HYP1 is 22 - thread discussing income and capital diversification

[Charlottesquare]

It strikes me that individuals chasing a reliable "system" of investing that objectively, and automatically works, effectively untouched by judgement calls , maybe are really chasing a Philosopher's Stone.

With HYP there is a basic system in there but untouched by human nudges it likely over longer periods of time tends to become skewed re diversity, thus possibly running increased risk, or certainly creating a portfolio that no sane individual would at that point in time have selected. (We are here because we are here)

People like order, they like systems, these deflect from their having to themselves make subjective judgements and decisions (top slice this one, sell the suspended dividend holding etc) but maybe reality is there can be no one Unified HYP system that works in all circumstances. (It was not just Einstein who struggled with unification)

[Arborbridge]

Because without the capital, where is the income coming from?

Yiou have the wrong end of the stick. Capital value varies much more than dividend income.

Data : Barclays Equity Gilt Study
Standard deviations of changes in yearly capital (price) and dividend values

21% vs 18%

Not what I'd call 'much' more.

Fundamentally a tendency for when stock prices dive deeply, dividend values have also seen substantial reductions.

It depends on the timescale. Over medium/short periods, income is usually more stable - but it's illuminating to look at TJH's income per unit over the various troubled times, and then one can see the income does drop quite dramatically in a similar way to the share price. In crisis times like that, dividend does take a knock too - but that's why anyone living off income will have an Safety Margin (i.e. not draw out all the income generated) or an income reserve against a such a fall.

Arb.

[1nvest]

Because without the capital, where is the income coming from?

Yiou have the wrong end of the stick. Capital value varies much more than dividend income.

Data : Barclays Equity Gilt Study
Standard deviations of changes in yearly capital (price) and dividend values

21% vs 18%

Not what I'd call 'much' more.

Fundamentally a tendency for when stock prices dive deeply, dividend values have also seen substantial reductions.

It depends on the timescale. Over medium/short periods, income is usually more stable - but it's illuminating to look at TJH's income per unit over the various troubled times, and then one can see the income does drop quite dramatically in a similar way to the share price. In crisis times like that, dividend does take a knock too - but that's why anyone living off income will have an Safety Margin (i.e. not draw out all the income generated) or an income reserve against a such a fall.

Arb.

HYP + income smoothing is a additional layer of complexity/risk, and if you're not taking all of the income then high yield might become just average yield. I believe some/many of Investment Trusts look to smooth dividends/income, so perhaps one/some of those might be a reasonable benchmark for a HYP + smoothed income.

[Arborbridge]

Because without the capital, where is the income coming from?

Yiou have the wrong end of the stick. Capital value varies much more than dividend income.

Data : Barclays Equity Gilt Study
Standard deviations of changes in yearly capital (price) and dividend values

21% vs 18%

Not what I'd call 'much' more.

Fundamentally a tendency for when stock prices dive deeply, dividend values have also seen substantial reductions.

It depends on the timescale. Over medium/short periods, income is usually more stable - but it's illuminating to look at TJH's income per unit over the various troubled times, and then one can see the income does drop quite dramatically in a similar way to the share price. In crisis times like that, dividend does take a knock too - but that's why anyone living off income will have an Safety Margin (i.e. not draw out all the income generated) or an income reserve against a such a fall.

Arb.

HYP + income smoothing is a additional layer of complexity/risk, and if you're not taking all of the income then high yield might become just average yield. I believe some/many of Investment Trusts look to smooth dividends/income, so perhaps one/some of those might be a reasonable benchmark for a HYP + smoothed income.

Well, if you say so! I would have thought not taking all of the income was reducing the risk, not increasing it. And as for complexity: occasionally topping up a holding is hardly that, and some of us would think that less complex than having to decide what to sell.

Each to his own.

[NotSure]

And as for complexity: occasionally topping up a holding is hardly that, and some of us would think that less complex than having to decide what to sell.

How did you ever decide what to buy?

Another option is to stick the lot in say an all-cap global tracker. Then it's pretty easy to work out what to sell. Or just have a simple system. A bit like HYPTUSS but in reverse?

