targeting a 4.5% natural yield

wmb194

cwep2 said:

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

Insurers weren't banned, it was just suggested. Legal & General told the government/PRA that it was being over dramatic and continued paying. It wasn't wrong.

bostonerimus

Prism said:

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. 

You beat me to it. A personal portfolio can be managed to produce regular income from a variety of sources. I would avoid putting "all the eggs in one basket" and use dividends, interest and growth along with annuities, SP, DB pensions and maybe even rental income or wages from part time employment to meet retirement income needs.

Stargunner

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. 

This ETF only invests in 50 of the top paying UK dividend companies 

Bravepants

bostonerimus said:

Prism said:

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. 

You beat me to it. A personal portfolio can be managed to produce regular income from a variety of sources. I would avoid putting "all the eggs in one basket" and use dividends, interest and growth along with annuities, SP, DB pensions and maybe even rental income or wages from part time employment to meet retirement income needs.

My plan is to have one "income" current account, to which all sources of income are paid, and then set up a standing order to pay a fixed monthly "salary" to my main personal current account. The salary would be rounded down slightly from the sum of income so that I automatically build up a buffer in the income account.

Linton

Stargunner said:

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. 

This ETF only invests in 50 of the top paying UK dividend companies 

Also it can be very volatile. In 2007/8 the list of the top UK dividend paying companies was dominated by the banks leading to a fall in IUKD’s price by 60%. IUKD would then have sold all its bank shares at the bottom of the market since they would no longer be in the top 50.  If you were taking dividends the price would still be 40% down from its pre-crash level as presumably would the dividends.

Just because a fund follows an index doesn’t ensure that it is a sensible investment. 

brucefan_2

Bravepants said:

bostonerimus said:

Prism said:

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. 

You beat me to it. A personal portfolio can be managed to produce regular income from a variety of sources. I would avoid putting "all the eggs in one basket" and use dividends, interest and growth along with annuities, SP, DB pensions and maybe even rental income or wages from part time employment to meet retirement income needs.

My plan is to have one "income" current account, to which all sources of income are paid, and then set up a standing order to pay a fixed monthly "salary" to my main personal current account. The salary would be rounded down slightly from the sum of income so that I automatically build up a buffer in the income account.

If you were able to do it to 'smooth' things out, a further level of buffer would be to get to a position where you could use, for example,  2023's income to provide 2024's salary.

NedS

My plan is to draw my tax free allowance from my SIPP each year (£16,760), and the income fund needs to generate that income. I'm just about there on generating the income and not due to retire for another year or so, which should put me comfortably over the threshold with that income reinvested and another year of contributions.

Once I begin drawing income, any excess income over my personal tax allowance will then get reinvested to help grow the capital and future dividend payments. Until the personal tax free allowance starts to rise again, I will not be taking inflationary increases, which again should help build a buffer.

easyrider11

NedS said:

My plan is to draw my tax free allowance from my SIPP each year (£16,760), and the income fund needs to generate that income. I'm just about there on generating the income and not due to retire for another year or so, which should put me comfortably over the threshold with that income reinvested and another year of contributions.

Once I begin drawing income, any excess income over my personal tax allowance will then get reinvested to help grow the capital and future dividend payments. Until the personal tax free allowance starts to rise again, I will not be taking inflationary increases, which again should help build a buffer.

Good idea. But is it not more sensible to draw your tax free allowance and put it straight into your annual ISA allowance to build you tax free income potential?

Linton

NedS said:

My plan is to draw my tax free allowance from my SIPP each year (£16,760), and the income fund needs to generate that income. I'm just about there on generating the income and not due to retire for another year or so, which should put me comfortably over the threshold with that income reinvested and another year of contributions.

Once I begin drawing income, any excess income over my personal tax allowance will then get reinvested to help grow the capital and future dividend payments. Until the personal tax free allowance starts to rise again, I will not be taking inflationary increases, which again should help build a buffer.

Yes,  that seems a good way of handling income within a SIPP.  The alternative of actually drawing down the dividends as and when they are paid would require an unreasonable amount of hassle.

Another approach which I adopt is to put all the income funds in an S&S ISA perhaps wholely or partly financed from the TFLS.  This has two advantages
1) Ongoing income is tax free for any amount and does not count against your tax allowance.
2) Possibly depending on your platform you can arrange for dividends to be transferred automatically into your current account so zero hassle actually getting the money.

This leaves the SIPP available for longer term Acc funds which can be then be left to get on with their job.

NedS

easyrider11 said:

NedS said:

My plan is to draw my tax free allowance from my SIPP each year (£16,760), and the income fund needs to generate that income. I'm just about there on generating the income and not due to retire for another year or so, which should put me comfortably over the threshold with that income reinvested and another year of contributions.

Once I begin drawing income, any excess income over my personal tax allowance will then get reinvested to help grow the capital and future dividend payments. Until the personal tax free allowance starts to rise again, I will not be taking inflationary increases, which again should help build a buffer.

Good idea. But is it not more sensible to draw your tax free allowance and put it straight into your annual ISA allowance to build you tax free income potential?

I'm currently still working, so have no tax free allowance available. Once I stop work, I will need to draw the £16,760 income to supplement other non-taxable income streams. At some point I will have to pay (basic rate) tax.

From a tax perspective, it makes no difference if money is drawn now and paid into an ISA for tax free growth or left in a SIPP to grow and be taken later. Assuming the same 20% tax rate, the same amount of cash is available after tax. The important thing is to fully utilise any marginal or tax free rates where available to avoid paying higher rates of tax later.