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High yield vs other investing strategies

General discussions about equity high-yield income strategies
OxDoc
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High yield vs other investing strategies

#211542

Postby OxDoc » March 30th, 2019, 3:59 pm

Hello, I heard about the high-yield portfolio concept in a discussion with someone who said they intend to hold no government bonds in their portfolio and just live off dividends in retirement following this approach. This sounds like putting a lot of faith in dividends remaining sufficiently high across all the market conditions that someone might encounter in their retirement. I am very intrigued by this approach and interested in understanding the risks more and how it compares to a portfolio made up of stock market trackers and government bonds, but couldn't find much by searching.

For example, it would be interesting to know how likely a high-yield portfolio is to run out of money. Is there data showing how much in assets relative to spending you would need to keep the probability of running out of money in a 30-40yr retirement below some threshold e.g. 5%, perhaps based on long-term historical data? How would the approach have fared in previous difficult times e.g. starting in the late 1920s or 1960s? How would it compare to tilting a trackers-bonds portfolio towards value stocks?

Is there sense in allocating part of the portfolio to a HYP strategy and allocating the rest between trackers and bonds following a different approach? Would this benefit the risk-return profile of the portfolio? I would be nervous about not having any government bonds in my portfolio as a safety net, but might like to have part of my portfolio allocated this way, as another potential way of diversifying.

Sorry if these questions have been discussed a lot before - I looked for but didn't find other relevant threads covering them.

syrio
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Re: High yield vs other investing strategies

#211549

Postby syrio » March 30th, 2019, 4:16 pm

I'd suggest reading up on withdrawal rate studies.

Portfolio charts has a lot of useful articles and tools to compare withdrawal rates on different portfolios.

https://portfoliocharts.com

In general more diversified portfolios tend to support higher withdrawal rates.

OxDoc
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Re: High yield vs other investing strategies

#211557

Postby OxDoc » March 30th, 2019, 5:06 pm

Thanks for the response. I've read quite a bit on WRs before, but nothing that discusses high-yield investing. Do you know of anything that addresses the HYP in particular? Portfolio Charts also doesn't seem to include this as an asset class.

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Re: High yield vs other investing strategies

#211572

Postby Urbandreamer » March 30th, 2019, 7:23 pm

I think that your OP covers a huge amount of ground.

Let's consider HYP first. On these boards HYP is a very specific thing. It's a concept proposed by Piad (S Bland) at a time when anyone with a personal pension was REQUIRED by the state to buy an annuety with it. It would be remis not to mention the concept.

Then there is the aspect of government bonds. That is government debt. It's true that technically the UK government has not reneged upon its debt for a couple of centuries. However it IS GOVERNMENT DEBT! Some may have religious reasons to avoid debt while others may have political reasons to avoid funding the state.

Ignoring the religious and political issues, gilts (government bonds) are not as secure or profitable as you presume. I avoid them myself. Please understand that I am not implying that the UK government would default. However if you lose value year on year and finally get your original capital back when it will only cover a packet of biscuits you may not be happy.

It's almost certain that if you buy a 10 year gilt today that you will lose money. It's not certain that you will even break even with a index linked gilt, given that currently you can't buy one from the goverment and must pay someone to sell you theirs. However the amount that you recieve is fairly certain set against the uncertanty of equity investment.

If you are serious in your research then you want the Barclays Equity Gilt study. However its ability to quantify risk is limited. To do the study they presume equity investment is in a index, while HYP in particular will carry more risk as it slants the portfolio towards companies with a high yield.

The research regarding mixing government bonds into a portfolio is known as CAPM portfolio theory. Government bonds were chosen as a proxi for a risk free return. Yet if you actually study gilts you will see that they are far from risk free.

Those of us who ARE looking to rely upon dividend income are careful with respect of risk managment, even those who consider themselves to follow the HYP idea. Most reseach rules out things that are imposible to quantify, hence presume that attempts to manage risk by equity selection has no effect.

I can't claim that I follow the HYP methodology. For one thing my portfolio yield is actually less than the FTSE 100. I have too many investments aimed at growth.

Despite the fact that I intend to retire before too long I am still almost 100% equity invested. I have seen more than one market crash and have shared the pain when things went wrong with companies that I invested in. It hasn't changed my opinion that I'd rather invest in companies than lend to the government.

