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"Building the Pot"

General discussions about equity high-yield income strategies
dealtn
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"Building the Pot"

#173087

Postby dealtn » October 11th, 2018, 5:48 pm

Having seen a post on what I think might be referred here as "the other board" about the best way to re-invest dividends, and having seen comments along the lines of "it's all about income" on other threads I am genuinely intrigued, and perhaps confused, as to why for some (most?) this sub-set of equities is so favoured to the exclusion of what it seems to be all others.

Believe it or not this isn't meant to be controversial, and I am wary of treading into waters that have an element of some, shall we say, history of defending against perceived attack.

I absolutely get that, certainly in the past when the original "Doris" articles were written, that given a choice between a balanced equity portfolio and an alternative of an annuity (or interest income from say a bank's savings account) the equity portfolio would be my preference, and for many others too in retirement. I particularly see the attraction of a (hopefully growing) high dividend yield income stream, over capital gains (even preservation for some) when at the retirement end of the age spectrum.

What I don't get is the constant reaffirmation to High Yielding shares, as a subset of all share alternatives, in what might be described as the "accumulation stage". Regardless of the arguments of which subset of equities has performed better in the past, under whatever conditions, isn't the aim in the "accumulation" phase to grow as big a pot as necessary, or at least in the most efficient form not detrimental to today's consumption, such that when the time for "retirement" arrives then the living off the (greatest possible) dividends stage of HYP commences.

As an infrequent visitor to these parts I get the sense that much commentary is on buying the next candidate or reinvesting dividends, and very little on living off the dividend stream once retired. (I get that many, or most, aren't retired yet so that little commentary is likely in that respect).

Dividends will come from the profits (generally speaking) of the companies invested in, yet those profits can be reinvested internally and not paid out, or paid out to shareholders to decide to reinvest, so the quantum of the dividend is part of the companies investment decisions, not some magic signal about a companies health or future potential. Why in the accumulation stage are some (many, most?) not concerned more about total return and the objective of the "size of the pot" at retirement, and thereby restricting the investment opportunities to a subset of the equity universe?

Are there some in these parts that genuinely think that the candidates that qualify in HYP are the best for both the accumulation and retirement stage of such a strategy. Is it that the cost of switching the portfolio at the time of changing from accumulation to retirement is sufficient deterrent? Or are there other reasons?

I am not saying that investing in HYP shares is wrong, I own some myself, but my motivation for doing so is for entirely different reasons.

My memories at least of the "Doris" articles were all about the retirement stage, not the accumulation stage and I am (genuinely and hopefully uncontroversially) perplexed at why so much focus is placed on HYP candidates during the construction and accumulation stage of anyone's investment lifetime. Perhaps some here can enlighten me with their thoughts without the thread descending into what in the past has turned out to be an (imo) unhealthy obsession about who holds the most correct "Doris" view?

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Re: "Building the Pot"

#173097

Postby EssDeeAitch » October 11th, 2018, 6:34 pm

All investment strategies are born of considered and reasoned thought processes. Not.

David Hume stated “Reason Is and Ought Only to Be the Slave of the Passions” and by this he meant that we make up our mind and then devise reasons to justify our decision. Much more recently Johnathan Haidt (a big Hume fan) wrote of the "elephant (emotion) and the rider (reason) in his excellent book "The Righteous Mind: Why Good People are Divided by Politics and Religion".

The elephant decides the direction and the driver devises the reasons for that direction. Our reasoning is more like an internal PR department rather than lawyer; facts are secondary. I only make this point to say that every person who makes a decision will have a dozen reasons as to why they made it. All plausible, all refutable.

Why buy a Skoda instead of a Mercedes? Why develop a HYP instead of a growth portfolio? Why do both? Why invest in trackers? It goes beyond numbers and into emotion.

Sorry to bang on about philosophy and psychology but it's the only way I can think about the questions you pose.

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Re: "Building the Pot"

#173103

Postby Walrus » October 11th, 2018, 6:40 pm

dealtn wrote:Having seen a post on what I think might be referred here as "the other board" about the best way to re-invest dividends, and having seen comments along the lines of "it's all about income" on other threads I am genuinely intrigued, and perhaps confused, as to why for some (most?) this sub-set of equities is so favoured to the exclusion of what it seems to be all others.

