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FTSE 100 as HY portfolio for the lazy?

General discussions about equity high-yield income strategies
Breelander
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Re: FTSE 100 as HY portfolio for the lazy?

#184574

Postby Breelander » December 3rd, 2018, 9:04 pm

Gengulphus wrote: I haven't yet confirmed just how the FT actuaries figure is calculated...


Section 4, the formula is in section 4.1.3

https://www.ftse.com/products/downloads ... o_Calc.pdf

Gengulphus
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Re: FTSE 100 as HY portfolio for the lazy?

#184646

Postby Gengulphus » December 4th, 2018, 9:34 am

Breelander wrote:
Gengulphus wrote: I haven't yet confirmed just how the FT actuaries figure is calculated...

Section 4, the formula is in section 4.1.3

https://www.ftse.com/products/downloads ... o_Calc.pdf

Thanks - a document I'd previously encountered, but the reminder of where to find it is definitely helpful!

The bits that are important here are actually in sections 4.1.1 and 4.1.2, since the point I was making was about the source for the dividend values used in the formula, not the formula itself. The formula itself is of some interest, though, because a detailed look at it and the description of its inputs reveals that it isn't exactly a description of a market-cap-weighted average, but more accurately a description of a market-cap-adjusted-for-free-float-weighted average. If dividenddata is using a market-cap-weighted average, that difference in the weighting of the average could account (or partially account) for some small discrepancies between the FTSE100 index values calculated by dividenddata and by the FT actuaries.

But quoting sections 4.1.1 and 4.1.3, with the crucial bits emboldened by me:

4.1.1 Dividend yield is a widely used measure of the income return on a stock or index. In calculating index dividend yields, FTSE applies a free float adjustment to the number of shares in issue for each constituent. The dividend used to calculate the yield is the dividend declared by the companies, i.e with no allowance for any tax credit.

4.1.2 Dividends for the previous 12 months are included in the dividend yield calculation from the XD date.
If the dividend is declared in a currency other than sterling, the 4pm WM/Reuters Closing Spot Rate on the day before the dividend is XD is used to convert the dividend into sterling unless the company announces a sterling equivalent which is used instead.

So each declared dividend enters the calculation when it goes ex-dividend, and leaves it again 12 months later (*). The dividenddata calculation is described in the sidebar of https://www.dividenddata.co.uk/dividend ... et=ftse100 as "This is based on the current share price and the total dividends declared in the previous 12 month period. In general, the dividend declaration date is used as the cut off date", which says that for it, a similar rule applies but with the critical date being when the dividend is declared, not when it goes ex-dividend. And I've confirmed that this really is the case - Itsallaguess's December dividends post allows one to find some FTSE100 companies that have a declared-but-not-yet-ex-dividend dividend and one can then check the details - for instance, it shows Royal Mail as having a dividend that goes ex dividend December 6th (this Thursday), https://www.dividenddata.co.uk/dividend ... et=ftse100 shows Royal Mail as having a yield of 7.70%, https://www.dividenddata.co.uk/dividend ... y?epic=RMG shows that 7.70% is the result of dividing a dividend total of 24.3p that includes that dividend by a price of 315.4p, https://www.dividenddata.co.uk/dividend ... y?epic=RMG shows that if one instead takes dividends that have gone ex dividend in the last 12 months, the dividend total is a bit lower at 24.0p and so the calculated yield using the same share price is also a bit lower at 7.61%. I can't confirm that that those are the figures the FT actuaries use with the same sort of detailed check of their calculations, but they are what the document says they use and that's probably as good as we're going to get...

So basically, it looks as if the dividenddata and FT actuaries figures are calculated from different dividend figures when the company has a declared dividend that hasn't yet gone ex-dividend and that dividend hasn't been held compared with the previous year's equivalent payment, and quite possibly the weightings of the averages they use are subtly different as well. So no real surprise that they result in slightly different FTSE100 yield figures, once one has dug into the matter deeply enough!

(*) As an aside, I do wonder whether that's to be taken absolutely literally. The reason is that the ex-dividend dates for a dividend and the equivalent dividend in the following year are seldom exactly 12 months apart, because they're both typically on Thursdays due to LSE rules / strong guidelines. That means that they are most commonly 364 days apart, causing them to drift towards earlier dates in the calendar by one or two days per year, next most commonly 371 days apart once every few years to correct for that drift, with other gaps less likely but possible if a company wants to materially alter its payment schedule. So it is not uncommon for say a final dividend to go ex-dividend and there to be a day or two when both it and the previous year's final have gone ex-dividend in the 12-month period, causing a spike in the company's contribution to the FTSE100 yield figure calculated... I'm a bit uncertain whether the actual calculation performed uses a not-quite-so-obvious interpretation of "the previous 12 months" to adjust for this, or just lets the spikes get into the final figure because they're too small to worry about - but it probably doesn't matter much!

Gengulphus

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Re: FTSE 100 as HY portfolio for the lazy?

#184650

Postby StepOne » December 4th, 2018, 10:26 am

toofast2live wrote:To be crystal clear; THERE IS NO WORK involved in the messianic PYADIC HYP. You do nothing. Never. Unless confronted by corporate decisions. Why there is a 20 year discussion board on the subject is one of the Oxymoronic delights of life...


I think even with a corporate action you could do nothing - just accept the default outcome.