One final point, you say "This sounds like putting a lot of faith in dividends remaining sufficiently high across all the market conditions..." however I would hope that it is obvious that depends upon what is meant by sufficient and what is done with any surplus in good times. Dividends can be spent, reinvested or invested in something else (ie property). IMHO it's dangerous to think in simple terms when the level of risk is increased. I seriously doubt that anyone who has spent decades investing thinks in the simple terms beloved by pension advisers. To be fair to them, they are usually dealing with people who don't want to consider the complexity and just want to be told what to do.

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Re: High yield vs other investing strategies

#211583

Postby Alaric » March 30th, 2019, 8:51 pm

OxDoc wrote:For example, it would be interesting to know how likely a high-yield portfolio is to run out of money.


It depends how much of the dividends you spend and to what extent you sell assets to make up an income shortfall.

If you make an assumption that Companies will not all cut their dividends or self destruct by paying all their capital reserves as dividend, the answer should be "never" provided you don't spend more than the dividends. There are numerous studies of "safe" withdrawal rates, many with an American bias though.

Be aware that "HYP" as defined on these boards is a narrow subset of Investing for High Income and Dividends and it's best not to use the term unless prepared to follow its narrow and restrictive guidelines. Discuss income producing assets by all means.

OxDoc
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Re: High yield vs other investing strategies

#211584

Postby OxDoc » March 30th, 2019, 9:02 pm

Thanks for the responses.

Replying to Urbandreamer - Yes I agree that government bonds are not risk-free. However, portfolios made up of stock trackers and govt bonds have been backtested over many decades , giving some idea of how they perform in different market conditions, and if your chosen allocation survives all past events then you can have greater confidence that it will survive in the future (no guarantees, of course). Personally, I would feel very wary of taking a pure HYP approach without knowing that it would have succeeded in the past, or the range of returns that would have been obtained, and I don't know how to do the analysis myself, so I thought I'd try asking here if anyone knows of any relevant analysis. Of course, others may just feel that they don't need such analysis to feel confident.

Another question that I forgot to add in my OP is how much were HYP incomes and capital value affected in the 2008 financial crisis? I guess there is data on that around at least?

Replying to Alaric - I do mean HYP as in the way it is defined on these boards. A key part of my question about success of the portfolio is what is it reasonable to assume about companies maintaining their dividends - how much have real incomes from a HYP portfolio fallen in previous periods of tough market conditions, for example? Do any studies of SWRs consider a HYP strategy?

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Re: High yield vs other investing strategies

#211619

Postby Arborbridge » March 31st, 2019, 8:12 am

OxDoc wrote:Another question that I forgot to add in my OP is how much were HYP incomes and capital value affected in the 2008 financial crisis? I guess there is data on that around at least?



That's quite an interesting question. We only have a couple of well documented examples of HYPs running for that long, but they indicate - in very broad terms - that your income could fall 40-50% and take up to seven years to recover. As this was one of the worst crashes in a couple of generations, you might take the view that it would be reasonable to allow for something similar during one's retirement.

Using that as a guide, many HYPers came up with a broad brush safety plan: 1) from your dividend income, keep a Safety Margin: spend (or drawdown) only 75-80% 2) keep an Income Reserve in cash of at least 18 months income requirement.

The are variations on this theme according to your outlook. For example, some do not like large amounts of cash simply on deposit, so might entertain "near cash" for part of it - what you accept as "near cash" is up to the investor!

As regards a "super crash" in which dividends virtually cease - my feeling on that is we might have worse things to worry about, such as social breakdown and blood on the streets. It's not something I'm planning for.

As to how much risk one can afford to take, that depends on the size of your retirement pot. Clearly, given a big enough pot on could live happily on gilts or fixed rate bonds. I guess most of us here are not able to do that and need to obtain a higher yield and a rising dividend payout.

Just to add my personally position experience. I started investing a pension pot in 2006 and by 2010 I was living from that income entirely, plus state pension. I've been reducing what small percentage I had in bond funds - yes the idea of having something less risky was attractive, but eventually I've sold most of them off.
Apart from cash in my "tank" I use for smoothing out dividend income, and income reserve, I am almost entirely in equities, mostly income equities. If there was another market crash, I do not intend to sell: I have faith that we would either recover as in all previous examples, or there would be a revolution and all would be swept away.

