FTSE 100 as HY portfolio for the lazy?

[petronius]

With dividend yield above 4% for the FTSE 100, and given the availability of cheap trackers for this index, one may be tempted to use this index as an income-generating tool. Vanguard VUKE ETF has a current yield of 4.25% and very low fees.

Clearly, not all 100 company are good dividend distributors, but this may provide some differentiation in terms of having some growth-oriented company in the mix.

Cap-weighting may be seen as a problem, but then again there are advantages in terms of not having to rebalance (this is reflected in low cost of trackers).

However, FTSE 100 exposure to sectors may not be ideal (too much banking and pharmas).

Having a substantial part of FTSE 100 revenues generated in USD may be seen as a plus or minus depending onone's perspectives on world economic dynamics.

Any thoughts?

[Lootman]

With dividend yield above 4% for the FTSE 100, and given the availability of cheap trackers for this index, one may be tempted to use this index as an income-generating tool. Vanguard VUKE ETF has a current yield of 4.25% and very low fees.

I have long advocated that if the overall market's yield gives you an income that meets your needs, then it is a better choice than a HYP, for the reasons you give and more: lower costs, less effort, more tax-efficient, greater diversification.

HYP should mostly appeal to those who do not have enough capital to achieve that goal, and so instead want to reach for a higher yield so they can squeeze an adequate income from an inadequate amount of capital. And therein lies the risk, especially if it predicated on just 15 shares.

Of course, Bland would not express it that way. But I can't see how he could refute the idea anyway.

[tjh290633]

I think that the point is that, at the moment, the FTSE100 does give an attractive dividend yield. However, currently the top 20 shares in my portfolio ranked by yield give a mean yield of over 7%. All 35 shares give me 5.5%.

There will be some very low yielding shares in the main index, and not owning some of those would be beneficial. I have 6 shares yielding under 3%:

30   SGRO   2.75%
31   RB.    2.54%
32   DGE    2.31%
33   CPG    2.26%
34   TSCO   1.84%
35   PSON   1.82%

Getting rid of those would raise my yield to 6.2%. Of course, you might not wish to.

TJH

[langley59]

Only fly in the ointment is the Brexit event racing towards us, the index may yet get cheaper, but that is market timing for you! If I had a lump sum to invest I would probably spend a little now and a little after March when the outcome in known.

Of course the opposite could happen, after the vote to leave in June 2016 the pound fell and the FTSE 100 rose. In my opinion the real threat to UK equities is not Brexit but the possibility of a Labour government given the anti business statements that party have already made.

[OZYU]

The FTSE yield is not 4.5%, the FT actuaries have it at 4.33%, and for practical purposes, unless one plans to hold the whole lot, both ISF and VUKE, for example, yield a bit less than that.

So not as attractive as it sounds, in particular since so many stout FTSE outfits yield so much more at the mo.

I had some spare cash which I have just deployed on LGEN and MCRO, to be honest there was too much choice for once. I don’t invest in baccy else it would have gone that way.

Agree Komrad Corbyn the greatest risk of all.

Ozyu

[bluedonkey]

It sounded attractive at first, but then the phrase "trashing the tracker" floated into my my mind.

[moorfield]

Agree Komrad Corbyn the greatest risk of all.

I think the even greater risk is Citizen McDonnell actually.

I have long advocated that if the overall market's yield gives you an income that meets your needs, then it is a better choice than a HYP, for the reasons you give and more: lower costs, less effort, more tax-efficient, greater diversification.

I agree with Lootman here. For now I’m comfortable using the HYP method (sort of) to build income. I have good idea what level I want to achieve within the next 10-15 years. Once I get closer to that, and nearer the end of full time employment, I suspect I will be moving more into an IT such as CTY (City of London), which I also think is a reasonable proxy to use for the minimum performance one should expect from HYP, both in terms of holdings (FTSE350), yield (very close to FTSE100 normally), and income growth (at or above rate of inflation).

[Itsallaguess]

With dividend yield above 4% for the FTSE 100, and given the availability of cheap trackers for this index, one may be tempted to use this index as an income-generating tool. Vanguard VUKE ETF has a current yield of 4.25% and very low fees.

Clearly, not all 100 company are good dividend distributors, but this may provide some differentiation in terms of having some growth-oriented company in the mix.

Cap-weighting may be seen as a problem, but then again there are advantages in terms of not having to rebalance (this is reflected in low cost of trackers).

However, FTSE 100 exposure to sectors may not be ideal (too much banking and pharmas).