Believe it or not this isn't meant to be controversial, and I am wary of treading into waters that have an element of some, shall we say, history of defending against perceived attack.

I absolutely get that, certainly in the past when the original "Doris" articles were written, that given a choice between a balanced equity portfolio and an alternative of an annuity (or interest income from say a bank's savings account) the equity portfolio would be my preference, and for many others too in retirement. I particularly see the attraction of a (hopefully growing) high dividend yield income stream, over capital gains (even preservation for some) when at the retirement end of the age spectrum.

What I don't get is the constant reaffirmation to High Yielding shares, as a subset of all share alternatives, in what might be described as the "accumulation stage". Regardless of the arguments of which subset of equities has performed better in the past, under whatever conditions, isn't the aim in the "accumulation" phase to grow as big a pot as necessary, or at least in the most efficient form not detrimental to today's consumption, such that when the time for "retirement" arrives then the living off the (greatest possible) dividends stage of HYP commences.

As an infrequent visitor to these parts I get the sense that much commentary is on buying the next candidate or reinvesting dividends, and very little on living off the dividend stream once retired. (I get that many, or most, aren't retired yet so that little commentary is likely in that respect).

Dividends will come from the profits (generally speaking) of the companies invested in, yet those profits can be reinvested internally and not paid out, or paid out to shareholders to decide to reinvest, so the quantum of the dividend is part of the companies investment decisions, not some magic signal about a companies health or future potential. Why in the accumulation stage are some (many, most?) not concerned more about total return and the objective of the "size of the pot" at retirement, and thereby restricting the investment opportunities to a subset of the equity universe?

Are there some in these parts that genuinely think that the candidates that qualify in HYP are the best for both the accumulation and retirement stage of such a strategy. Is it that the cost of switching the portfolio at the time of changing from accumulation to retirement is sufficient deterrent? Or are there other reasons?

I am not saying that investing in HYP shares is wrong, I own some myself, but my motivation for doing so is for entirely different reasons.

My memories at least of the "Doris" articles were all about the retirement stage, not the accumulation stage and I am (genuinely and hopefully uncontroversially) perplexed at why so much focus is placed on HYP candidates during the construction and accumulation stage of anyone's investment lifetime. Perhaps some here can enlighten me with their thoughts without the thread descending into what in the past has turned out to be an (imo) unhealthy obsession about who holds the most correct "Doris" view?


I am very much in the building phase and because of that I don't really fit in on the HYP-P board.

I view the HYP element of my portfolio as buying long term income streams and look to buy when I think specific areas are on sale. I guess I see it as trying to buy an annuity on the cheap over my lifetime of investing.

I don't have hard and fast rules around what I buy today for instance I picked up some HFEL at around a 6.7% yield which I thing long term will be a decent deal for me.

That being said I'm also running value strategies/ growth strategies and themes as part of my portfolios. I think it's safer to post on here and gleam what you can from the other board. Following it religiously doesnt seem to be an optimal strategy for me and the reality is no one there is really a Doris as they wouldn't be posting on there daily!!!!

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Re: "Building the Pot"

#173107

Postby Alaric » October 11th, 2018, 6:53 pm

dealtn wrote:What I don't get is the constant reaffirmation to High Yielding shares, as a subset of all share alternatives, in what might be described as the "accumulation stage".


There can be a practical reason. Particularly if you invest in Investment Trusts, as you approach your retirement you can be sure of approximately what your income level will be, so you just switch off reinvesting it in favour of withdrawing it. If you want or need a cash buffer, just start withdrawing the dividends some while beforehand.

The old "accumulate and then buy an annuity" approach was immensely risky as your lifetime income would depend on the relationship between equity markets and fixed interest markets at the date of your retirement. The same risk , albeit lower, is still there if you have to sell Growth stocks in favour of buying Income ones.

There's quite a lot to be said in favour of high yield strategies. Never being prepared to sell if it becomes apparent you are stuck with a dog shouldn't be one of them.

