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  • FIRST POST
    • stphnstevey
    • By stphnstevey 15th Jun 19, 9:18 AM
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    stphnstevey
    Why dividends in retirement and not sell stock?
    • #1
    • 15th Jun 19, 9:18 AM
    Why dividends in retirement and not sell stock? 15th Jun 19 at 9:18 AM
    Generally it seems recommended to move to dividend paying investments in retirement.

    I understand this is to produce an income, but I am not quite sure how this might be better than simply liquidating stock

    I suppose share prices are more volatile which leads to unpredictability in returns vs for example, "Dividend Aristocrats" that have produced fairly reliable dividend returns

    Also the frequency is likely more regular, with minimal effort

    There are no trading costs for dividends vs liquidating stock

    Tax wise there seems to be a bigger capital gains allowance than for dividends, although at say 2% dividend it would still take £100k in holdings to fill the dividend allowance

    Are there other reasons for this suggested move to dividends in retirement?
Page 2
    • dividendhero
    • By dividendhero 15th Jun 19, 6:22 PM
    • 1,461 Posts
    • 2,625 Thanks
    dividendhero
    If you sell shares down and take divis, you can get two tax free allowances £12,000 pa for CGT and £12,500 for income tax. £24,500pa tax free - kerrching
    • bowlhead99
    • By bowlhead99 15th Jun 19, 6:33 PM
    • 8,988 Posts
    • 16,426 Thanks
    bowlhead99
    Originally posted by cogito
    Or Finsbury Growth & Income IT? Some similar holdings.
    Originally posted by Sally57
    It's common for funds with an equity income objective to have some similar holdings. However, FinsburyGT's strategy is to be principally invested in UK stock market listed companies, while Evenlode's Global Income is taking exposure to global stocks in the search for the risk/return and dividend profile it wants.
    • Audaxer
    • By Audaxer 15th Jun 19, 9:08 PM
    • 1,701 Posts
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    Audaxer
    I have trouble seeing how that view makes sense. Getting some of your money returned to you in short order as a dividend is not a bonus. In fact, it's worse than a bonus if that return of capital is now miraculously transformed into taxable income.
    Originally posted by EdSwippet
    My investments are all in a S&S ISA so thankfully that's not a problem.
    • bostonerimus
    • By bostonerimus 15th Jun 19, 9:23 PM
    • 3,012 Posts
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    bostonerimus
    Generally it seems recommended to move to dividend paying investments in retirement.
    Originally posted by stphnstevey
    That's very old thinking. A total return strategy that includes interest, dividends and capital gains is popular today.
    Misanthrope in search of similar for mutual loathing
    • Audaxer
    • By Audaxer 16th Jun 19, 12:37 PM
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    Audaxer
    I'm retired and have about 6 years until my state pension kicks in so all my income is now from my dividends and some savings. Between my SIPP and a GIA I generate about £18k pa which covers all my bills and usual discretionary spending. The payments are steady and reliable and require no effort on my part.
    Originally posted by ColdIron
    ColdIron, I'd be interested to know what approximate equity/bond percentages you have in your income portfolio. My income portfolio includes about 35% of bond funds (mainly strategic and global bond funds) which I think are good defensive assets, but I wonder whether they can sustain growing dividends over the long term like good equity income funds or ITs can. I'd be interested in your view.
    • Thrugelmir
    • By Thrugelmir 16th Jun 19, 2:18 PM
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    Thrugelmir
    Just to highlight a timely example of why dividends might be viewed as paying yourself.

    This week I purchased a bunch of shares in Capital Gearing Trust.

    I hadn't realised I'd done so the day before the XD date.

    The next day was the XD day and the share price dropped around 1% to allow for the dividend and I was £300 down on something I'd only purchased the day before.

    In a month or so I'll get the dividend.

    But it's basically part liquidation of my holding in the trust and if I choose to reinvest it will cost me more money to do so in (small) dealing fees and stamp duty.

    That feels a bit like paying twice so personally I'd be much happier with no dividend and simply grow the pot.
    Originally posted by Aminatidi
    Buy shares when they have gone XD. As XD announcements coincide with the release of financial information. Resulting in the share prices reflecting this.
    “The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett
    • Linton
    • By Linton 16th Jun 19, 4:07 PM
    • 10,876 Posts
    • 11,288 Thanks
    Linton
    ColdIron, I'd be interested to know what approximate equity/bond percentages you have in your income portfolio. My income portfolio includes about 35% of bond funds (mainly strategic and global bond funds) which I think are good defensive assets, but I wonder whether they can sustain growing dividends over the long term like good equity income funds or ITs can. I'd be interested in your view.
    Originally posted by Audaxer
    Ok, I am not Coldiron, but we do appear to have similar strategies, so I will give an answer...
    In my income portfolio there is a 50/50 equity bond (mainly corporate and em bonds) ratio. Bonds by their very nature cannot provide sustainable growing returns unless some of the interest is reinvested. However I take the view that if one needs extra return to provide inflation linking that is best achieved by the use of a growth portfolio rather than taking some of the income from the income focussed investments. Use a growth portfolio purely for growth and an income portfolio purely for income, they are each optimised for their respective objectives and perhaps pretty poor for anything else.
    Growth of the income portfolio usually happens naturally as part of the annual rebalance.
    • ColdIron
    • By ColdIron 16th Jun 19, 5:42 PM
    • 5,321 Posts
    • 7,290 Thanks
    ColdIron
    ColdIron, I'd be interested to know what approximate equity/bond percentages you have in your income portfolio. My income portfolio includes about 35% of bond funds (mainly strategic and global bond funds) which I think are good defensive assets, but I wonder whether they can sustain growing dividends over the long term like good equity income funds or ITs can. I'd be interested in your view.
    Originally posted by Audaxer
    My income GIA contains investment trusts only so there isn't much in the way of regular bond funds available. I have some high yield bonds along with property. The non equity proportion is currently 22.7%. I shall be very surprised if the HY bonds achieve any capital or dividend growth at all over time and not much in the way of downside protection either but that's not their job here

