Imminent Retirement and HYP - Reflections...

[thebarns]

I retire tomorrow !!!!!!!

Aged 52, no defined pension, just cash and stock ISAs, and a defined contribution SIPP which I can access when 55.

I do have 2 kids, 9 and 16, and an understanding wife who will work another 3-4 years. She also has no final salary pension and a more modest defined contribution SIPP.

I joined Motley Fool I think around 2010 when I started to take more of an interest in managing my investments.

I was attracted to HYP and over the years probably built up holdings in 30-35 of the usual suspect individual shares.

I also invested amounts in investment trusts, venture capital trusts, individual corporate bonds and preference shares, in addition to a cash safety net. Tax relief has also been a significant factor in accumulating the SIPP over the years.

But the majority of my investments were in HYP- I don't keep detailed records but do follow matters fairly closely.

I used to initially read a lot of the posts by Lootman, Gengulphus, Luni and F858B. I still remember, and no offence meant by this, I use it as a learning event, F858B tipping a very narrow range of HY shares and gold stating that one could not go wrong with investments in supermarkets, gold, utilities etc, even at one point stating he'd be happy to chuck the lot in just one or two of said picks - I can't remember the exact stuff - however a number of these HY shares have performed poorly.

I've had most of the bad shares that have lost a lot of capital value and also cut or stopped dividends.

I acknowledge that it is a portfolio approach and some have done ok, but overall it has not produced great results, when looking at income and capital together and contrasting it to other strategies.

However the more I have watched it over the years, the more I have learned that HY strategy should and will only form part of my portfolio strategy in retirement.

A simple world or ftse tracker would have served me much better over the years.

I will have much time to ponder matters over the following weeks and I will not completely ditch HY strategy but I may reduce it to around 20-25% of the portfolio.

I will also use a total return and drawdown basis for another part, simply putting it into a world tracker.

I will also continue to use selected overseas and uk investment trusts and uk reits, preference shares and corporate bonds to fulfil income needs.

I post this as my thoughts and own personal reflections on my last 7-8 years of paying attention to my portfolio and perhaps too much of an emphasis on the HY side of matters than should have been, but I live and learn !

And as an observation to those who may go down to narrow a route of just or too much in a UK HY investment strategy.

[BreakoutBoy1]

Many thanks for sharing your experience. I am convinced that a cheap global index tracker is preferable to a HYP approach for many investors. At least that way you are guaranteed to benefit from the successes of the Amazons as well as the failures of the Carillions.

[Clitheroekid]

The biggest concern I'd have in holding a traditional HYP portfolio is that dividend cover for the FTSE 100 has nearly halved over the past 7 years, from nearly 3 to about 1.6.

It seems to me that there are far too many companies paying dividends that they simply can't afford, and that sooner rather than later these dividends will be severely cut. We've already seen this happen an uncomfortably large number of times recently.

At that point the `rationale' for holding a HYP share like BP, where any expectation of a significantly increasing capital value is sacrificed for yield, completely falls apart. Not only is the yield no longer attractive but there's likely to be a capital loss as well.

That's not to say that I don't hold a number of HYP type shares myself, including BP and Shell, and because I have always reinvested the dividends they've been very good investments in overall return terms. But I'm very much aware of the risks, and if I sensed there was a real prospect of a dividend cut I'd have no hesitation in selling them.

As I don't actively need income well over half of my overall portfolio is in growth stocks (or more accurately hoped for growth stocks!) where dividends (if they are paid at all) are a nice bonus but not a driver for buying them.

[kempiejon]

At that point the `rationale' for holding a HYP share like BP, where any expectation of a significantly increasing capital value is sacrificed for yield, completely falls apart. Not only is the yield no longer attractive but there's likely to be a capital loss as well

Is that the safety of the dividends or the prospect of increase is no longer attractive? BP yield around 6% just what one would like in a HYP surely - or is that too high and hence at risk?

[BreakoutBoy1]

BP has an uncovered dividend: They pay out more in dividends than the profits booked. The profits have been severely impaired by Deepwater Horizon claims and a low oil price. This situation can only persist for a few years before the company is forced to cut the dividend. If one invests in BP one is taking a gamble on a higher oil price and an end to exsanguination from dubious legal liability claims.

The first is more probable than the last. BP remains a bargepole stock for me, probably forever: Deepwater Horizon highlighted the abject flaws in the companies risk management and contractor safety oversight. The company only survived due to its deep pockets, pockets which then were picked bare by the lawyers. A second Gulf of Mexico event would eliminate the company for good, and I doubt they are better prepared to prevent such a disaster today.