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Re: "Building the Pot"

#173108

Postby JuanDB » October 11th, 2018, 6:53 pm

I don’t invest in individual HY shares, but I do invest in HY ITs. Different to the original question, however I think that can be boiled down to a total return vs natural yield comparison?

My intent is for retirement soon, in my mid 40s and, 10 years into a bull market believe that yield will be more reliable than growth for a period of time. I’m building an income stream not the biggest possible pot. Conversely my pension is focussed on growth and will be left to work it’s magic for 15 or so years.

I could of course be entirely wrong. Only time will tell.

Juan

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Re: "Building the Pot"

#173109

Postby monabri » October 11th, 2018, 6:59 pm

Does it not depends on one's age! ...?

If you are in your mid 60s ( ie the standard retirement age) then you might want 'instant income' and you don't have 10+ years to wait for growth before converting to an income stream.

I'm a little bit younger but have adopted HYP-Practical and added income ITs/ETFs. Why have I gone down that route? I believe ( rightly or wrongly) that many growth ITs are expensive and 'crusing for a brusin'. Come the correction, that will be the time for me to divert income from HYP-Practical and income ITs into growth ITs with a view to convert them to income at a later date.

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Re: "Building the Pot"

#173110

Postby tjh290633 » October 11th, 2018, 7:06 pm

Alaric wrote:
dealtn wrote:What I don't get is the constant reaffirmation to High Yielding shares, as a subset of all share alternatives, in what might be described as the "accumulation stage".


There can be a practical reason. Particularly if you invest in Investment Trusts, as you approach your retirement you can be sure of approximately what your income level will be, so you just switch off reinvesting it in favour of withdrawing it. If you want or need a cash buffer, just start withdrawing the dividends some while beforehand.

The old "accumulate and then buy an annuity" approach was immensely risky as your lifetime income would depend on the relationship between equity markets and fixed interest markets at the date of your retirement. The same risk , albeit lower, is still there if you have to sell Growth stocks in favour of buying Income ones.

There's quite a lot to be said in favour of high yield strategies. Never being prepared to sell if it becomes apparent you are stuck with a dog shouldn't be one of them.


The other argument is that you will have a target level of income when the accumulation stage ends. Therefore it makes sense to build that flow of income and reinvest it, rather that going for a so-called growth strategy and switch to an income strategy when accumulation ends.

My experience has been that reinvesting income from relatively higher-yielding shares or funds has been the better option, as compared with doing the same from lower yielding equivalents.

If you have the time, then you can compare both approaches, as I did.

TJH

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Re: "Building the Pot"

#173113

Postby Dod101 » October 11th, 2018, 7:23 pm

I understand the OP's puzzlement. It has puzzled me as well, why those in the 'building' phase tend to concentrate exclusively in some cases on a HYP strategy. They are, as the OP said, building a retirement fund, and whether buying HYP shares and reinvesting the dividends is the best way to that end I question. Obviously we have the power of compounding but if there is little or no growth in the capital what is the point? Some of course may have another portfolio running alongside a HYP (I do even although I have long since been retired and live primarily off my dividends.)

At least though there is a strategy and an aim. That goes a long way in any form of investing, and a HYP is not a difficult strategy to follow. On the other Board though it is to my mind much too proscribed and allows for very little variation. For instance I think capital does matter very much even although income has the priority. We are allowed to write freely on this Board but even for here what I have said is probably enough for now.

Dod

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Re: "Building the Pot"

#173126

Postby Itsallaguess » October 11th, 2018, 8:07 pm

dealtn wrote:
Are there some in these parts that genuinely think that the candidates that qualify in HYP are the best for both the accumulation and retirement stage of such a strategy. Is it that the cost of switching the portfolio at the time of changing from accumulation to retirement is sufficient deterrent? Or are there other reasons?


I've not come across a single HYP investor on either this board or the old Motley Fool board who thinks HYP is 'the best strategy'.

What I have come across are many people who are happy that it may be 'the best for them'.....

Why that might be the case is likely to vary from individual to individual, but may well include it's simplicity, it's reliability, or it's ability to easily switch at any time from being an accumulation strategy to a distribution strategy, simply by flicking the switch on the dividend-stream from re-investment to distribution-mode.

