When do you stop chasing yield?

[Davidsb]

Hi Itsallaguess -

...I believe the Digital Look forecast-yield figures are based on a aggregate of those analyst forecasts...

I believe the DL forecast-yield figures are based on the average of selected analysts' forecast dividend values, divided by the current* share price - this means of course that said analysts are not making two forecasts (future dividend and future share price) but one.

* I also believe that the DL forecast-yield figures are only recalculated once per week (on Monday mornings) - thus share price movements during the week do not result in an updated forecast-yield percentage. Thus (for example) the UBM forecast yield of 3.1% is based on Monday's opening share price of 740.5p and the forecast dividend of 22.87p. Today's closing share price of 880.5p would give a forecast yield of 2.6%, but it is still showing as 3.1%.

[moorfield]

Answer. Don't chase yield in the first place. I think your two times the City of London yield is too high. Anything more than say 50% above the FTSE100 yield is about as high as I would go. That would be anything much more than around 6%. That is not hard and fast because there might be circumstances where you might go higher but you need a good reason.

Quite understood Dod. I'm looking to put more "risk management" around my buying/topping up in future so need to start somewhere. Looking back on my CLLN history I see I bought some in every calendar year since 2010. With such rule applied retrospectively, I would (probably) have stopped buying more CLLN from 2014 onwards.

[moorfield]

Does this mean that you would question SSE as its latest div yield is 6.8% and future yield is 7.4% (according to Digital Look - or whatever its new name is)?

I assume a companies latest announced and/or paid dividend until told otherwise, and avoid "forecasts" of any kind.

In the case of SSE that's 92.30p / 1342p = 6.9% today.

Were the yield to start drifting higher than 2*CTY I would stop buying.

(As far as SSE is concerned, it is not a buy in my portfolio currently anyway, due to a separate control which limits the collective income of my 3 Utilities holdings.)

[Dod101]

Itsallaguess

I suspect based on your previous posts that your are being obtuse but the difference is as follows.

Assumption is a supposition'; a forecast is a prediction (crystal ball stuff)

I simply assume, suppose or take for granted that the monetary value of my dividends will be at least the same as the previous year. We cannot spend yield; only cash.

But my point is that forecasting a yield is pretty well meaningless because you need to know the share price on which it is based as well as take a guess on the monetary dividend. In the case of SSE, since in recent years the dividend has not increased by more than around 3% or so, it means that a forecast yield is predicting a dividend increase of around 6% which seems unlikely or a fall in the share price which would not be good news.

Dod

[moorfield]

It's all well and good saying one should not top up at a high yield, but isn't the logic of this that one should be selling at those levels?

I'm happy to hold what I already have bought - CNA being the pertinent example.

This train of thinking is about where the next batches of freshly minted cash goes, in practice I'm saying I'll be restricting the yield range to 3.7%-7.4% (*) in future.


(*) Those numbers are a little out of date btw, I haven't accounted for CTY's latest quarterly dividend yet.

[Itsallaguess]

I simply assume, suppose or take for granted that the monetary value of my dividends will be at least the same as the previous year.

Which is a forecast....

I'm not being obtuse - I'm trying to highlight that your dismissal of other forecasts, made by people in direct contact with these companies and discussing their current projections, does not alter the fact that you are making a forecast of your own with the above assumption....

Cheers,

Itsallaguess

[Itsallaguess]

But my point is that forecasting a yield is pretty well meaningless because you need to know the share price on which it is based as well as take a guess on the monetary dividend.

No, this isn't the case with the Digital Look forecasts, as very helpfully explained by Davidsb in his earlier post.

The only thing being forecast is the future dividend amount, which is exactly the same as your own forecast except for the fact that DL is looking ahead, rather than back.....

Cheers,

Itsallaguess

[moorfield]

In general, be suspicious of very high yields, but where to draw the line is difficult.

Indeed so. The thinking is to try and apply some relative rather than fixed measure as yields ebb and flow.

[Itsallaguess]

I believe the DL forecast-yield figures are based on the average of selected analysts' forecast dividend values, divided by the current* share price - this means of course that said analysts are not making two forecasts (future dividend and future share price) but one.

* I also believe that the DL forecast-yield figures are only recalculated once per week (on Monday mornings) - thus share price movements during the week do not result in an updated forecast-yield percentage. Thus (for example) the UBM forecast yield of 3.1% is based on Monday's opening share price of 740.5p and the forecast dividend of 22.87p. Today's closing share price of 880.5p would give a forecast yield of 2.6%, but it is still showing as 3.1%.