[scrumpyjack]

The drop in oil prices has forced BP to cut the fat so it can be profitable at a $40 oil price (shows how much fat there was!). Certainly there is the risk of another catastrophe but I think they are worth holding without having too many eggs in one basket. There is so much political correctness about oil being a 'bad' thing and that consumption is going to fall drastically with the move to electric cars that a contrarian position of holding some has merit.

I would certainly rather hold BP than Aramco when that is foisted on the city.

[BreakoutBoy1]

I find myself conflicted about Aramco. As a longtime follower of Matt Simmons I will obviously be keen to read the disclosures about reservoirs and resources to see how closely the "Twilight in the Desert" hypothesis is playing out. He has been dead this last 8 years but the depletion of the Ghawar field is still ongoing.

[Wizard]

I retire tomorrow !!!!!!!

Congratulations on your retirement!

And thanks for your reflections. It seems to accord with a few of the annual reports at the end of 2017, i.e. that over the last 5 or so years HYP has not had a vintage period.

Terry.

[moorfield]

I retire tomorrow !!!!!!!
Aged 52, no defined pension, just cash and stock ISAs, and a defined contribution SIPP which I can access when 55.

I do have 2 kids, 9 and 16, and an understanding wife who will work another 3-4 years. She also has no final salary pension and a more modest defined contribution SIPP.

The morning after the night before? Congratulations, thebarns, an impressive achievement which I am hoping to emulate within the next 10 years.

A simple world or ftse tracker would have served me much better over the years.

And as an observation to those who may go down to narrow a route of just or too much in a UK HY investment strategy.

Well that's grabbed my attention.

I hold 21 shares currently across all wrappers (SIPP, ISA, VCT), which I have quite closely aligned to the HYP strategy over the last 5 years or so, and present value guesstimates of my retirement income (mid 50's) are already comfortably ahead of target. Your post has now left me seriously pondering a bonfire of my low yielders (BATS, ULVR, IMI, JMAT, WTB, SGE) to be replaced with City of London IT (the benchmark I measure HYP against) - that would immediately boost my overall forecast income this year by ~8% - followed by a managed retreat from HYP altogether (ie all future top ups into ITs)

Damascene reading.

[kempiejon]

Your post has now left me seriously pondering a bonfire of my low yielders (BATS, ULVR, IMI, JMAT, WTB, SGE) to be replaced with City of London IT (the benchmark I measure HYP against) - that would immediately boost my overall forecast income this year by ~8%

BATS 17+ years div increase shows 11.5% 10 year compounded annual dividend growth rate
ULVR 18+ years div increase only 6.7% growth over 10 years
IMI 13 years div increase 7.3% 10 year growth
JMAT 18 years 8.3% growth
WTB 15 years and 12% growth
SFE 18+ years dividend growth 8.2% over the last 10 years
data from https://www.dividenddata.co.uk/ftse-div ... ic&order=1
With those pedigrees they are not shares I'd be selling even if comparatively low yield. CTY does boast a unblemished history of dividend increases of over 18 years but 4.65% compounded growth over the last 10 years.

[moorfield]

With those pedigrees they are not shares I'd be selling even if comparatively low yield. CTY does boast a unblemished history of dividend increases of over 18 years but 4.65% compounded growth over the last 10 years.

Precisely, hence my pondering aloud. My own goals remain income focussed, and my fast-forwarded thinking now (into mid 50's) is more about sustaining and "derisking" what I hope will be a comfortable level of income into my 60s, 70s and onwards ...

[thebarns]

Moorfield,

It is indeed the evening after getting in late this morning - 4am after spending a final evening and early morning with (now ex) colleagues making sure I truly was leaving the office for the last time !

It was a final opportunity to visit a club ( think we used to call it a disco) which happened to be playing 80s music till the early hours allowing a number of us to reminisce about our lost youth !

And yes I am now retired and even told the taxi driver on the way home who said I looked far too young to retire - I think he was after a tip !

Whilst my HY portfolio was not foremost in my mind as the Eurthymics blasted out the speakers, I stand by my view that my own personal HY strategy, which involved a collection of most of the usual subject individual shares, good and bad, will be reduced to 20-25% of my overall portfolio, from perhaps around 75% just now, however I will not completely exit from the process for that part of my portfolio - I just think that 4-5 different strategies are more appropriate rather than one mainly consisting of just UK HY shares.

"Sweet dreams are made of....."

[AleisterCrowley]

"...cheese"
And who am I to disagree?

