Arborbridge wrote:In a way, it is an odd pick, especially as LGEN has about double the yield and hasn't cancelled, whereas PSON did cancel, though three years ago. Would you worry if over 6% over your income comes from LGEN, as I does in my case? How far would you trust to one company to provide for you? - given that we no nothing of what the future holds for either company.
Dod101 wrote:To answer your question, no I would not be bothered with over 6% from L & G. I prefer to follow my overall income for my entire portfolio, ...
An instructive example: BT's dividends paid in HYP1's eighth year were its 5.4p interim for 2007-2008 (paid February 2008) and its 10.4p final for 2007-2008 (paid September 2008), totalling 15.8p; in the following year, the corresponding figures were 5.4p and 1.1p, totalling 6.5p, a 59% cut to the year's dividend. Meanwhile, the dividends paid by Lloyds in HYP1's eighth year were its 2007 final of 24.7p (paid May 2008) and its 2008 interim of 11.4p (paid October 2008), totalling 36.1p; in the following year, Lloyds paid no dividends at all, a 100% cut. So both cuts were bad (obviously due to the "Great Financial Crisis"), but the cut by Lloyds was considerably worse than the cut by BT, wasn't it?
The answer for HYP1 is that no, it wasn't. HYP1 had 5682 BT shares and 702 Lloyds shares a bit after the start of its eighth year, figures that remained unchanged and rose to 1196 respectively by a bit after the end of its ninth year (*). So its dividends from BT reduced from 5682 * 15.8p = £897.76 to 5682 * 6.5p = £369.33, while those from Lloyds reduced from 702 * 36.1p = £253.42 or possibly a bit more (**) to nothing. So the impact of the BT dividend cut was a £528.43 drop in income received, around twice the ~£253.42 impact of the Lloyds dividend cancellation...
So viewed somewhat abstractly as a percentage drop in the dividends paid by the two companies, independent of the portfolio they're in, the Lloyds dividend cancellation back then was considerably worse than the BT dividend cut, but viewed in terms of their practical effects on HYP1's income, the BT dividend cut was considerably worse than the Lloyds dividend cancellation... The basic explanation of that discrepancy is that at the start of HYP1's eighth year, BT was
much more heavily income-weighted in HYP1 than Lloyds:
its year 7 annual review reveals that BT had just produced 19.3% of its annual income (£858 out of £4,452), compared with 5.5% (£244 out of £4,452) for Lloyds.
I.e. how badly any particular dividend cut affects a HYPer depends quite a lot on the company's income weighting in their HYP (i.e. its contribution to the HYP's total income as a percentage of that total income): the larger the income weighting, the worse the effects of any dividend cut by that company on your income. This can easily make even a quite moderate dividend cut by a highly income-weighted holding just as bad as or even worse than those of complete dividend cancellation by a lightly income-weighted holding. That IMHO makes Arb's question "
How far would you trust to one company to provide for you?" an important one for any HYPer to answer - though note that there's no sensible general answer that applies to all HYPers, only individual answers specific to each HYPer that depend (among other things) on how big an overall income reduction they can take in their stride and how risk-averse they are by temperament.
As it happens, my own answer is in the region of 6%: I generally don't top up holdings that are contributing more than 5% of my HYP's income, start to consider trimming holdings that rise to contributing more than 6%, am pretty likely to decide to trim them before they rise to contributing more than 7%, and am practically certain to trim them before they rise to contributing more than 8%. That doesn't mean that 6% is the right answer for other HYPers - and indeed, I would be fairly certain that for quite a lot of HYPers, it isn't the right answer. My reason for that certainty is that it's impossible to attempt to make all income weightings less than 100% divided by your number of holdings (since that would lead to the nonsensical conclusion that the total of the income contributions of all the holdings was less than the portfolio's total income), and pretty impractical to attempt to make them all less than a figure a bit above that (as income weightings would very frequently be pushed above the limit by routine dividend rises). In practice, I wouldn't try to use an answer less than 150% divided by the number of holdings - so I wouldn't regard "
up to 6% of the HYP's income" as a sensible answer to "
How far would you trust to one company to provide for you?" for HYPs containing less than 25 holdings.
(*) Sources for these share counts are
here and
here.
(**) I cannot be entirely certain of the full explanation for the increase in the Lloyds share count between those posts' dates of 27/01/2007 and 30/12/2009, as pyad had left TMF in early 2008 and only gave very perfunctory details of what had happened to HYP1 while he was away when he returned in late 2009. One increase was definitely due to the company's
1-for-40 bonus issue in May 2009, but that can only be a small part of the overall increase. Other very likely ones are reinvestments of the lapsed-entitlements payment from the company's
compensatory open offer in June 2009 and the lapsed-rights payment from its
rights offer in December 2009 - both of those would have fully in accordance with HYP1's general policy at the time of reinvesting corporate action proceeds in the holding that produced them. My memory is that these three corporate actions could reasonably account of the entirety of the increase in the number of Lloyds shares in HYP1 - that memory is probably a decade or more old, so not necessarily reliable, but I've just done a rough calculation that indicates the same (***). So I'm reasonably certain that all the increases happened in 2009, after Lloyds had ceased paying dividends, but not quite certain that a small part of the overall increase wasn't due to a small top-up with takeover proceeds in 2008. There were three such takeovers, of Resolution in February 2008, Scottish & Newcastle in April 2008 and Alliance & Leicester in October 2008; the bulk of their proceeds were reinvested in new holdings of Pearson and Persimmon, but some was put into some small top-ups. I don't think those top-ups included Lloyds, but cannot be absolutely certain they didn't - if they did, the Lloyds dividends for HYP1's eighth year could have been a bit more than the £253.42 calculated above.
(***) The rough calculation actually indicated a rise to around 1275 shares, but trading costs and reinvestment at somewhat worse prices than the calculation assumes could easily reduce that to 1196 shares.
Gengulphus