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Income IT’s v HYP – 5 years on

General discussions about equity high-yield income strategies
funduffer
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Income IT’s v HYP – 5 years on

#216642

Postby funduffer » April 22nd, 2019, 5:22 pm

This post summarises my experience of 5 years of income generation using a portfolio of Investment Trusts (IT’s) and a High Yield Portfolio (HYP) of shares.

Context

I retired at the end of 2013 aged 58 and took my DB pension early (with the inevitable actuarial reduction), and decided to boost my retirement income by investing in a portfolio of income generating IT’s and a HYP. I used part of my pension lump sum, and a number of languishing old cash ISA’s to finance all this. I chose these 2 investment methods of increasing my income, as I had read about both on TMF (IT baskets and HYP), thanks to such contributors as Luniversal and pyad, plus many others too many to mention.

I have invested roughly equal amounts in the IT’s and HYP, and most of the investments were made in 2014. Since then, I have topped up both portfolios with some extra bits of cash, and most of the dividends generated, having discovered I did not need to spend as much in retirement as I had anticipated.

So looking back after 5 years, how have these 2 portfolios worked out, and what have I learnt?

Current Status of the 2 portfolios

My HYP currently looks like this:

                                                                                 Value     Div    Fcst 
Share Epic Sector %Total %Total Yield

Unilever ULVR Food Producers 6.19% 3.15% 3.20%
BAE Systems BA Aerospace & Defence 3.77% 2.81% 4.70%
Sainsbury (J) SBRY Food & Drug Retailers 4.90% 3.66% 4.70%
Royal Dutch Shell 'B' RDSB Oil & Gas Producers 7.39% 6.81% 5.80%
HSBC Holdings HSBA Banks 7.52% 7.05% 5.90%
Vodafone Group VOD Mobile Telecommunications 4.28% 6.05% 8.90%
National Grid NG Multiutilities 2.91% 2.78% 6.00%
GlaxoSmithKline GSK Pharmaceuticals & Biotechnology 12.34% 10.40% 5.30%
South32 Limited (DI) S32 Mining 3.45% 5.26% 9.60%
Legal and General Group LGEN Life Insurance 7.46% 7.12% 6.00%
Galliford Try GFRD Construction & Materials 2.54% 5.21% 12.90%
Imperial Brands IMB Tobacco 5.88% 7.75% 8.30%
Lloyds Banking Group LLOY Banks 3.49% 2.88% 5.20%
Marston's MARS Travel & Leisure 4.62% 5.58% 7.60%
Stagecoach Group SGC Travel & Leisure 2.33% 2.41% 6.50%
Capita CPI Support Services 1.62% 0.00% 0.00%
SSE SSE Electricity 4.12% 4.65% 7.10%
British Land Company BLND Retail REITs 3.40% 2.86% 5.30%
WPP WPP Media 4.77% 4.85% 6.40%
BHP Group BHP Mining 7.04% 8.73% 7.80%

Portfolio Running Yield = 6.29%


Value Div
Sector %Total %Total

Food Producers 6.19% 3.15%
Aerospace & Defence 3.77% 2.81%
Food & Drug Retailers 4.90% 3.66%
Oil & Gas Producers 7.39% 6.81%
Banks 11.01% 9.93%
Mobile Telecommunications 4.28% 6.05%
Multiutilities 2.91% 2.78%
Pharmaceuticals & Biotechnology 12.34% 10.40%
Mining 10.49% 13.99%
Life Insurance 7.46% 7.12%
Construction & Materials 2.54% 5.21%
Tobacco 5.88% 7.75%
Travel & Leisure 6.95% 7.99%
Support Services 1.62% 0.00%
Electricity 4.12% 4.65%
Retail REITs 3.40% 2.86%
Media 4.77% 4.85%
Total 100.00% 100.00%

Note: 1...'Value %Total' is the portfolio value of the share as a % of the total portfolio
2...'Div %Total' is the expected dividend of the share based on forecast yield
as a % of the total portfolio expected dividend


I recently reviewed 5 years of this HYP in a post on the HYP board, so I won’t repeat all the twists and turns as they are well described here (although there have been a couple of recent top-ups!):

viewtopic.php?f=15&t=16153

My IT portfolio looks like this:

                                                                                 Value     Div    Fcst 
Share Epic Sector %Total %Total Yield

Henderson Far East Income Ltd. HFEL Equity Investment Instruments 13.25% 18.22% 5.90%
BlackRock World Mining Trust BRWM Equity Investment Instruments 8.84% 9.88% 4.80%
City of London Inv Trust CTY Equity Investment Instruments 13.10% 12.83% 4.20%
Dunedin Income Growth Inv Trus DIG Equity Investment Instruments 13.25% 14.21% 4.60%
Scottish American Inv Company SCAM Equity Investment Instruments 14.53% 9.82% 2.90%
Murray International Trust MYI Equity Investment Instruments 11.10% 11.38% 4.40%
BMO Capital & Income Investmen BCI Equity Investment Instruments 13.79% 10.93% 3.40%
Aberdeen Standard Equity Incom ASEI Equity Investment Instruments 12.13% 12.72% 4.50%

Portfolio Running Yield = 4.29%


Value Div
Sector %Total %Total

Equity Investment Instruments 99.99% 99.99%
Total 100.00% 100.00%

Note: 1...'Value %Total' is the portfolio value of the share as a % of the total portfolio
2...'Div %Total' is the expected dividend of the share based on forecast yield
as a % of the total portfolio expected dividend


In choosing the constituents of the IT portfolio, I aimed to achieve the following (back in 2014):

An overall yield >4%
Overall discount rather than premium, and no large premiums
TER <1% overall
Income growing at least as fast as CPI inflation.

I have pretty much achieved all these.

I also wanted diversification – geographical (MYI, SCAM, HFEL), sectorial (BRWM), size (ASEI), but with an overall UK bias (CTY, DIG, BCI). In retrospect, BRWM was a poor choice, choosing a cyclical sector (mining) that was bound to run into trouble at the low part of the cycle, which it did in 2016 with a dividend cut.

Performance

As I withdraw some dividends, I track performance by unitisation of both portfolios, using income units. Thus, income per unit, and unit price give an indication of income and capital performance that can be compared with inflation, and the FTSE AS respectively.

The start dates for the 2 portfolios was slightly different (I largely invested in the IT’s first), so for convenience, and to minimise the effects of dividend drag, I will use the financial years 2014-15 to 2018-19 for the basis of the comparison.

Also, I have normalised unit price for both IT’s , HYP and the FTSE AS to the value of 1.0 as of 5/4/2015, and income per unit as the value 1.0 for the period 6/4/14 to 5/4/15. This allows them to be compared directly.

For income, the 5-year performance is as follows:



Overall, HYP income per unit has grown by 19% over 5 years, and that from the IT’s by 26%, both easily outstripping inflation. This is slightly flattering as the Base year (2014-15) is still subject to some dividend drag, making the growth rate seemingly higher in the next year. Even so, it has been relatively straight forward to outstrip inflation, although the path has not been smooth from year to year.

Perhaps more important, is the HYP (currently at 6.29%) has a much higher yield than the IT's (4.29%), and this has been the case throughout the 5 year period. If income is vital to you, HYP will give you more bang for your buck!

For capital, the 5-year performance is as follows:



Overall, over 5 years, HYP unit price has fallen nearly 10% (mostly in Year 4), whereas the FTSE AS has risen 8%. Not great, but given this is an income strategy, capital should be secondary. I try not to worry about this too much!

On the other hand, the IT’s have outpaced the FTSE AS gaining +15% over the same 5 year period, largely driven by the US-focussed SCAM. You could argue I should use a different benchmark than the FTSE AS for the IT’s, but it is not that important to me, so I don’t want to spend any effort on this.

Note, although I have normalised the capital value, in reality the HYP and IT portfolios have roughly equal value (within 5%) and have had very similar amounts of original capital invested in each.

Lessons Learned

So over 5 years of investing in income generating IT’s and a HYP, what have I learnt? Here are a few lessons:

• IT’s take little work, and on the whole are reliable producers of income
• A HYP is more work, but perhaps more interesting if you enjoy investigating companies.
• A HYP is more volatile, with dividend cuts, specials, and corporate actions occurring regularly. Even Doris with her non-tinkering HYP needs to stay awake.
• A HYP can generate more income (higher yield) than IT’s, but probably at the expense of a lower income growth rate. It will be interesting to compare again after 10 years!
• The IT portfolio has more closely followed the FTSE AS on capital value, whereas the HYP has fallen behind particularly from 2017 onwards. I think this has probably been a general trend for FTSE high yield shares over this period.