[Arborbridge]

And as for complexity: occasionally topping up a holding is hardly that, and some of us would think that less complex than having to decide what to sell.

How did you ever decide what to buy?

Another option is to stick the lot in say an all-cap global tracker. Then it's pretty easy to work out what to sell. Or just have a simple system. A bit like HYPTUSS but in reverse?

Deciding what to buy isn't too difficult, especially for an income investor. If one had to decide what to sell to realise capital for income - well that is more of a problem, and not something I would like to do on a regular basis. Particularly if one happens to do it in times of falling prices - that would mean selling off the seed corn at a bad time.

I don't see any point in a global tracker if I'm after income - though I've recommended one for my daughter who is in the accumulation stage but does not want to get too involved in the "choosing" part.

[dealtn]

Particularly if one happens to do it in times of falling prices - that would mean selling off the seed corn at a bad time.

Which is exactly the same issue when a Company Director decides to pay you a dividend. At least with the former you can do it at the time of your choosing - and possibly pay less tax too.

[tjh290633]

It depends on the timescale. Over medium/short periods, income is usually more stable - but it's illuminating to look at TJH's income per unit over the various troubled times, and then one can see the income does drop quite dramatically in a similar way to the share price. In crisis times like that, dividend does take a knock too - but that's why anyone living off income will have an Safety Margin (i.e. not draw out all the income generated) or an income reserve against a such a fall.

Arb.

There are obvious correlations, such as the 2008-10 period. Many dividends were cut and share prices fell in sympathy, often quite low if there was no dividend paid, but then the dividend fell more than the share price, so the variation in dividend had to be more than that of the share price. When they resumed dividends, the change was infinite, so the same applied.

I agree with you about the need to have a safety margin, or reserve account.

TJH

[tjh290633]

Particularly if one happens to do it in times of falling prices - that would mean selling off the seed corn at a bad time.

Which is exactly the same issue when a Company Director decides to pay you a dividend. At least with the former you can do it at the time of your choosing - and possibly pay less tax too.

I always thought that it was the shareholders who had to approve t he dividends paid, on the recommendation of the Board of Directors, not a Company Director.

It depends where you hold your portfolio whether tax comes into play. CGT looks like it might be coming back into favour.

TJH

[1nvest]

And as for complexity: occasionally topping up a holding is hardly that, and some of us would think that less complex than having to decide what to sell.

How did you ever decide what to buy?

Another option is to stick the lot in say an all-cap global tracker. Then it's pretty easy to work out what to sell. Or just have a simple system. A bit like HYPTUSS but in reverse?

Deciding what to buy isn't too difficult, especially for an income investor. If one had to decide what to sell to realise capital for income - well that is more of a problem, and not something I would like to do on a regular basis. Particularly if one happens to do it in times of falling prices - that would mean selling off the seed corn at a bad time.

I don't see any point in a global tracker if I'm after income - though I've recommended one for my daughter who is in the accumulation stage but does not want to get too involved in the "choosing" part.

Single global tracker accumulation fund, sell shares as/when income is required (to the amount/timing that best matches your personal needs). Sometimes you'll sell when up, or down, broadly washes.

[dealtn]

Particularly if one happens to do it in times of falling prices - that would mean selling off the seed corn at a bad time.

Which is exactly the same issue when a Company Director decides to pay you a dividend. At least with the former you can do it at the time of your choosing - and possibly pay less tax too.

I always thought that it was the shareholders who had to approve t he dividends paid, on the recommendation of the Board of Directors, not a Company Director.

It depends where you hold your portfolio whether tax comes into play. CGT looks like it might be coming back into favour.

TJH

Agreed, it is poposed by a Board of Directors rather than an individual one and approved by shareholders (usually by default as most won't vote).

[Lootman]

Deciding what to buy isn't too difficult, especially for an income investor. If one had to decide what to sell to realise capital for income - well that is more of a problem, and not something I would like to do on a regular basis. Particularly if one happens to do it in times of falling prices - that would mean selling off the seed corn at a bad time.

That is not hard to do in my opinion, speaking as someone who does it.

