The Lemon Fool

"it does occasionally move into view for a HYPer, annualised dividend growth of 5% odd which is nice"

Reading this comment on the thread about Diageo's return of capital programme triggered thoughts about the old debate over lower yielding shares with relatively high dividend growth and their value within an income portfolio. Having nothing better to do, and with no particular agenda, I've crunched a few numbers that may or may not be of interest to HYPers. I doubt the results will be particularly revelatory to most, but may give a little food for thought.

What I thought I'd do is take a range of FTSE 100 shares with varying current yields and 5 year compound annual growth rates (CAGR), assume the growth rates remain stable, and project future income on that basis. I added the data for City of London IT (CTY) as it seems to be a popular comparator for HYPs. I must stress that this wasn't a particularly rigorous exercise, and I rounded some of the source data but I'm confident that it gives some reasonably reliable results for comparing relative outcomes in general. (Data taken from dividenddata.co.uk).

Companies:


Assuming £100 invested in each, the growth rates lead to these annual dividends:



The times taken for the annual payouts to catch up with the fixed £6.00 of GSK are as follows:

6 years: CTY
7 years: NG.
11 years: REL and ULVR
12 years: SVT
13 years: BA.

(As it prompted this whole thing, Diageo, with a current yield of 2.1% and a CAGR of 5%, would exceed £6.00 in year 23)


The total (cumulative) dividend paid out after purchase at the same intervals:



The times taken for each holding to reach a total payout in excess of its £100 initial cost are as follows:

15 years: CTY
16 years: NG.
17 years: REL and GSK
18 years: ULVR, SVT and BA.

(Diageo, at current yield and growth would take 26 years)

I will leave you to make what you will of these figures (if anything!). FWIW, my own view is that if a HYP is intended for immediate income, then a generous starting yield with at least some dividend growth (RPI equivalent or more) clearly does seem the way to go. However, If planning for the very long term (> 20 years), then other options may be worth considering. (Of course, we are talking about "natural" income here and not how to optimise the size of a pot through total returns...)

Anyway, this was just a casual exercise on an idle Sunday so please don't be too critical - I'm simply sharing it because I thought it might be of some interest and maybe engender some discussion...

Cheers, CP

Very nice to see you have done in a more organised way something I have occasionally played with on the back of an envelope.
It confirms that at my age of 76, with let's say circa10 years of active investing left before I simple cannot be bothered any more, it makes more sense to buy a moderately high yield than a low one (other things being equal).

Others, I know have spotted this and gone down the prefs route or similar.

Arb.

From the top of my head, the CAGR of dividends for IMB and WPP was attractive....until both were slashed.

WPP
https://www.dividenddata.co.uk/dividend ... y?epic=WPP

IMB
https://www.dividenddata.co.uk/dividend ... y?epic=IMB

monabri wrote:From the top of my head, the CAGR of dividends for IMB and WPP was attractive....until both were slashed.

WPP
https://www.dividenddata.co.uk/dividend ... y?epic=WPP

IMB
https://www.dividenddata.co.uk/dividend ... y?epic=IMB

I remember WPP only too well! I'd been on the look out for buying this doyen of a company for maybe five years or more, but the yield was always quite low. Low because (presumably) it was seen as a reliable stalwart and it was the best in class.
There came a time when the yield popped into HYP territory, so I took my chance. About two weeks later Sir Martin Sorrell had his little problem, and WPP had a bigger problem.

I'm not sure what the lesson is, (become a chart watcher? ) except that nothing is forever - even though we want eternity holdings, they don't exist.

Arb.

Very interesting thread.

A HYP with 15 GSK's would have a great income......that declined in real terms every year!

It might take 11 years for the tortoise (ULVR) to overtake the hare (GSK), but during those 11 years it would provide an increasing income.

If your lifestyle is constant for decades, then you need inflation proofing of some sort, which the ULVR's and DGE's of this world provide.
(Unless you want to bother with reserving income each year.)

If your income is tight, and your life expectancy not too long, then GSK's might be a better option.

FD

At over 80 I couldn’t agree with you more Arb - a received dividend is real money in ones pocket now, a valuation is only as good as pie in the sky, so its jam today please to continue the food analogy.

funduffer wrote:Very interesting thread.

A HYP with 15 GSK's would have a great income......that declined in real terms every year!

It might take 11 years for the tortoise (ULVR) to overtake the hare (GSK), but during those 11 years it would provide an increasing income.

If your lifestyle is constant for decades, then you need inflation proofing of some sort, which the ULVR's and DGE's of this world provide.
(Unless you want to bother with reserving income each year.)

If your income is tight, and your life expectancy not too long, then GSK's might be a better option.

FD

If your income is tight, is about right. The difference between the pension pot needed for a lower yielder and higher yield is very significant - I couldn't have retired ten years ago had I invested in ULVR and waited for the jam tomorrow to build up.

Luckily, I was in the position where, although tight, I could survive on a healthy mixed of investments.


Arb.

Jolly interesting.
Like Arb, I had only made brief calculations before opting for an HYPish portfolio heavy in Fixed Interest with its - at that time - relatively high yield.
The compelling metric for me was the lonnnng time before the growing but low yielder overtook the cumulative income of the static but high yielder.

In a way, the results flatter CTY; post pandemic, we won't be seeing a 4% CAGR.
On the other hand, CTY has not cut its divi whereas many HYP sturdies have, and in this respect I would put the Dividend Hero ITs in a separate box, slow growth but reliable.

As commented, a low but rising divi is a bet on longevity. I bought into ULVR recently, in preference to more yieldy options. Aged 70, I must imagine that I have another 18 years

V8

CryptoPlankton wrote:Anyway, this was just a casual exercise on an idle Sunday so please don't be too critical - I'm simply sharing it because I thought it might be of some interest and maybe engender some discussion...