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Re: FTSE 100 as HY portfolio for the lazy?

#184696

Postby Lootman » December 4th, 2018, 1:33 pm

StepOne wrote:
toofast2live wrote:To be crystal clear; THERE IS NO WORK involved in the messianic PYADIC HYP. You do nothing. Never. Unless confronted by corporate decisions. Why there is a 20 year discussion board on the subject is one of the Oxymoronic delights of life...

I think even with a corporate action you could do nothing - just accept the default outcome.

I believe that there is always a default option for any corporate action, and it's probably my most common choice. But there are times when you might not want that. The default may create a tax event that you wish to avoid. Or it may lead to another holding that you do not want, or that does not fit into the strategy your are running.

So for a HYP the yield of the new holding may be too low for you. Or it may be a foreign security that you do not wish to have. In an ISA it may be a security that you cannot hold in an ISA. And so on.

Then there are some corporate actions where your holdings splits into 2 or 3 different securities, such as is currently planned with United Technologies, which can be messy.

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Re: FTSE 100 as HY portfolio for the lazy?

#184704

Postby StepOne » December 4th, 2018, 2:13 pm

Lootman wrote: In an ISA it may be a security that you cannot hold in an ISA.


Yes it's true that the default option might not be the best option for you. I think the general HYP point is that investors frequently make bad decisions, so the question is whether over time taking the default option would be better or worse than the average decision-making of the average investor. Based on my own decision-making over the years, it's a close run thing !!

(off topic e.g. at one time I chose to subscribe to Aminex warrants priced at 20p. Since these couldn't be held in an ISA I had to open a standard share-dealing account with my ISA provider, which cost me £5 a quarter. The warrants got extended, but eventually expired, and it took me a long time to get around to closing this account - at the cost of a sixty pound account closure fee! Overall it cost me the best part of £200 quid to hold on to those worthless warrants. I don't know what the default option was for that, but it can't have been any worse than what I did!)

Cheers,
StepOne

Gengulphus
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Re: FTSE 100 as HY portfolio for the lazy?

#184740

Postby Gengulphus » December 4th, 2018, 5:22 pm

Lootman wrote:
StepOne wrote:
toofast2live wrote:To be crystal clear; THERE IS NO WORK involved in the messianic PYADIC HYP. You do nothing. Never. Unless confronted by corporate decisions. Why there is a 20 year discussion board on the subject is one of the Oxymoronic delights of life...

I think even with a corporate action you could do nothing - just accept the default outcome.

I believe that there is always a default option for any corporate action, and it's probably my most common choice. But there are times when you might not want that. The default may create a tax event that you wish to avoid. Or it may lead to another holding that you do not want, or that does not fit into the strategy your are running.

So for a HYP the yield of the new holding may be too low for you. Or it may be a foreign security that you do not wish to have. In an ISA it may be a security that you cannot hold in an ISA. And so on.

Then there are some corporate actions where your holdings splits into 2 or 3 different securities, such as is currently planned with United Technologies, which can be messy.

Yet another case is when the default outcome involves getting a clearly worse financial outcome than taking the right action would. The classic case of that is many open offers (not all of them, and not rights issues despite their apparent similarities). It happens if the subscription price of the open offer is a fair amount below the share price, the open offer is basically certain to go through successfully, one's holding is big enough (which usually just means not very small) and there's no compensation to the shareholder for failing to take up their entitlement to subscribe (there seldom is, but I've encountered one compensatory open offer that I definitely remember (Lloyds in 2009) and I vaguely recall encountering another in passing since, though I can't remember any details).

The point there is that the default option for such an open offer is to do nothing and so let one's entitlement lapse without compensation. But one could sell the number of shares one is entitled to subscribe for at the current share price, take up one's entitlement at the lower subscription cost, and end up ahead on cash and equal on everything else, provided only (a) that the open offer does go through and (b) that one has enough entitlements to make the difference in price add up to more than the selling commission.

Or a similar set of actions is to sell enough shares at the higher share price to pay the subscription price on all your entitlements and use the proceeds to subscribe for all of those entitlements, so ending up with more shares and equal on everything else, subject to the same two conditions.

In essence, entitlements in a non-compensatory open offer have a financial value, but only if you use them, so letting them lapse will not be a good option, as long as the risk and costs of using them are sufficiently small.

Gengulphus

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Re: FTSE 100 as HY portfolio for the lazy?

#185316

Postby eventide » December 7th, 2018, 11:14 am

The FTSE100 dividend futures contract looks like it will to settle for Dec20 2018 at 309.5 index points, which would imply a yield of 4.54% based on a 6818 FTSE at time of writing.

This contract (with expiries out to 2024) was designed to allow equity derivative book to hedge dividend exposures from writing longer dated forward and option contracts, so it really rather ought to deliver an accurate representation of actual dividends received on a basket of stocks comprising the FTSE 100.

Futures prices for following years can be traded at or around:

2019: 313
2020: 303
2021: 278

These prices are not forecasts, just levels at which you could hedge a long or short FTSE100 dividend exposure and reflect supply and demand for that risk position.

By way of comparison, in around 1999/2000 when the FTSE was not a million miles away from these levels, there were approximately 153 index points of dividends (although the dividend contract didnt exist at the time)


Anyway, I think given most of 2018 is in the book, the 12m trailing dividend yield quotation of 4.54% based off 6818 is a reasonable way of stating it.


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