Excuse any typos - not proof read, as I can hear voices downstairs urging me to breakfast!
Arb.

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Re: High yield vs other investing strategies

#211620

Postby Dod101 » March 31st, 2019, 8:24 am

I can answer some of the OP's questions (as can many on these Boards) I have been living off my dividends or at least my investments since I retired at the end of 1994 so I have lived through the tech crisis of 2000/1 and the financial crisis of 2008/9 and come through pretty well unscathed. I am at least 90% invested in equities at all times, the balance being a very small amount in bond funds and the balance in cash or equivalent.

I have a dividend income which has at least kept pace with inflation and during the 2008 crash, a number of financial shares cut or suspended their dividends but I got out of banks fairly early on and avoided the big losses. I still lost about 25% in terms of capital in 2008 against the FTSE100 drop of about 31% and the following year was up by 17% against the FTSE100 up by around 19% according to my notes to myself at the time. That was still a long way short of a full recovery but meanwhile many dividends were at least maintained if not increased. I do not recall struggling with income at the time. I was down nowhere near Arb's 40/50% in income terms (or capital terms for that matter)

My High Yield Portfolio (it is not a HYP as tightly defined on the HYP Practical Board) yields about 5.4% currently, which is more than sufficient for me. I would never try to live off the income from Gilts, not on religious grounds or lending to the Government, but simply because there is no scope for increases in that income whereas with equities, I understand a bit about how the market works and there is a good chance of dividend increases year on year. I enjoy the dynamics of equity investing.

I am inclined at times to criticise pyad's style of investing but it works, although many, including me, will use a variation on it just because it suits their temperament better.

Does that help?

By the way, I have never been guilty of over analysing situations too much not got too involved with portfolio theories. Investing is above all practical and art rather than science.

Dod

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Re: High yield vs other investing strategies

#211655

Postby tjh290633 » March 31st, 2019, 10:54 am

I am about to go out, so can only be brief. I have reported several times on the fall in both dividend income and capital values at the time of the 2008 crisis.

Briefly I lost about 50% of my dividend income in the year following, 2009-10, and set about a revision of my portfolio to correct the situation. Some companies stopped dividends briefly, some like the banks for an extended period.

Since then, my dividend income has recovered to be above the level which I enjoyed prior to the crisis.

It is only right to point out that most Investment Trusts only suffered a slight, if any, fall in income because they were able to use their revenue reserves. Look at the now BMO Capital and Income Trust (BCI) for an example.

I have never held fixed interest securities. The reason is that word "fixed". My dividend income has beaten inflation comprehensively over the past 32 years. If you start with more than enough dividend income, there is very little prospect that you will have to draw capital, provided that you have a reserve fund, as often discussed here.

TJH

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Re: High yield vs other investing strategies

#211677

Postby GoSeigen » March 31st, 2019, 2:49 pm

tjh290633 wrote:My dividend income has beaten inflation comprehensively over the past 32 years.



That's a pretty low bar. Even cash in the bank should be able to do that with judicious use of term accounts.


GS

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Re: High yield vs other investing strategies

#211707

Postby Backache » March 31st, 2019, 5:55 pm

GoSeigen wrote:
tjh290633 wrote:My dividend income has beaten inflation comprehensively over the past 32 years.



That's a pretty low bar. Even cash in the bank should be able to do that with judicious use of term accounts.


GS

Either term accounts are wildly more exciting than I realised, or your misunderstanding the post.
He means that his income from the original shares that he bought is far higher than it was by a factor that is greater than inflation.
All my bank accounts pay less than they used to.

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Re: High yield vs other investing strategies

#211708

Postby Arborbridge » March 31st, 2019, 5:59 pm

GoSeigen wrote:
tjh290633 wrote:My dividend income has beaten inflation comprehensively over the past 32 years.



That's a pretty low bar. Even cash in the bank should be able to do that with judicious use of term accounts.


