, and specialist niche areas like infratrsucture or property.

The problem with targetting 2-3% is that for an income of £10K you need £400K of potfolio.  By aiming for a higher natural income you can have £200K in a separate and very different set of investments targeted say for high growth.  This makes one's multi-tasked portfolio simpler to manage with precisely chosen investments and also could provide a diversifying income stream.

In my £400K pot/£10K income example, if it was all in one portfolio how would you increase the income to say £12K?  By having the portfolios separate it becomes simply a matter of moving money from one portfolio to the other with no changes in the individualholdings or allocations.

I was just using the December payouts for a simple example but the whole year still shows the same trend if not quite as extreme. We can see what tends to happen in a recession - even a brief one like 2020. A proper recession would likely be much worse.

2019 - £9.30
2020 - £6.03
2021 - £8.40
2022 - £8.70

Someone relying on regular equities to provide a steadily rising income might be very disappointed.

So onto your very valid point of using different investments to provide a more reliable higher yield I definitely agree with, and just like you do it I only use a percentage of the total pot (a bucket) using property, infrastructure and energy trusts. However I am also aware that however well I might try and pick these, they may well fail to provide an income too over time. So its a balancing act. Saying that, I didn't actually pick these investments for their yield, but for diversification - if they all stopped paying dividends due to a policy change, rather than an income problem I would simply revert to capital sales to make up the difference.

Overall, including the higher yield bit, the lower yield cash/bond bit and the 'normal' yield global equity bit it all comes out in the wash at about 2.5%, which is only a touch more than a world tracker and certainly not the figure that some are after.

To really get a natural yield of 4-5% across the whole pot takes too much sector and equity risk for my liking. In a part of the pot then sure.

Prism

easyrider11 said:

I also looked at Ishares IUKD, a UK income ETF with the top 350 dividend payers on the UK index. It pays out a hefty 6% at the moment but I am concerned rising costs will eat into this. Still - should give 5% long term. 

The yield isn't important on its own as it goes up as the price falls, even if the amounts decrease.

What is important is an actual increasing dividend payment amount which for IUKD has been lower for the last 5 years. 

BlackRock iShares UK Dividend UCITS ETF GBP (Dist) (IUKD) Dividends (dividendmax.com)

coastline

Sticking with the FTSE 100 which has paid a decent dividend since launch in 1985. There's been occasions where total payments in £bn's have been cut . First link shows the 2008 GFC and 2020 pandemic where they were slashed. I remember the BOE advising companies to reduce payments during lockdown.

 UK dividends down 49% on last year - FTAdviser.com

Now on an upward trend again.

FTSE 100 cash returns forecast to hit £114bn in 2022 | Trustnet

So it's not certain the dividend will rise every year but the FTSE 100 has a record of inflation beating dividend payments in the long term. The 3.2% yield at launch or £32 at 1000 is now way ahead in real terms today at 3.5% and index 7850. Worthy candidate in an income portfolio.

FTSE-100-Dividend-yield-over-30-years-2015-05.png (605×341) (ukvalueinvestor.com)

I agree with much that has been posted and buying out of favour can be very rewarding. Buying single shares is a bit different and you must separate market sentiment and a share going ex growth for example. Take Vodaphone which pays a healthy dividend . Now set the chart to MAX and it's a disaster.

Vodafone Group PLC (VOD:LSE) Share price, analysis, charts, news, dividends, EPS forecasts, annual reports and RNS - Investors Chronicle

jimjames

Prism said:

Linton said:

Prism said:

jimjames said:

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

This is a great example of the ups and downs of investing for yield. On the face of it the current yield is great at over 5% and the cost is low. However if we check the dividend history here ...

FTSE U.K. Equity Income Index Fund - Income (vanguardinvestor.co.uk)

... we can see that when times get tough, during any type of recession, the dividend payments drop off very quickly. For example in 2017 the payments had crept up to £4.4 but were then lower for the next two years. In 2019 they got back to nearly £5 but then halved and have not recovered since.

The businesses that pay higher dividends tend to be those that cut them aggressively when needed. I would say a much more modest 2-3% is required to give it more chance of being sustainable. 

I dont know where you got the data for 

 " In 2019 they got back to nearly £5 but then halved and have not recovered since.".