Every year I sell off one or two of my taxable holdings to utilise my annual CGT-free allowance. Insofar as I wish to retain that holding, I repurchase it in my iSA with the new year's subscription.

That makes more sense to me than failing to use my CGT-free allowance and/or reducing the value of my sheltered holdings in my ISA by withdrawing cash from it.

[Arborbridge]

Particularly if one happens to do it in times of falling prices - that would mean selling off the seed corn at a bad time.

Which is exactly the same issue when a Company Director decides to pay you a dividend. At least with the former you can do it at the time of your choosing - and possibly pay less tax too.

There's no real choice of the appropriate moment unless you have a crystal ball.

[Itsallaguess]

Particularly if one happens to do it in times of falling prices - that would mean selling off the seed corn at a bad time.

Which is exactly the same issue when a Company Director decides to pay you a dividend.

At least with the former you can do it at the time of your choosing

I see this point crop up quite a lot in these types of discussions, and I'd like to propose that when it comes to regularly paid out dividends, we might actually see it as the flip-side of pound-cost averaging on the way in, and as such might be considered a little more favourably in that context...

If we consider the share-purchase side of things, there's a valid argument to be had where regular, automatic investment of capital, which ignores market fluctuations, might deliver some benefit to an investor who prefers not to consider himself very good at 'market timing', and as such, just wants to regularly drip-feed funds into shareholdings over a long-term time period where, with a fair wind, there is likely to be some level of balance between purchases made during a rising market, and those made during a dropping one.

I'd like to think that the above 'pound-cost-averaging' process is broadly seen as beneficial, where an investor doesn't think he's got any particular skill with specifically 'timing' individual investments into the stock market...

If the above is broadly accepted, and where we then might consider regular dividends that are paid out, in the main, at a specific drum-beat through a company's financial year, might we consider those regular capital-removals as just the mirror-image of the above 'pound-cost-averaging' process, where any reductions in company-held capital that's paid out in one dividend payment, which might be taken out of the company 'at a relatively bad time', could be seen to be balanced out by another dividend payment that's paid out during a time where the company is in a better position?

In short then, the question might be - does 'pound-cost-averaging' have a potential benefit on the way in *and* on the way out, given that the clear alternative in both situations is putting faith in an individual investor's long-term ability to personally 'time' things correctly each time they might take an alternative manual approach, in *either* of the two capital-flow directions?

If taking the investor out of the process on the way in might be seen as being 'a good thing' - why then wouldn't that also broadly apply on the way out as well?

Cheers,

Itsallaguess

[dealtn]

Particularly if one happens to do it in times of falling prices - that would mean selling off the seed corn at a bad time.

Which is exactly the same issue when a Company Director decides to pay you a dividend.

At least with the former you can do it at the time of your choosing

I see this point crop up quite a lot in these types of discussions, and I'd like to propose that when it comes to regularly paid out dividends, we might actually see it as the flip-side of pound-cost averaging on the way in, and as such might be considered a little more favourably in that context...

If we consider the share-purchase side of things, there's a valid argument to be had where regular, automatic investment of capital, which ignores market fluctuations, might deliver some benefit to an investor who prefers not to consider himself very good at 'market timing', and as such, just wants to regularly drip-feed funds into shareholdings over a long-term time period where, with a fair wind, there is likely to be some level of balance between purchases made during a rising market, and those made during a dropping one.

I'd like to think that the above 'pound-cost-averaging' process is broadly seen as beneficial, where an investor doesn't think he's got any particular skill with specifically 'timing' individual investments into the stock market...

If the above is broadly accepted, and where we then might consider regular dividends that are paid out, in the main, at a specific drum-beat through a company's financial year, might we consider those regular capital-removals as just the mirror-image of the above 'pound-cost-averaging' process, where any reductions in company-held capital that's paid out in one dividend payment, which might be taken out of the company 'at a relatively bad time', could be seen to be balanced out by another dividend payment that's paid out during a time where the company is in a better position?

In short then, the question might be - does 'pound-cost-averaging' have a potential benefit on the way in *and* on the way out, given that the clear alternative in both situations is putting faith in an individual investor's long-term ability to personally 'time' things correctly each time they might take an alternative manual approach, in *either* of the two capital-flow directions?