    The SIPP is a bit more complex as I have logically split it into sub portfolios. Income, wealth preservation and cash. The income section has strategic and corporate bonds, a small allocation to HY bonds and some property and infrastructure. The non equity proportion is currently 40.3%. The WP section is a split between PNL and RCP, I don't have the bond allocation to hand but you can look these up

    You can't expect capital growth from bonds if you are taking income from them but that's not what they're there for. Same story for growing dividends (interest), the asset class isn't called Fixed Income for nothing. I haven't needed to do this yet but I expect to increase the amount in bonds through rebalancing from equities. Like Linton I have separate growth portfolios and these contain some bonds with income reinvested but they are there for the usual reason to control volatility, probably about 35%. As I am retired I don't need to shoot the lights out and will be increasing the bond allocation over the years as I bed & ISA. There comes a time when hanging on to what you have becomes more important than growth at all costs. As I said earlier, if I need to increase the income pots I can supplement them from the growth pots or the WP ITs
    • Audaxer
    • By Audaxer 16th Jun 19, 7:45 PM
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    Audaxer
    Thanks Linton and ColdIron for your responses. My income portfolio is 38% UK Equity Income, 20% Global Equity Income, 5% Asian Equity Income and 37% in strategic and global bonds. The income for the first year was about 3.9% of the original investment, and it should be slightly higher this year. The Global Equity Income funds have the lowest yields but have shown by far the greatest growth so far. I am hoping with annual rebalancing that this level of income will be sustainable over the long term without having to sell capital for income, but maybe that is being too optimistic?
    • IanSt
    • By IanSt 17th Jun 19, 7:44 AM
    • 280 Posts
    • 208 Thanks
    IanSt
    If you sell shares down and take divis, you can get two tax free allowances £12,000 pa for CGT and £12,500 for income tax. £24,500pa tax free - kerrching
    Originally posted by dividendhero
    Though hopefully most people will have enough of their investments held within tax efficient wrappers to reduce the amounts they need to pay for either tax
    Last edited by IanSt; 17-06-2019 at 8:54 AM.
    • Thrugelmir
    • By Thrugelmir 17th Jun 19, 10:23 AM
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    Thrugelmir

    You can't expect capital growth from bonds if you are taking income from them but that's not what they're there for.
    Originally posted by ColdIron
    Potentially a capital loss though. If the market price is above nominal value.

    Nominal value is additionally being eroded by inflation over time.
    “The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett
    • bostonerimus
    • By bostonerimus 17th Jun 19, 10:31 AM
    • 3,012 Posts
    • 2,320 Thanks
    bostonerimus
    I haven't really changed my investment strategy after retirement as I figure the best way for me to produce returns from my portfolio is by growth and that means a high equity allocation. I can do that without much worry because I have other income sources from rent and a DB pension. I think you need to guarantee an certain income floor in retirement and that can come from state pension, annuities and high quality bonds etc. Twenty years before I retired I bought a rental property with the idea that it would provide retirement income and I took a government job in the latter part of my career because of the excellent retirement benefits it offered.
    Last edited by bostonerimus; 17-06-2019 at 1:16 PM.
    Misanthrope in search of similar for mutual loathing
    • JohnRo
    • By JohnRo 17th Jun 19, 10:40 AM
    • 2,780 Posts
    • 2,620 Thanks
    JohnRo
    I am hoping with annual rebalancing that
    this level of income will be sustainable over the long term without having to sell capital for income, but maybe that is being too optimistic?
    Originally posted by Audaxer
    It's not optomistic, it's a perfectly reasonable expectation.

    As long as the portfolio has a great many regionally diverse components and you're able to add external contributions that inflate the income base you can forecast reliabilty and with a fair degree of certainty what income you'll be receiving at points in the future.

    The reason I chose to put a little effort into cobbling together a reliable IT equity income generating portfolio is that it allows some degree of financial certainty and forward planning far into the future, without fretting about market volatility.

    I don't think it's saying anything but the obvious that it's far more difficult to plan ahead and achieve that with a growth strategy that relies much more on income from either ongoing or final sale of capital gain.
    'We don't need to be smarter than the rest; we need to be more disciplined than the rest.' - WB
    • Thrugelmir
    • By Thrugelmir 17th Jun 19, 10:44 AM
    • 63,703 Posts
    • 56,410 Thanks
    Thrugelmir
    I haven't really my investment strategy after retirement as I figure the best way for me to produce returns from my portfolio is by growth and that means a high equity allocation.
    Originally posted by bostonerimus
    In reality there's been little choice. As Central Banks have bought up fixed interest stocks driving yields endlessly lower. High equity allocation shoulders a higher level of risk. While equity prices have risen, underlying company performance hasn't grown at the same rate across the board.
    “The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett
    • cogito
    • By cogito 17th Jun 19, 12:28 PM
    • 4,405 Posts
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    cogito
    As long as the portfolio has a great many regionally diverse components and you're able to add external contributions that inflate the income base you can forecast reliabilty and with a fair degree of certainty what income you'll be receiving at points in the future.
    Originally posted by JohnRo
    What do you mean by 'regionally diverse components'?
    • JohnRo
    • By JohnRo 17th Jun 19, 12:36 PM
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    JohnRo
    In my particular case it mean income oriented investment trusts containing equity from around the world.

    That could also apply to bond exposure but doesn't in my case to any degree worth mentioning.
    'We don't need to be smarter than the rest; we need to be more disciplined than the rest.' - WB
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