GS


Not "comprehensively" and not starting at a higher yield than any cash in the bank would give you. It isn't such a low bar as you make out - it's just the TJH didn't have time to spell out the "height of the bar" or other details as he was rushing out.

You'd have been quite a poor investor not to beat cash for both yield and income growth in the past five or ten years. Unless you know of some magic non-equity account that I don't know about.

Arb.

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Re: High yield vs other investing strategies

#211740

Postby GoSeigen » March 31st, 2019, 8:08 pm

Backache wrote:
GoSeigen wrote:
tjh290633 wrote:My dividend income has beaten inflation comprehensively over the past 32 years.



That's a pretty low bar. Even cash in the bank should be able to do that with judicious use of term accounts.


GS

Either term accounts are wildly more exciting than I realised, or your misunderstanding the post.
He means that his income from the original shares that he bought is far higher than it was by a factor that is greater than inflation.
All my bank accounts pay less than they used to.


I don't think my misunderstanding the post. ;-)

The CPI has risen by 3.2% compound over the 32-year period tjh selected.

Over most of that period bank interest was somewhat higher than that for term accounts. In 2008, for example, 5-year savings rates of 5-6% were available: I know because I invested in one.

So I'd be very surprised if anyone who had kept their capital in the bank and reinvested interest had not beaten inflation over the 32 years.

Perhaps you assumed I was making an unfair comparison? You maybe imagined that at the start and end of the period the income would be measured in terms of income from two different assets, i.e. interest on cash in the bank on the one hand and dividends from shares on the other. In my mind I would measure the income assuming that I invested my funds in the SAME asset at the start and finish in both cases, whether that be shares or cash.


That's not to say I think cash in the bank will always do better than inflation, though I think most of the time it will. Nor does it mean I think shares will perform tepidly over coming years. I'm actually bullish about UK shares and have a majority of my funds invested in them.

It's just that if you are pleased to have beaten inflation then I don't think that is a demanding goal. For comparison, I aim for 3% net net net (i.e. 3% after inflation, fees and taxes) and over the past 15 years actual portfolio performance was closer to 7% net net net, and mostly from fixed-interest investments and NOT shares.


GS
P.S. I also note that TJH said his income had comprehensively beaten inflation; none of the above is in reference to his portfolio, just the benchmark of beating inflation. I note that Artemis Strategic Assets fund run by the star equity manager William Littlewood has recently moved to an inflation-based benchmark: its target is CPI + 3% (similar to mine).

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Re: High yield vs other investing strategies

#211745

Postby GoSeigen » March 31st, 2019, 8:35 pm

Arborbridge wrote:
GoSeigen wrote:
tjh290633 wrote:My dividend income has beaten inflation comprehensively over the past 32 years.



That's a pretty low bar. Even cash in the bank should be able to do that with judicious use of term accounts.


GS


Not "comprehensively" and not starting at a higher yield than any cash in the bank would give you. It isn't such a low bar as you make out - it's just the TJH didn't have time to spell out the "height of the bar" or other details as he was rushing out.

You'd have been quite a poor investor not to beat cash for both yield and income growth in the past five or ten years. Unless you know of some magic non-equity account that I don't know about.

Arb.


Please also see my previous post. TJH and I were talking about 32 years, not the past five or ten. The latter was your innovation.


TJH has had a bee in his bonnet about beating inflation ever since I've been reading his posts. We have had several discussions about it. In particular he has a pathological distaste for fixed-interest no matter how much better its return is likely to be versus shares. He waves away the possibility of equity income falling (which it can) and NEVER mentions the fact that debt is senior to equity and that this is a huge advantage in its favour.

I think it's a duty of people who think about these things from a different frame of reference to put forward facts and arguments that have been omitted. There was a similar poster on TMF in the old days who was convinced that the best way to invest was to put all one's cash into a single bank's shares and reinvest all the dividends. He was absolutely deaf to people who posted from an alternative perspective. His approach was too rigid and came off the rails spectacularly in 2008/9. TJH may be a talented investor but I think his insistence that fixed interest is innately inferior to dividends is equally flawed.


GS

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Re: High yield vs other investing strategies

#211753

Postby tjh290633 » March 31st, 2019, 9:18 pm

GoSeigen wrote:
Arborbridge wrote:
GoSeigen wrote:

That's a pretty low bar. Even cash in the bank should be able to do that with judicious use of term accounts.