I tried some of the growthier strategies, and they simply didn't suit me. I didn't enjoy it, I don't think I was any good at it, and I was never really comfortable with it, but even if I had been, I'm not sure I'd have been comfortable switching horses at a future point in time and moving into the distribution phase with a second new strategy that I'd not used before.

I'm much more comfortable following a simple income-investment strategy whilst in the accumulation phase and sticking with it during any future distribution phase.

I tend to stay away from HYP Practical as I have around 38% of my portfolio invested in income-related Investment Trusts, and I think this wider diversification has benefited me greatly as my portfolio has grown. I know that I wouldn't be comfortable at all with my current invested capital being allocated to just 15 or 20 individual HYP shares, and I've known that for a long time as my portfolio grew, so I do gain a great deal of benefit from being more widely diversified with my Investment Trusts, even if that diversification comes at a slight, and acknowledged, performance cost....

I have been able to see my income stream for many years as it gets delivered in the form of generally growing dividends across my portfolio - it's just that I've decided that I don't need it yet, and I can re-invest it to achieve the great compounding benefits of doing so.

That reliability, and the ability to monitor that not-needed income stream during the accumulation phase, is one of the best aspects of this strategy for me, as it means that when I come to flick the switch into distribution-mode later on, I will have the confidence of those earlier years behind me when I begin to rely on the income stream later on. That's really important for me personally.

Switching strategies is not for me. I think it's great for those that are comfortable in doing so, but I really do think that a huge part of personal investing is finding and sticking to a strategy that we're individually comfortable with, and I feel really lucky to have done so for many years.

I don't for one minute think that it's 'the best', but I do know that it's the best for me....

Cheers,

Itsallaguess

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Re: "Building the Pot"

#173129

Postby IanTHughes » October 11th, 2018, 8:20 pm

dealtn wrote:Are there some in these parts that genuinely think that the candidates that qualify in HYP are the best for both the accumulation and retirement stage of such a strategy.

Not me. It may be, but I do not know for sure. Mind you, neither do I know that another strategy would be better, only time will tell.

dealtn wrote:Is it that the cost of switching the portfolio at the time of changing from accumulation to retirement is sufficient deterrent?

That is something to consider if only starting out one’s retirement portfolio later on in life, closer to when the income is actually needed, but probably not relevant for those still in their early years.

dealtn wrote:Or are there other reasons?

I am not saying that investing in HYP shares is wrong, I own some myself, but my motivation for doing so is for entirely different reasons.

My memories at least of the "Doris" articles were all about the retirement stage, not the accumulation stage and I am (genuinely and hopefully uncontroversially) perplexed at why so much focus is placed on HYP candidates during the construction and accumulation stage of anyone's investment lifetime. Perhaps some here can enlighten me with their thoughts without the thread descending into what in the past has turned out to be an (imo) unhealthy obsession about who holds the most correct "Doris" view?

Well, I can only answer for myself which is to say that yes, I started my retirement pot in the later years. I personally do not want to be forced to fund my impending retirement by selling chunks of a “low” yield portfolio. But there is another reason.

Having made the decision to shun what I perceive to be the expensive help of the professionals, Independent Financial Advisers, fund managers and the like, I needed a strategy where I felt confident in my ability to make a reasonable fist of it. A value strategy? I would never know when to sell. A growth strategy? I would have some difficulty in finding the right assets to purchase. But income, now that I do understand. I can fairly easily pick out such things as Cashflows, Debt, Earnings and the like, and make a reasonable job of locating a sustainable and hopefully rising income stream. I am by no means perfect at it and I have certainly made a few mistakes. But when you consider the all-important diversification, as well as the large size of the businesses in question, I am confident that I am marching in the right direction.

So no, I cannot say that HYP is a better long-term strategy for building a pot, but then can you say it is not? But I can say it is a strategy that I am comfortable with, confident enough to put my hard-earned money on the line, a consideration which I think you will agree is important.