I think to assume a CAGR of 10% for RELX and even 6.5% for ULVR over 25 years is probably unsustainable, but who knows. A "sawtooth" pattern might be a more interesting model ie. to build in periodic dividend cuts. I've seen plenty of those already in my first 12 years ...

So it could all revolve around ones age and life expectancy - but I contradict that with my most recent purchases being both GSK and SGRO, so perhaps it depends on ones mood?

moorfield wrote:
I think to assume a CAGR of 10% for RELX and even 6.5% for ULVR over 25 years is probably unsustainable, but who knows. A "sawtooth" pattern might be a more interesting model ie. to build in periodic dividend cuts. I've seen plenty of those already in my first 12 years ...

Well, it is only illustrative of course, and I did try to pick companies with fairly consistent records for that reason. As it happens, ULVR's 15 year CAGR (the longest period I can find) is exactly 6.5% and REL's is 8.2% - so not too unrealistic?

Anyway, it's interesting to see how people still value the likes of ULVR above, say NG, which gives over 50% more income while still keeping up with inflation (for now!). ULVR doesn't catch up for 14 years and will still have returned less in year 21! (Of course, there are other good reasons to hold it - I do.)

As discussed, what portfolio yield and growth you should aim for really depends on (amongst other things) your time horizons.

Arborbridge wrote:
I remember WPP only too well! I'd been on the look out for buying this doyen of a company for maybe five years or more, but the yield was always quite low. Low because (presumably) it was seen as a reliable stalwart and it was the best in class.
There came a time when the yield popped into HYP territory, so I took my chance. About two weeks later Sir Martin Sorrell had his little problem, and WPP had a bigger problem.

Arb.

Looks like I bought WPP at the same time as you

RC

I think what is in part missed by this type of analysis is what the dividend may signal. A company with a lengthy track record of above inflation dividend increases is probably doing something right, compared to a company struggling to maintain the same dividend over the same period which may well be doing less right. How long before the latter finally reaches the point where the board decides it needs to 'rebase' the dividend to a new lower level where it can then show what a great job they are doing by starting to increase the dividend again? Shell comes to mind.

CryptoPlankton wrote:Anyway, it's interesting to see how people still value the likes of ULVR above, say NG, which gives over 50% more income while still keeping up with inflation (for now!). ULVR doesn't catch up for 14 years and will still have returned less in year 21! (Of course, there are other good reasons to hold it - I do.)

As discussed, what portfolio yield and growth you should aim for really depends on (amongst other things) your time horizons.

I did a similar exercise here with preference shares see viewtopic.php?f=31&t=556 (5 yrs ago now, eek )

For last 10 years I have been measuring portfolio income against a target line which extrapolated to my target retirement date, early 2030s, gives me - roughly - a higher rate tax payers' income and at an overall yield of 5%+ will almost certainly put the portfolio above the pension LTA. By then I may well have moved from individual HYPish shares to dull steady collectives.

Wizard wrote: How long before the latter finally reaches the point where the board decides it needs to 'rebase' the dividend to a new lower level where it can then show what a great job they are doing by starting to increase the dividend again? Shell comes to mind.

As does recently IMB, VOD, SSE and perhaps next year GSK v2.0

(A little O/T - that brings us back to an idea I've suggested here before of not buying or topping up "too high" yields relative to the FTSE or other benchmark. I now try to avoid topping up < CTY or > 2* CTY, which gives me a pretty narrow range to work with.)

With my bold:

CryptoPlankton wrote:... What I thought I'd do is take a range of FTSE 100 shares with varying current yields and 5 year compound annual growth rates (CAGR), assume the growth rates remain stable, and project future income on that basis. I added the data for City of London IT (CTY) as it seems to be a popular comparator for HYPs. I must stress that this wasn't a particularly rigorous exercise, and I rounded some of the source data but I'm confident that it gives some reasonably reliable results for comparing relative outcomes in general. (Data taken from dividenddata.co.uk).

It seems to me that just as important a question as "When do you want your jam?" is "How far into the future are you comfortable making that assumption that growth rates remain stable?", to which my answer is less than 10 years even if I can't find any indication that they won't remain stable...

See viewtopic.php?p=412730#p412730 for something I posted on the Diageo thread that expands on that point, and that might equally have gone on this one.

Gengulphus

When one is old even making new investments getting a 5% dividend doesn’t make much sense unless one wants to die rich - that is apart from the thought that one may be protecting oneself from inflation, so one may as well live off the capital rather than taking any investment decisions/risks.But no challenge and no fun, and so boring.

Matchless wrote:When one is old even making new investments getting a 5% dividend doesn’t make much sense unless one wants to die rich ...

Given the choice of dying rich and its opposite, I know which I prefer! ;-)

Gengulphus

Gengulphus wrote:

Matchless wrote:When one is old even making new investments getting a 5% dividend doesn’t make much sense unless one wants to die rich ...

Given the choice of dying rich and its opposite, I know which I prefer! ;-)

Gengulphus

I know what you are saying of course. But there was a popular bestseller in the 1990s called "Die Broke" by Stephen Pollan that advocated exactly that i.e. making a financial plan that ended up with you dying broke:

https://www.getrichslowly.org/die-broke ... l-the-end/

Not saying I buy into it. But I can see the argument that anything left over when you expire has, in a sense, been wasted. Or rather, that there were years of working and saving and doing without that ended up not being necessary.

Matchless wrote:When one is old even making new investments getting a 5% dividend doesn’t make much sense unless one wants to die rich - that is apart from the thought that one may be protecting oneself from inflation, so one may as well live off the capital rather than taking any investment decisions/risks.But no challenge and no fun, and so boring.

I take it you don't have children