GS


Not "comprehensively" and not starting at a higher yield than any cash in the bank would give you. It isn't such a low bar as you make out - it's just the TJH didn't have time to spell out the "height of the bar" or other details as he was rushing out.

You'd have been quite a poor investor not to beat cash for both yield and income growth in the past five or ten years. Unless you know of some magic non-equity account that I don't know about.

Arb.


Please also see my previous post. TJH and I were talking about 32 years, not the past five or ten. The latter was your innovation.


TJH has had a bee in his bonnet about beating inflation ever since I've been reading his posts. We have had several discussions about it. In particular he has a pathological distaste for fixed-interest no matter how much better its return is likely to be versus shares. He waves away the possibility of equity income falling (which it can) and NEVER mentions the fact that debt is senior to equity and that this is a huge advantage in its favour.

I think it's a duty of people who think about these things from a different frame of reference to put forward facts and arguments that have been omitted. There was a similar poster on TMF in the old days who was convinced that the best way to invest was to put all one's cash into a single bank's shares and reinvest all the dividends. He was absolutely deaf to people who posted from an alternative perspective. His approach was too rigid and came off the rails spectacularly in 2008/9. TJH may be a talented investor but I think his insistence that fixed interest is innately inferior to dividends is equally flawed.


GS

I have not done any calculations on the subject, but the obvious way to test your theory is to look at a portfolio giving a high yield in 2007. Cash it in with perfect foresight before the crisis erupted, putting the proceeds into fixed interest securities or cash deposits until, again with perfect foresight, reinvest in a similar portfolio (it will not be identical, since some of the shares no longer qualify) and calculate the income flow over the period from 2007 until, say 2017. Compare that with staying with the portfolio throughout, making changes to its composition as and when needed.

TJH

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Re: High yield vs other investing strategies

#211755

Postby Breelander » March 31st, 2019, 9:23 pm

GoSeigen wrote:... I'd be very surprised if anyone who had kept their capital in the bank and reinvested interest had not beaten inflation over the 32 years.



Sorry, I though the whole point was taking income out of the portfolio, not reinvesting it.....

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Re: High yield vs other investing strategies

#211767

Postby OxDoc » March 31st, 2019, 10:43 pm

Thanks again for the responses. It's very useful to hear people's experiences using this approach.

I did some more searching and came across historical real dividend data for the S&P500 at multpl (the site says I can't post a link), which I thought looked useful for seeing how much dividends have varied in the past. From the associated table of data, it looks like the worst years to begin trying to live off dividends were:
[*]1917, after which dividends fell 48% to 1920 and didn't rise above the 1917 level sustainably until 1950. The 1918-1949 average dividend was 79% of the 1917 dividend, so I make it that a person who could just have lived off dividends in 1917 would have needed 6.5 years of spending from other sources to last through that period.
[*]1968, from where dividends fell 23% to 1975, sustainably rising to the 1968 level again in 1989. 1969-1988 had an average dividend 85% of that in 1968, so 3 years of spending would have been required from other sources.
[*]2008, with dividends falling 23% to 2010, recovering to 2008 levels from 2012, averaging 80% of the 2008 level between 2009-2011. So only 0.6 years of spending would have been required from other sources.

Of course, high-yield shares may have performed differently (and it seems like they may have performed worse given the experiences from the financial crisis reported above). I couldn't find similar data for UK stocks.

Since SWR studies on stock tracker and bond portfolios will have taken into account the dividend yield for the whole market, this can't be used to figure out if trying to cover expenses with dividend income is a more efficient investing strategy, but at least it gives some idea of the risks I think.

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Re: High yield vs other investing strategies

#211783

Postby Arborbridge » April 1st, 2019, 7:58 am

GoSeigen wrote:
Please also see my previous post. TJH and I were talking about 32 years, not the past five or ten. The latter was your innovation.


TJH has had a bee in his bonnet about beating inflation ever since I've been reading his posts. We have had several discussions about it. In particular he has a pathological distaste for fixed-interest no matter how much better its return is likely to be versus shares. He waves away the possibility of equity income falling (which it can) and NEVER mentions the fact that debt is senior to equity and that this is a huge advantage in its favour.