Each to their own really


Ian

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Re: "Building the Pot"

#173140

Postby dspp » October 11th, 2018, 9:26 pm

An advantage of HYP for newbies, in addition to the many that you have all described, is the ability to "try before you buy", i.e. to test out the strategy in the accumulation phase before then going over to using the same strategy in the harvesting phase. If you think of the (huge generalisation here) typical TMF new arrival they would generally turn up and think, "golly gosh, must retire in 10-years, sh1ty death, need to get cracking". They were sensible enough to discard the pure gambling approaches (aka AIM oil explorationists, TMT, et al), and likewise concerned about how to spot value, and so long term high yield seemed to be a 'safe' enough signal for them to use as a guidance mechanism. In its crudest HYP boils down to (for many users) as "pick the better ones from the FTSE, discarding the utter dogs".

I also think that once folks have gotten their feet under the table, and absorbed a few sharp elbows from Mr Market, they then go on to evolve their personal approaches. So the relatively crude and simple rules of the HYP strategy are an excellent way of helping people sit down at the table without making too many utter horlicks on day 1. That in a sense is exactly why the HYP-P board has so many definition issues as, very quickly, most people diverge their reality from the original purity.

Whether HY is THE BEST way to 'build the pot' vs TR is highly debatable. To my mind it all depends on where (and when) you are starting from. But it is not a disastrous method to start with, and as such has much to be recommended.

Many thanks to dealtn for this thread. And ditto can I comment that I am very glad to see people using this board to discuss the role of higher-yielding shares in the overall context, which is to be welcomed. That is exactly what this board is for in its widest sense and with elastic attached. In that respect there are no hard and fast rules here and provided that there is a higher yield aspect to a thread then please feel free, as I note people are. Phew.

regards, dspp

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Re: "Building the Pot"

#173167

Postby Pastcaring » October 11th, 2018, 11:32 pm

I always found it all so easy.No silly names or acronyms,I' ve got no idea what a " Doris " is and no interest at all in finding out.

I buy companies,not something that has to fit into a box with a few silly acronyms printed on it.

Learn about compounding,the company that funds around one third of my income I have owned since 1991 I think,possibly 92.Leverage is also wonderful ,for every A$ 6000 spent then on CBA reinvesting the dividends means that $6K grows to around $300K now.

People tend to think I have strange ideas,I always thought that paying off a loan of A$6K was far easier than trying to save up A$300K by putting in a little bit every month .

The plan to build it was just leave it alone to compound.The original idea was to replace income from work with the good old passive income.

I aimed for an income of A$100K a year ,when I reached that I went for the ' leave room for a good margin of error' .I decided that perhaps a net income of double average earnings would be best.

Now I have a wonderful problem,the best problem in the world.I pay more than average wages in tax ,and marvel at the insanity of people that think paying tax is a curse.Paying a lot of tax means you have a lot of money in your pocket.

I never aimed for a ' pot ' ,I always aimed for an income stream that was reasonably predictable.I don' t have much of an idea at all what I am worth,I never bother looking ,it can change by around $100k on a daily or weekly basis ,so why bother looking.The pot also doesn't really mean anything,when CBA was at $96 a share the dividend was around A$4.20 a share. Now it is around $70 a share dividend is $4.31. The pot went down,put the yield really went up .

I think the silliest thing ever is this 4% drawdown that people waffle on about,or this FIRE thing try to save up as much as possible,retire as early as possible,and live on two tins of beans a day.

I enjoy not being part of the crowd,and I would never give my money to somebody else on the basis of,everybody else says he is good so he must be.

I could go on but it' s easy to see

Hands under the arts end and do nothing.

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Re: "Building the Pot"

#173182

Postby Itsallaguess » October 12th, 2018, 4:42 am

Pastcaring wrote:
Learn about compounding, the company that funds around one third of my income I have owned since 1991 I think, possibly 92.

Leverage is also wonderful, for every A$ 6000 spent then on CBA reinvesting the dividends means that $6K grows to around $300K now.


I really do enjoy reading your heart-on-sleeve posts, and your honesty is very refreshing.

With that said, I've got to mention that leverage really is wonderful, but mostly on the way up....