If taking the investor out of the process on the way in might be seen as being 'a good thing' - why then wouldn't that also broadly apply on the way out as well?

Cheers,

Itsallaguess

Because of that "averaging". A fixed sum paid into an investment means you buy more at lower prices and buy less at higher prices. When you are selling that exact same arithmetic means you are selling more at low prices than you are selling at high prices.

(And that's before you get to the frictional costs of taxes and any reinvestment of currently unrequired returned capital).

[Itsallaguess]

In short then, the question might be - does 'pound-cost-averaging' have a potential benefit on the way in *and* on the way out, given that the clear alternative in both situations is putting faith in an individual investor's long-term ability to personally 'time' things correctly each time they might take an alternative manual approach, in *either* of the two capital-flow directions?

If taking the investor out of the process on the way in might be seen as being 'a good thing' - why then wouldn't that also broadly apply on the way out as well?

Because of that "averaging".

A fixed sum paid into an investment means you buy more at lower prices and buy less at higher prices.

When you are selling that exact same arithmetic means you are selling more at low prices than you are selling at high prices.

But those 'regular sales' (as dividends..) might be seen to 'average out' over long periods when compared to 'manual sales', where a judgement is made each time in terms of 'timing the market', and so assuming dividends might always be paid out when they 'shouldn't' is unfair, I think, if not also considering that sometimes it might well be a 'good time' to release some company capital, and sometimes it might well not be a 'good time' to carry out manual sales of shares...

Remember that we're comparing that 'averaging dividend payout process' to all the manual-sales that might be seen as an alternative. I don't think it's particularly fair to assume that all those manual-sales would be at 'good times', and assume all dividend-payments might be at 'bad times', and it was the *averaging* process over long periods of time that I was trying to highlight as being slightly similar to the 'pound cost averaging' aspect of capital going in...

I fail to see why all manual-sale situations might somehow always be considered 'optimal' when compared to forced-liquiditation in the form of regular dividends.

I don't think it's likely to be that black and white...

Cheers,

Itsallaguess

[tjh290633]

I think that we are heading back into the argument between income investors and TR advocates.

Put simply, pound cost averaging has an effect when investing, but withdrawing some or all accumulated dividends, where no shares have to be sold to provide the cash, is totally different. There is the change in dividends with time, mostly upwards, but that has to offset against inflation.

You could say: Dividends good, TR bad.

TJH

[NotSure]

In short then, the question might be - does 'pound-cost-averaging' have a potential benefit on the way in *and* on the way out....

To me it does. When accumulating, make no attempt to time, just buy regularly. After retirement, make no attempt to time, just sell regularly. Accumulation funds/trusts all the way and no fiddling about.

[Charlottesquare]

In short then, the question might be - does 'pound-cost-averaging' have a potential benefit on the way in *and* on the way out....

To me it does. When accumulating, make no attempt to time, just buy regularly. After retirement, make no attempt to time, just sell regularly. Accumulation funds/trusts all the way and no fiddling about.

Selling as you describe is fine if good times and bad times get evenly spread, or you start selling in a higher market, but if you start your selling years, say years one to four of them, in a market trough period you really make life hard on the remaining balance to catch matters up when later market recovery happens, the much lower balance remaining has to work so much harder. (So, only retire in a strong market )

[88V8]

Particularly if one happens to do it in times of falling prices - that would mean selling off the seed corn at a bad time.

Which is exactly the same issue when a Company Director decides to pay you a dividend. At least with the former you can do it at the time of your choosing - and possibly pay less tax too.

There's no real choice of the appropriate moment unless you have a crystal ball.

Yeah. A few weeks ago I did a sell-off to maximise my CGT allowance and use up losses brought forward..,. then after three years the Chinese start to open up, and many of the shares I sold have risen by 10-20% so I won't be buying them back any time soon...

Fortunately I recycled the funds rather than sitting in cash, but the safe divi payer I chose hasn't risen at all.
Where was Mystic Meg when I needed her...

V8