I think it's a duty of people who think about these things from a different frame of reference to put forward facts and arguments that have been omitted. There was a similar poster on TMF in the old days who was convinced that the best way to invest was to put all one's cash into a single bank's shares and reinvest all the dividends. He was absolutely deaf to people who posted from an alternative perspective. His approach was too rigid and came off the rails spectacularly in 2008/9. TJH may be a talented investor but I think his insistence that fixed interest is innately inferior to dividends is equally flawed.


GS


I apologise if I had the time scale wrong - I probably didn't read the thread thoroughly.

What seem to be lacking from your argument is any form of detail. You wrote: "... I'd be very surprised if anyone who had kept their capital in the bank and reinvested interest had not beaten inflation over the 32 years."
But tha is not a number, just a feeling. So HYP beats inflation (which TJH's does) and you reckon fixed interest does (which actually would surprise me) doesn't show that HYP is inferior to fixed interest, so that does not seem to advance the conversation.

The important issue for me is not whether either beats inflation, but whether either would provide a flow of income sufficient for my retirement and provides increases to keep that income sufficient. Against that requirement, I see fixed interest as a none-starter.

Arb.

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Re: High yield vs other investing strategies

#211792

Postby JamesMuenchen » April 1st, 2019, 9:34 am

tjh290633 wrote: I have not done any calculations on the subject, but the obvious way to test your theory is to look at a portfolio giving a high yield in 2007. Cash it in with perfect foresight before the crisis erupted, putting the proceeds into fixed interest securities or cash deposits until, again with perfect foresight, reinvest in a similar portfolio (it will not be identical, since some of the shares no longer qualify) and calculate the income flow over the period from 2007 until, say 2017. Compare that with staying with the portfolio throughout, making changes to its composition as and when needed.
I was far from perfect, and didn't sell out my HYP before the crash.

But thanks to the excellent work of fellow fools on TMF I transferred my HYP duds into fixed interest prefs (LLPC) in 2011. When payments were resumed (in 2012?) I had a massive increase in income compared to pre-crash, as I had been buying with a yield of 14.5%. I sold out in 2014 for a ~100% capital gain.

I'm absolutely certain that I had a much better result than sticking with HY equities, and anyone that traded perfectly as you propose would have made ridiculous amounts of money.

I don't believe there's any good doctrinal reason to rule out Prefs, least of all for income seekers.

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Re: High yield vs other investing strategies

#211798

Postby Breelander » April 1st, 2019, 10:14 am

JamesMuenchen wrote:...thanks to the excellent work of fellow fools on TMF I transferred my HYP duds into fixed interest prefs (LLPC) in 2011. When payments were resumed (in 2012?) I had a massive increase in income compared to pre-crash, as I had been buying with a yield of 14.5%. I sold out in 2014 for a ~100% capital gain...

...I don't believe there's any good doctrinal reason to rule out Prefs, least of all for income seekers.



Due to an unprecedented set of circumstances LLPC/LLPD were available at well below par, by some 30% or so. Those conditions did indeed make them (and other) Prefs a 'bargain of a lifetime'. So much so in fact that some were even proposed as candidates for Gengulphus' demo HYP.

Gengulphus wrote:Given how long-term my objectives for this HYP are, it really does need to be able to grow the income like the other shares in the portfolio. The only way to do that with preference shares is to reinvest at least part of the dividend income they produce....

... At NWBD's 8.5% yield, a 50:50 split seems reasonable... I.e. it seems reasonable to me to think of NWBD as at least similar to a more normal HYP share with a 4.25% yield and a 4.25% growth rate...

...there is still the in-practice issue of good data sources about preference shares - specifically, ones that allow me to provide the safety-factor information about their issuers that I normally put in the 'candidates' and 'final run-off poll' posts, or some sort of reasonable equivalent...

... without a suitable data source and being out of time to find one, I'm afraid I'm vetoing NWBD this time around...
https://web.archive.org/web/20161111233 ... 58107.aspx


The chances of Prefs ever again having the double-digit returns required to make them a viable alternative to an HYP are diminishingly small IMHO.


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