Having a substantial part of FTSE 100 revenues generated in USD may be seen as a plus or minus depending onone's perspectives on world economic dynamics.

Any thoughts?

I think I'd prefer a spread of general income-oriented Investment Trusts to be honest....

This is one of those situations where I think a modicum of active-management via Investment Trusts can remove quite a lot of the inherent risk with index-investment.

One of the risks to FTSE100 index-investment is covered by your sector-imbalance statement regarding the current banking/pharma situation, but whilst that might be a worry today, that situation is purely market-cap dependant, and that sector concentration might well change over a period of years, and could change into a sector-situation that we might well not be so comfortable about, but which we'd have very little (read none...) control over....

If someone is needing an income from a 6% yield, then HYP becomes attractive (whilst acknowledging the inherent risks at that yield-point..), but if we're really talking about being content with a yield of around 4 or 4.5%, then I'd very much prefer a good spread of income-related Investment Trusts, which would still give a fantastic level of diversification, perhaps in areas far beyond those available via the FTSE100 index, and importantly would still have someone's hand on the tiller that isn't purely looking at market-cap as being the only ticket needed to get in the door....

Cheers,

Itsallaguess

[Breelander]

The FTSE yield is not 4.5%, the FT actuaries have it at 4.33%...

It depends on how you measure it, Dividend Data currently has it at 4.50%

Current FTSE 100 yield: 4.50%

https://www.dividenddata.co.uk/dividend ... et=ftse100

Luni and I had a long argument discussion on this back on TMF as the ft100 yield quoted by DigitalLook back then was also significantly different from the FT Actuaries calculations. Turned out both figures were correct.

Currently the average yield of a ft100 member is 4.50% (ie. the equal-weighted yield) while the FT Actuaries calculate the cap-weighted yield (total dividends paid divided by total market cap).

To get 4.33% you'd need not only to hold the whole ft100, but also buy each holding in proportion to its market cap. Buy an equal-weighted portfolio of the ft100 and you'd get the 4.5% yield. In general, ft100 trackers are cap-weighted portfolios.

[88V8]

Surely the idea of a self-managed HYP is to outperform.
Not everyone wants the faff or the risk.
But that's the idea.

Funds = managed mediocrity.

V8

[77ss]

.....
Currently the average yield of a ft100 member is 4.50% (ie. the equal-weighted yield) while the FT Actuaries calculate the cap-weighted yield (total dividends paid divided by total market cap).

To get 4.33% you'd need not only to hold the whole ft100, but also buy each holding in proportion to its market cap. Buy an equal-weighted portfolio of the ft100 and you'd get the 4.5% yield. In general, ft100 trackers are cap-weighted portfolios.

Equal weighted trackers seem to be a bit of a rarity.

One such (an FT100 ETF tracker) is:

Xtrackers FTSE 100 Equal Weight UCITS ETF (XFEW). Charges are higher than for VUKE, which would probably nullify any supposed extra yield.

[bluedonkey]

Murray International is currently yielding 4.7%.

[TahiPanasDua]

[quote="Breelander
Xtrackers FTSE 100 Equal Weight UCITS ETF (XFEW). Charges are higher than for VUKE, which would probably nullify any supposed extra yield.

Current yield is apparently 3.71%

TP2

[andyalan10]

Dividenddata.co.uk currently quotes a FTSE 100 dividend yield of 4.53%.

Cutting and pasting from https://www.dividenddata.co.uk/dividend ... et=ftse100 (where the 4.53% is quoted) and dividing by 101 gives an unweighted average of 4.05%. Taking out RDSA and reducing the divisor to 100 gives an answer of 4.02%

So it would appear that the 4.53% is a cap weighted figure.

The all share yield I have found quoted as 4.04% "in October 2018".

So 3.71% for an unweighted FTSE ETF may not be as bad as it initially appeared. But I'll stick with a reasonably diverse high yield portfolio with a historic yield of 6.16% as of Friday's close.

[Grumpsimus]

Clearly an FT100 Tracker is not a subsitute for HYP. They are two distinct and seperate entities.

However, the original question implies that there is a lot work in running a HYP. This need not be the case and one of the advantages of HYP is that it can be very maintenance, particularly after the HYP has been set up and is running. In my case I have a quick look at end of most weeks, record dividends as they arise, major review at the end of the year. In the last year I had no coporate actions, made four purchases from accumulated dividends and no sales. I think I spent roughly 6/8 hours on my HYP over the year.