Congratulations. I'm 52 and reckon I've got at least three more years to go ! Unless ERNIE is feeling generous

[moorfield]

"...cheese"
And who am I to disagree?

This means nothing to me.

[BBLSP1]

This means nothing to me

Oh, Vienna.

More seriously, Moorfield (120071), the problem with City IT is that it fishes largely in the FTSE100 pool, so will not achieve the aim of diversifying away from that. After having built up a HYP portfolio of the usual suspects which satisfies my core retirement income needs, and picking up City and Merchants along the way, I am diversifying into internationally focussed income ITs that are disconnected from the UK economy.

[Itsallaguess]

the problem with City IT is that it fishes largely in the FTSE100 pool, so will not achieve the aim of diversifying away from that.

Agreed, but as a way of diversifying into the FTSE100 pool, it's certainly got it's merits, especially in situations where portfolio low-yielders are being rotated out of a HYP and into something that's going to provide more income.

Looking at the 10-year chart for City of London, it's had little of note with regards to catastrophic price issues over that period, and even after the good increase in share price over the past 10 years, it still yields around 4.1% today -

https://i.imgur.com/8HYo1Z4.png

https://uk.webfg.com/equity/City_of_London_Inv_Trust

I'm a big fan of both income IT's in general, and also the principal of rotating low-yielding stocks into higher-yielding alternatives. If we're not looking to shoot the lights out with the choices we make to rotate into, then Investment Trusts like City of London can offer a good instant-diversification boost for investible capital, as well as providing a relatively stable return in the form of dividends.

I agree that international diversification is also a welcome alternative option, but I wanted to specifically discuss your point above, because on the face of it the comment sounds like a good reason not to bother with investments like City of London, but I think there's more to simply saying that 'it fishes in the same FTSE100 pool', as though that's a bad thing....

I think it's actually a good thing if people are happy to fish in the same FTSE100 pool, but in a way that might deliver regular, slightly smaller fish than some of the other anglers, but also almost guarantees that we'll still catch something of worth during our time at the riverside, and in a way that doesn't necessarily mean we'll get our feet wet in the process....

Cheers,

Itsallaguess

[moorfield]

I'm less concerned with the diversification aspects of future investments and more with stability of the income they generate, which is where I see the usefulness of ITs. I think would want to avoid watching income dips like this happening to my HYP shortly after any early retirement starts ... (if I'm lucky enough to get there)


[/quote]

viewtopic.php?p=96058#p96058

[Gengulphus]

Looking at the 10-year chart for City of London, it's had little of note with regards to catastrophic price issues over that period, and even after the good increase in share price over the past 10 years, it still yields around 4.1% today -

https://i.imgur.com/8HYo1Z4.png

Yes, quite clearly that chart doesn't show a fall in value by about 1/3rd in its first year and a bit.

Oh, wait a minute...

Gengulphus

[Itsallaguess]

Looking at the 10-year chart for City of London, it's had little of note with regards to catastrophic price issues over that period, and even after the good increase in share price over the past 10 years, it still yields around 4.1% today -

https://i.imgur.com/8HYo1Z4.png

Yes, quite clearly that chart doesn't show a fall in value by about 1/3rd in its first year and a bit.

Oh, wait a minute...

I wasn't suggesting that it hadn't had any issues at all, but rather that there was nothing catastrophic.

It had some issues during 2007/2008, along with the rest of the wider market during that period, but recovered quickly and didn't look back for the next 10 years.

No catastrophe there that I can see, and I've certainly had bigger issues price-wise over the same period with single-share HYP holdings that have showed greater price deterioration, and a often a comparatively poor ability to bounce back.....

Cheers,

Itsallaguess

[Gengulphus]

I wasn't suggesting that it hadn't had any issues at all, but rather that there was nothing catastrophic.

It had some issues during 2007/2008, along with the rest of the wider market during that period, but recovered quickly and didn't look back for the next 10 years.

No catastrophe there that I can see, and I've certainly had bigger issues price-wise over the same period with single-share HYP holdings that have showed greater price deterioration, and a often a comparatively poor ability to bounce back.....

Ah, I see. You're contrasting the behaviour of an IT, which is a portfolio in an opaque wrapper, with that of a single-share holding in a HYP.

Try comparing apples with apples - the behaviour of an IT with that of a whole HYP. Or oranges with oranges - the behaviour of a single-share holding in an IT with that of a single-share holding in a HYP. The latter is somewhat more difficult in principle because of the opaqueness, but when the IT shares many of the HYP's holdings, as CTY probably does, it's rather easy!

Gengulphus