HYP Fallacy

[MrFoolish]

A high level of income is taxed, but a high level of growth is not, at least not until sold and then not at all via CGT if you pop your clogs before then.

Surely you must be aware that most people stick their HYP shares in ISAs?

[Arborbridge]

One's tolerance of higher yields also depends on one's age. It takes a long time for a rising divi with a 4% start to cumulatively overtake a 6% static.

V8

If you need the income then that makes sense. However many older folks may have too much money (insofar as that is possible). In which case their primary concern may be the minimisation of taxation.

A high level of income is taxed, but a high level of growth is not, at least not until sold and then not at all via CGT if you pop your clogs before then.

As it happens I was looking yesterday at my holding of every HYPer's favourite non-yielding share: Berkshire Hathaway. I bought 100 shares some 15-20 years ago for about $10,000 (which was say £6,000 at the time). It has quadrupled since then with a current value of about $40,000 (£32,000 at current FX).

So I have gone from 6K to 32K with not a penny of tax. And ironically much of that is due to BRK collecting dividends but not paying them out.

Of course IHT could take 40% of it in the end, but at least for now this old codger runs a LYP.

One might say "what a waste". What has that investment achieved for you or anyone else? Yes, I know it's certainly nice to have (and I applaud your farsighted investment) but unless you are going to use it, what's it for? It's dead money which either is there for security (yes, that would be a valid reason) or to pass on - but unless you create an income from it, isn't it all a bit pointless?

Well, I'll answer my own question in one way: without people with pools of excess money, British arts and charities would be far worse off. When people feel they have sufficient wealth for their own security is when they can use that wealth to do so good for causes they believe in. And thank heavens for those people!

I reduced my non-income generating holdings because I get no benefit - I'd prefer to enjoy the income. Each investment has to give me something in return or it is dead money.

Arb.

[tjh290633]

A high level of income is taxed, but a high level of growth is not, at least not until sold and then not at all via CGT if you pop your clogs before then.

Surely you must be aware that most people stick their HYP shares in ISAs?

I agree with this. I have invested via PEPs and ISAs since they began. I was able to shelter all my investments many years ago, with one paying no or minimal dividends left outside. Recently they started paying more substantial dividends, so were disposed of and the cash moved into my main ISA to avoid paying tax.

TJH

[vand]

I'm sure that if you filter FTSE 350 on:

6%+ forward dividend yield
5yrs+ rising dividend payouts

you will get a lot of companies that meet that criteria.

Whether or not any randomnly selected 15 of those will continue to grow their dividend payout or - most importantly - delivery a reasonable total return - over the next 5-10 years and beyond, of course no one can be sure, but there are no guarantees when it comes to the markets for a HYP or any other strategy, so if you are going to be a stock picker then pick your poison and take your chances!

Not sure that with target 6% or higher initial yield I would be that comfortable that dividends would continue to rise, for one thing markets are certainly likely not predicting same given initial yield is already at 6% or higher.

Kinda disagree here.. I think there are plenty of current dividend payers who are paying >6% and will continue to increase payouts going forward. Lots of REITs and Renewable plays have their income stream contracted to rise in line with inflation (and mainly RPI rather than CPI).

They have gone from being 4% payers to 6% payers (and often 7%+) as they have sold off in the current higher interest rate environment to maintain their risk premium over the risk-free rate, but their business models haven't substantially changed..

If interest rates fall (which I think will happen sooner rather than later) then their shares will just be re-rated higher, so the future returns that would have occurred through reinvested (higher) dividends will be bought forward through higher shareprice and then future slightly lower dividend.

This is ceteris paribus in regard to the general economy, of course. Rates can get cut in a deep recession that changes the underlying investment thesis.. this would affect all businesses, though, not just these particular income plays.

[Lootman]

A high level of income is taxed, but a high level of growth is not, at least not until sold and then not at all via CGT if you pop your clogs before then.

Surely you must be aware that most people stick their HYP shares in ISAs?

And of course I max out ISAs, and have done since PEPs started in 1987.

But for those fortunate enough to have received an inheritance, stock awards from their employer or other windfalls, you cannot shelter all of it in ISAs. And there are enough questions about capital gains tax in TLF to tell me that a good number of Lemons run taxable portfolios.

If you need the income then that makes sense. However many older folks may have too much money (insofar as that is possible). In which case their primary concern may be the minimisation of taxation.

A high level of income is taxed, but a high level of growth is not, at least not until sold and then not at all via CGT if you pop your clogs before then.

One might say "what a waste". What has that investment achieved for you or anyone else? Yes, I know it's certainly nice to have (and I applaud your farsighted investment) but unless you are going to use it, what's it for? It's dead money which either is there for security (yes, that would be a valid reason) or to pass on - but unless you create an income from it, isn't it all a bit pointless?

I can understand seeing it as "pointless" or a "waste" in a sense. I tend to look at investments as being about cashflows rather than just income or just dividends. Obviously I need income to live off but in practice my investments throw off more cash (in the broadest sense, including gains) than I need. And so that surplus is reinvested in much the same way as you might reinvest dividends that are surplus to your needs.

The other thing is that I enjoy investing, and the growth in my portfolio gives me personal satisfaction in addition to financial security. It's a hobby and keeps my brain active.