Note that dividends are paid 6 monthly.  In 2022 there were 2 distributions, one of £4.3375 and another of £43584 giving a total of £8.7. In 2021 the total was £8.4 and similar totals prior to the 1.5 year disruption during and immediately after COVID.  In reality one would not rely on a single UK index fund.  An income portfolio should include equity funds from across the world, bond funds, and specialist niche areas like infratrsucture or property.

The problem with targetting 2-3% is that for an income of £10K you need £400K of potfolio.  By aiming for a higher natural income you can have £200K in a separate and very different set of investments targeted say for high growth.  This makes one's multi-tasked portfolio simpler to manage with precisely chosen investments and also could provide a diversifying income stream.

In my £400K pot/£10K income example, if it was all in one portfolio how would you increase the income to say £12K?  By having the portfolios separate it becomes simply a matter of moving money from one portfolio to the other with no changes in the individualholdings or allocations.

Someone relying on regular equities to provide a steadily rising income might be very disappointed.

Definitely, that fund was just one example. The advantage of an investment trust in comparison is that they can hold some income back to smooth things out so are then able to keep dividends rising with some having track records over 50 years of increased payments. Past performance isn't guarantee of the future though

Prism

jimjames said:

Prism said:

Linton said:

Prism said:

jimjames said:

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

This is a great example of the ups and downs of investing for yield. On the face of it the current yield is great at over 5% and the cost is low. However if we check the dividend history here ...

FTSE U.K. Equity Income Index Fund - Income (vanguardinvestor.co.uk)

... we can see that when times get tough, during any type of recession, the dividend payments drop off very quickly. For example in 2017 the payments had crept up to £4.4 but were then lower for the next two years. In 2019 they got back to nearly £5 but then halved and have not recovered since.

The businesses that pay higher dividends tend to be those that cut them aggressively when needed. I would say a much more modest 2-3% is required to give it more chance of being sustainable. 

I dont know where you got the data for 

 " In 2019 they got back to nearly £5 but then halved and have not recovered since.".

Note that dividends are paid 6 monthly.  In 2022 there were 2 distributions, one of £4.3375 and another of £43584 giving a total of £8.7. In 2021 the total was £8.4 and similar totals prior to the 1.5 year disruption during and immediately after COVID.  In reality one would not rely on a single UK index fund.  An income portfolio should include equity funds from across the world, bond funds, and specialist niche areas like infratrsucture or property.

The problem with targetting 2-3% is that for an income of £10K you need £400K of potfolio.  By aiming for a higher natural income you can have £200K in a separate and very different set of investments targeted say for high growth.  This makes one's multi-tasked portfolio simpler to manage with precisely chosen investments and also could provide a diversifying income stream.

In my £400K pot/£10K income example, if it was all in one portfolio how would you increase the income to say £12K?  By having the portfolios separate it becomes simply a matter of moving money from one portfolio to the other with no changes in the individualholdings or allocations.

Someone relying on regular equities to provide a steadily rising income might be very disappointed.

Definitely, that fund was just one example. The advantage of an investment trust in comparison is that they can hold some income back to smooth things out so are then able to keep dividends rising with some having track records over 50 years of increased payments. Past performance isn't guarantee of the future though

True, and that is why City of London is popular. However also worth mentioning that anyone can hold back income payments that they receive which is what I assume most people would try and do when they get bumper years. 

cwep2

Prism said:

I was just using the December payouts for a simple example but the whole year still shows the same trend if not quite as extreme. We can see what tends to happen in a recession - even a brief one like 2020. A proper recession would likely be much worse.

2019 - £9.30
2020 - £6.03
2021 - £8.40
2022 - £8.70

Worth noting that in 2020 the government actually banned a lot of firms from paying dividends (eg banks, insurance companies), Covid was new and extremely uncertain time and they didn't want companies paying out profits from 2019 only to need bailing out by govt in 2020. Even profitable ones etc. So some of this dip wasn't recession driven but a government mandate to stop dividends. Same was true in Europe.

See: https://www.bankofengland.co.uk/prudential-regulation/publication/2020/statement-on-dividend-payments-and-share-buybacks-beyond-2020