Thanks for fleshing out that detail, as it's important if the forecasts are being dismissed due to a lack of understanding of this process.

Cheers,

Itsallaguess

[ZipserSir]

But my point is that forecasting a yield is pretty well meaningless

I might be wrong, but I don't think anyone forecasts yield; forecasts relate to dividend amounts only.

A forward yield can be derived from the forecast dividend and a share price, but it is a calculation (rather than a forecast), which is why you should only be interested in the forecast dividend.

[Itsallaguess]

I also believe that the DL forecast-yield figures are only recalculated once per week (on Monday mornings) - thus share price movements during the week do not result in an updated forecast-yield percentage.

Thus (for example) the UBM forecast yield of 3.1% is based on Monday's opening share price of 740.5p and the forecast dividend of 22.87p.

Today's closing share price of 880.5p would give a forecast yield of 2.6%, but it is still showing as 3.1%.

Apologies, I meant to also cover this issue on an earlier post, but yes, short-term fluctuations like the 12% rise seen in UBM today can sometimes cause short-term blips with the DL forecast-yield data, and there is of course a risk to putting too much emphasis on one external data-point for single companies using this type of data.

This is why I prefer to always take an overall portfolio-view of these yield-forecasts, where of course with a decent amount of diversification a single data-point will have a relatively minor influence on the overall portfolio projections, and individually each forecast becomes just part of the overall forecasting noise.

So we shouldn't dismiss the potential usefulness of that portfolio-level forecast, which as I've said in the past have been a good guide to the level of income received in the forthcoming 12-month period, to a degree of accuracy that I'm really quite happy given the work involved in the whole process.

Cheers,

Itsallaguess

[Dod101]

Itsallaguess

If Davidsb's explanation is correct then the forecast yield for SSE of 7.4% is ridiculous. That would mean a dividend increase of 8.8% to get from 6.8% to 7.4% based on today's price.

And since I do not sit down and forecast anything I cannot magically find myself with a forecast when I just assume the same again unless your lexicon is different from mine.

Dod

[Itsallaguess]

And since I do not sit down and forecast anything I cannot magically find myself with a forecast when I just assume the same again unless your lexicon is different from mine.

It's clear that you will refuse to admit that 'assuming' a company will at least pay out the same dividend in the next 12 month period as it did so in the previous year is, in itself, an act of 'forecasting'.*

So, let me come over to your side of the road then, and say that I too am only making an 'assumption'....

I'm 'assuming' that the analysts making the forecast for the next 12 month's dividend are generally going to be correct......

Cheers,

Itsallaguess

* even though it is.......

[Dod101]

Well let's leave that there. It is a discussion/argument about semantics in the end I suppose. Call it unresolved.

The real point is that it seems highly unlikely to me that SSE is suddenly going to find the capacity to increase the dividend by 8.8% in its current year based on what it has done in recent years and its recent pronouncements.

Do you believe that forecast is realistic? I don't.

Dod

[Itsallaguess]

The real point is that it seems highly unlikely to me that SSE is suddenly going to find the capacity to increase the dividend by 8.8% in its current year based on what it has done in recent years and its recent pronouncements.

Do you believe that forecast is realistic? I don't.

Well, on that we can agree, Dod....

I think in the case of the SSE forecast of 7.4%, I suspect the 7.4% forecast yield figure is being generated by using the 2019 year-end dividend prediction of 97.37p, which when divided into the Monday share price of around 1321p, would give a figure of 7.37%, which looks to be then rounded to the given 7.4% forecast yield figure.

We've seen these types of anomalies before, and whilst they might sometimes be presented as a reason not to trust these types of forecasts, I will maintain that to do so would be akin to holding Carillion up as a reason that HYP's can't work.....

Single data-set issues do not mean that portfolio-level data can't still be very useful and productive....

Cheers,

Itsallaguess

[Bouleversee]

Good grief. If SSE is yielding 7.4% then I definitely would not be buying or topping up. In fact I will be keeping a very close eye on it because that is uncomfortably high and I am not sure can be discounted solely on political grounds.

Fortunately my newspaper (The TImes) says the yield is a mere 6.8%. That makes me feel slightly better but not much. Presumably 7.4 % is somebody's forecast. I never look at forecasts.