On the old TMF boards that some of us used to frequent, there was a chap who had almost all of his capital in a single bank, and he enjoyed the dividends from it in a similar way to your CBA situation.

One day it stopped delivering those dividends, and the share price came a right cropper, and I can imagine that he learnt a very real and very swift lesson in the art of diversification.

He thought that the bank in question was bullet-proof, but nothing ever is....

Totally agree on the hands-under-arse situation though, and that's another reason that I like the income-investment approach - I find that the vast majority of the heavy-lifting is done by time alone, and not me adding value into the investment process.

That in itself is a very strong, additional benefit of the approach for me personally, because it means I can just sit back and watch it, monitor it, and gain confidence over time that things are likely to happen in the future that have happened in the many years of the past.....

Cheers,

Itsallaguess

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Re: "Building the Pot"

#173190

Postby Dod101 » October 12th, 2018, 6:28 am

Who/what is CBA?

Dod

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Re: "Building the Pot"

#173238

Postby bluedonkey » October 12th, 2018, 11:00 am

Per TJH: "The other argument is that you will have a target level of income when the accumulation stage ends. Therefore it makes sense to build that flow of income and reinvest it, rather that going for a so-called growth strategy and switch to an income strategy when accumulation ends."

Yes, this has been one of the key points about HYP for me. I know pretty accurately how much annual expenditure I need to cover when I retire. I can compare the current annual HYP income with that and see that year by year the two are converging. I don't aim to be a great investor just one who can live comfortably in retirement. If it does that, job done.

That said, I have recently made a minor departure from HYP by investing the dividend flow outside HYP shares (first into non-UK income IT, then non-UK ETF tracker plus a small amount in Fundsmith).

BD

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Re: "Building the Pot"

#173239

Postby Steveam » October 12th, 2018, 11:00 am

Commonwealth Bank of Australia

Dod101
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Re: "Building the Pot"

#173251

Postby Dod101 » October 12th, 2018, 11:27 am

Pastcaring wrote:I always found it all so easy.No silly names or acronyms,I' ve got no idea what a " Doris " is and no interest at all in finding out.

I buy companies,not something that has to fit into a box with a few silly acronyms printed on it.

People tend to think I have strange ideas,I always thought that paying off a loan of A$6K was far easier than trying to save up A$300K by putting in a little bit every month .


So easy it is surprising that most people do not do it and it is so easy because Pastcaring has taken a high risk route which so far has paid off.

It is now easy for him to extrapolate that into a formula for success for all. I wish him well for the future and just a smidgen of luck. He may need it.

Dod

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Re: "Building the Pot"

#173256

Postby Julian » October 12th, 2018, 11:57 am

Please understand that nothing I say is an attempt to fight a corner or my claiming any are valid reasons and individual HYP-ers might be subject to some, all or none of the influences I suggest below but here are a few things spring to mind mostly to do with emotions...

1 - Even in the building phase some people would like to see constant forward progress towards their goal. By concentrating on the income generation properties of an HYP and discouraging constant monitoring of capital value, and one principle of HYP being to try to pick shares with constantly growing dividends into the future, it is a strategy designed to deliver at least the perception of constant forward progress.

2 - Getting accumulation from re-investing dividends can also feel to an investor as if they are actively saving extra money each month. Someone saving into a building society account might look at their finances with a view to how much money each month they are tucking away for a house deposit, a new car or whatever. I suspect that re-investing HYP dividends has a more immediate feeling of savings for many people rather than the more erratic but hopefully ultimately upward accumulation of wealth that comes from the growth in share values.

3 - There is no need to plan a switch from one strategy to another when moving from asset accumulation to using those assets to generate income so it's a sort of "do the thinking once" strategy rather than a 2-step thing which might be appealing to some. Some might say that such a switch is not necessary anyway but some people seem deeply suspicious that slicing off capital value from a growth portfolio to generate reliable income is as durable a tactic as living off high-yield investments but that is a whole other debate that has been much discussed.