The HYP Practical board can give a misleading impression of the amount of work required as it tends to attract those who like doing a lot of figures. Indeed I have a theory that some people have a psychological need to keep doing something and talking about it, even if it not really required and doesn't improve the outcome.

[Itsallaguess]

The HYP Practical board can give a misleading impression of the amount of work required as it tends to attract those who like doing a lot of figures.

Indeed I have a theory that some people have a psychological need to keep doing something and talking about it, even if it not really required and doesn't improve the outcome.

Amen to that.

Cheers,

Itsallaguess

[toofast2live]

Clearly an FT100 Tracker is not a subsitute for HYP. They are two distinct and seperate entities.

However, the original question implies that there is a lot work in running a HYP. This need not be the case and one of the advantages of HYP is that it can be very maintenance, particularly after the HYP has been set up and is running. In my case I have a quick look at end of most weeks, record dividends as they arise, major review at the end of the year. In the last year I had no coporate actions, made four purchases from accumulated dividends and no sales. I think I spent roughly 6/8 hours on my HYP over the year.

The HYP Practical board can give a misleading impression of the amount of work required as it tends to attract those who like doing a lot of figures. Indeed I have a theory that some people have a psychological need to keep doing something and talking about it, even if it not really required and doesn't improve the outcome.

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...

[Gengulphus]

Dividenddata.co.uk currently quotes a FTSE 100 dividend yield of 4.53%.

Cutting and pasting from https://www.dividenddata.co.uk/dividend ... et=ftse100 (where the 4.53% is quoted) and dividing by 101 gives an unweighted average of 4.05%. Taking out RDSA and reducing the divisor to 100 gives an answer of 4.02%

So it would appear that the 4.53% is a cap weighted figure.

Thinking about that, an idea has struck me about the difference between the dividenddata and FT actuaries FTSE100 yield figures, namely that if the dividenddata figure was a cap-weighted rolling historical yield figure (based on the last year's worth of dividends, whether that was the interim and final for one of its financial years, or the final for one financial year and interim for the following, or various similar combinations for quarterly payers) and the FT actuaries one a cap-weighted standard historical yield figure (not rolling, so the total dividends for the company's last completely-declared financial year, with any dividends declared for a subsequent not-yet-completely-declared financial year being ignored), that could explain the dividenddata figure being a bit higher.

And I've confirmed that the dividenddata figure is based on rolling historical yields, specifically by choosing a particular company that I knew had a December 31st financial year end, increasing dividends and no currency issues to confuse the issue, then link-chasing. The company I happened to think of first was Legal & General, which https://www.dividenddata.co.uk/dividend ... et=ftse100 shows to have a yield of 6.39%. Clicking on the arrow at the end of its line takes one to https://www.dividenddata.co.uk/dividend ... ?epic=LGEN, which shows that yield is calculated as (11.05p+4.60p)/244.9p = 15.65p/244.9p = 6.39%. Clicking on the Dividend History tab, finding the line about Legal & General and then clicking on the arrow at the end of that line gives https://www.dividenddata.co.uk/dividend ... ?epic=LGEN, which shows that the standard historical dividend is 4.30p+11.05p = 15.35p, and so the standard historical yield is 15.35p/244.9p = 6.27%.

That's a difference of 0.12 percentage points, or about 2% of the yields concerned. That sort of difference will happen for quite a high proportion of FTSE100 companies at this time of year, since just about all of those with financial year ends on or around December 31st will have announced interim or quarterly results since their last financial year's finals and most of those with financial year ends on or around March 31st will have done so as well: any rise or fall of the interim or quarterly dividends announced in those results would be reflected in a difference between their rolling and standard historical dividends. So if the FT actuaries and dividenddata FT100 yield figures are (the same type of) averages of standard and rolling historical yields, one would expect the dividenddata figure to be a bit higher, which is indeed what we're seeing - and the amount by which it's higher looks to be in the right ballpark.

The above confirms that dividenddata is working from the rolling historical dividend. I haven't yet confirmed just how the FT actuaries figure is calculated, but working from the standard historical dividend seems very plausible to me.

Gengulphus

[Gengulphus]

Indeed I have a theory that some people have a psychological need to keep doing something and talking about it, even if it not really required and doesn't improve the outcome.

Indeed. But then some people have a psychological need to indulge their curiosity about how things work, some have a psychological need for distraction activities to divert them from harmful activities like frequent trading, and some have a not-so-psychological need to keep tax records... And some even seem to have a psychological need to psychologically diagnose people they've never met... :-J

Gengulphus

[Breelander]

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