Dod

The Times always gives historic yields. Dividend Data gives a current yield of 6.88% for SSE which is the sum of the dividends declared in the past 12 months (92.3p, which includes the interim to be paid on March 16) divided by the current share price, which seems about as close as one can get. SSE
has not increased its dividends dramatically (+ 1.13% yr to Mar. 2016, + 2.13% yr. to Mar. 2017) but its share price has fallen considerably, which increases the current yield. The P/E ratio, acc. to The Times, is 9.9 which is not excessively high so hopefully the dividend can be maintained. I personally prefer to have my capital value maintained or hopefully increased in exchange for a lower dividend and am rather nervous about future plans and outcomes. Sorry, Ian, but II don't derive much comfort from the statement you quoted. I expect Carillion said much the same thing.

I am in rather a dilemma as it is the last of my late husband's share holdings awaiting sale or transfer. I already have quite a large holding in my ISA and didn't really want more as I don't feel terribly confident about them long-term and would have had to bed-and-ISA with attendant costs if I had kept them so I had been hanging on in the hope that the price would recover to the probate value but it's some way off that. They are x-d tomorrow but the estate will pay less tax than I would have to if I held them outside an ISA . No doubt the price will drop proportionately so I will dither for a bit longer and hope they go up again. Or I might just decide to draw a line which I should have done ages ago.

[JamesMuenchen]

OK. How do soothsayers divine a forecast yield anyway? Considering that SSE has only just about managed an RPI increase for the last few years, somebody must be expecting a further drop in the share price.

If I were to make a forecast of yield, well I wouldn't. I might make a stab at the actual likely dividend in monetary terms but then I can see no useful purpose to that so have never bothered. Forecasting the yield is just silly to my mind because you need to make two guesses. The first is the actual dividend in monetary terms and the other is the likely share price. The likelihood of getting both of those right is virtually nil and thus the 7.4% forecast is worth nothing.

Forecast yield is the expected dividend (based on company guidance) divided by the current share price.

[Arborbridge]

OK. How do soothsayers divine a forecast yield anyway? Considering that SSE has only just about managed an RPI increase for the last few years, somebody must be expecting a further drop in the share price.

If I were to make a forecast of yield, well I wouldn't. I might make a stab at the actual likely dividend in monetary terms but then I can see no useful purpose to that so have never bothered. Forecasting the yield is just silly to my mind because you need to make two guesses. The first is the actual dividend in monetary terms and the other is the likely share price. The likelihood of getting both of those right is virtually nil and thus the 7.4% forecast is worth nothing.

Arb is correct and that is why I will be keeping a close watch on SSE for the next several months, but an election is not due until 2021 isn't it? But you never know and Corbyn will I think by that time have blown it.

Dod

You've made a fundamental error here, as people have pointed out. The yield is based on today's price, and no one is trying to guess what the price will be in a year's time - that would be foolhardy. The forecast given is what your dividend per share might be (NOT the yield) and based on that one can see how much bang for the buck one will receive if it turns out as forecast. Sometimes forecasts are lower than last year (e.g. SBRY) and that is just as useful to know. Frankly, what happened last year is, so last year! and on balance the information less useful than the latest available.
Analysts concensus are based on guidance from the company - which naturally could be flaky - but that guidance is likely to be far better informed than any guess you or I might make as outsiders, so I'll take it, thanks.

Corbyn will I think by that time have blown it. Aha! So you do make forecasts

Arb.

[Raptor]

Moderator Message:
The yield discussion is now going round in circles. Can we now return to the OPs post. Thanks, in advance. Raptor.

[Arborbridge]

Well let's leave that there. It is a discussion/argument about semantics in the end I suppose. Call it unresolved.

The real point is that it seems highly unlikely to me that SSE is suddenly going to find the capacity to increase the dividend by 8.8% in its current year based on what it has done in recent years and its recent pronouncements.

Do you believe that forecast is realistic? I don't.

Dod

It's not unresolved, and one cannot leave it at a point were you've apparently made another error (though forgive me if I've missed something in the thread).

Nobody is suggesting the dividend is going to increase by 8.8% - well, AFAIK. The concensus forecast increase in dividend for the year to March 2018 is 3.5% and for the following year to March 2019 is only 3.0%.

So where did you see 8.8%?