4 - Even when working there is for some people (and I confess here that I am one of them) something compelling about having an additional very visible and theoretically reasonably reliable income source available. As I was building my portfolio in the early 2000s and still working, in a job I hated as it happens, it felt almost magical to me to see this not huge but non-trivial amount of income being credited to my account through seemingly no effort of my own(*) and it gave me great comfort as the income rose to see myself move through the "if I quit my job now at least I could buy food" to "at least I could pay the bills" to "at least I could pay the bills and just about feed myself" all the way through to "I could actually live a fairly decent student lifestyle without needing to work". I know I could have got similar reassurances from looking at the income generation (and potentially also, with reference to 3 above, income extraction) capabilities of an invested-for-capital-growth portfolio but somehow seeing an extant dividend stream felt more real.

5 - With reference to the deliberate mistake above, I of course could not know that "somehow seeing an extant dividend stream felt more real" because I didn't actually compare the two approaches; at that time my waggon was hitched 100% to the HYP horse (or elephant!) and there is maybe another answer to the question. For whatever reason an investor stumbles upon a strategy that appeals to them so they implement it with little in the way of a beauty parade against other approaches and a certain inertia sets in in terms of researching and potentially switching to or incorporating alternative strategies further down the line.

6 - (This one is a neutral observation.) If one's investments are not tax sheltered there are tax issues either way. Building a pot pre-retirement using HYP incurs ongoing tax inefficiencies vs capital growth since the dividends paid out should only be reinvested only after whatever tax liability has been deducted otherwise an investor is going to get a nasty shock further down the line. On the other hand, accumulating assets primarily via capital growth with a view to subsequently switching to high yield investments will probably, assuming one's investments have been successful, result in some capital gains tax challenges to overcome when they want to make the switch.

I suppose, despite my disclaimer at the top of my post, it is pretty obvious that at least on 4 above that is from my personal experience. I am now retired and living almost 100% off investment income so I'm maybe not the best person to answer this question since my asset-building days are behind me (although my assets are still growing) but there it is for what it's worth.

For the record about 2/3rds of my drawn income now comes from HYP (and income ITs) with the other 1/3rd coming from a capital growth portfolio where I sell off holdings as necessary to sustain that part of my income stream. (I avoid the word "top-slice" since to me that implies only selling if there is growth to be released which is not a rule I stick to.) If it wasn't for the CGT issues I think I would probably be reconfiguring more aggressively to a 50%/50% split of income between HYP-like and growth sources. My incorporation of a growth strategy alongside my HYP strategy was also facilitated by a significant capital injection from an inheritance. Would I be more pure HYP today were it not for that capital injection? I'm not sure. I think I would still have introduced some growth holdings but maybe not to the same extent because the extra capital allowed me to add growth without needing to reduce the HYP income so was less scary than selling off income-generating assets to move into a strategy that I wasn't yet familiar with in practice.

- Julian

(*) It was down to my effort of course, it's just that the effort had already been expended by me in the preceding years in earning the salary from which I had saved the capital that I was now seeing income from. Despite that I can still fairly vividly remember the me from 15 or so years ago sitting in front of a PC logged into my broker account and looking at the dividends credited that week and, when they were quite decent sized ones, literally thinking "this is magical". Emotions can be a powerful driver.

JuanDB
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Re: "Building the Pot"

#173258

Postby JuanDB » October 12th, 2018, 12:05 pm

Having reached the stated objective one would have thought diversification a prudent step. Focus on a single stock seems to be an unnecessary downside risk.

I have few largish (high 5 figure) positions in a geographically diverse range of income ITs held with different account providers and I do wonder which risks I am taking. I assume any event that would significantly disrupt the dividend stream into an IT diversified across a 100 or so equities would effect any other correlated investment. So I’m probably left with fund provider risk which I consider to be low.

Betting most of the farm on a single company is for one with larger vegetables than I.

Juan

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Re: "Building the Pot"

#173272

Postby Gengulphus » October 12th, 2018, 1:06 pm

dealtn wrote:... certainly in the past when the original "Doris" articles were written, ...

Are you referring to pyad's two original HYP articles written in November 2000 or about his one and only (AFAIAA) "Doris" article written in December 2006? It makes quite a difference to when and what you're talking about!

First original HYP article
Second original HYP article
"Doris" article

Gengulphus


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