Overall, I intend to stick with both the HYP and IT’s, at least until I draw my state pension in 4 years’ time. At that point, I may switch entirely to IT’s - but the jury is still out.

On the other hand, HYP is fun and IT’s are boring! I do enjoy reading the blogs and researching my next top-up, so I may continue with both portfolios just for this!
Thanks for reading if you got this far, and I would be interested in any comments.

FD

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Re: Income IT’s v HYP – 5 years on

#216694

Postby Crazbe7 » April 22nd, 2019, 9:11 pm

funduffer

Thank you for your review.

Interesting reading for someone who is 58 and contemplating early retirement. Note your the comments on income from HYP v IT. I just want an income the increases with CPI, ITs seem the way to go. I have a reasonable cash reserve so I'm not chasing income.

I run an HYP and a separate portfolio of ITs. Currently moving to 50:50 HYP:IT from the current 65:35. Based on your review this may become 35:65 to minimise the variations of income from the HYP. This will be supplemented with DB pensions and Final salary pension schemes/Old age pension as I get further into retirement.

The plan is to draw down from the DB pensions with the income from the HYP/ITs providing some quality and fun in my retirement before the Final salary pension schemes/Old age pension kick in with continuing income from the HYP and ITs which are ISA sheltered so relatively tax efficient.

Crazbe7

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Re: Income IT’s v HYP – 5 years on

#216752

Postby 88V8 » April 23rd, 2019, 9:21 am

funduffer wrote:• A HYP can generate more income (higher yield) than IT’s, but probably at the expense of a lower income growth rate. It will be interesting to compare again after 10 years!


Thankyou for an excellent analysis.

Being as I am interested in income, the disparity in yield between IT and HYP is key.
But as you say, the HYP road is not smooth.

A while ago I did a rough calculation of the contrast between an HYP then yielding c4% and Fixed Interest - Prefs etc - then yielding a static 6% or so, to see how long it took for the accelerating HYP tortoise to overtake the FI hare.
Overtake that is in terms of both annual income and accumulated income.

The answer depended one's growth forecast for the HYP, but it was a long time.
Unless you are unlucky with your HYP selections - Interserve, Carillion, were among mine - I would think that your IT tortoise will never catch the HYP hare. So your HYP hobby will provide both interest and reward.

V8

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Re: Income IT’s v HYP – 5 years on

#216770

Postby MaraMan » April 23rd, 2019, 10:25 am

Excellent analysis thank you for sharing.

My experience 3 years after retiring early is similar in some ways. I took three different strategies with our 2 ISA's and 2 SIPPS

ISA 1 - HYP shares
ISA 2 - Income IT's
SIPP - Small number of balanced Growth IT's and shares.

Its early days to draw any conclusions, but so far the Income IT's have slightly outperformed the HYP shares while producing a similar yield. However, the SIPP has blown the other two away, while still withdrawing an equivalent income as the HYP yield. Although my SIPP is much bigger than my ISA's it has fewer holdings. Based on this I think Terry Smith may be right ( :shock: ) and growth is better than income as a long term strategy, it just takes a bit more organisation I guess.

I do though intend to maintain the ISA strategies the way they are for the forseeable future, as I too enjoy researching and holding individual shares. I will probably reduce the number of shares and IT's held in them over time. I accept three years is much too soon to be taking anything to heart, but it is interesting how its working out.

MM
Last edited by MaraMan on April 23rd, 2019, 10:36 am, edited 1 time in total.

nmdhqbc
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Re: Income IT’s v HYP – 5 years on

#216774

Postby nmdhqbc » April 23rd, 2019, 10:32 am

funduffer wrote:Perhaps more important, is the HYP (currently at 6.29%) has a much higher yield than the IT's (4.29%), and this has been the case throughout the 5 year period. If income is vital to you, HYP will give you more bang for your buck!


6.29% and 4.29% seem to be the running yields. Are those the right things to compare? Aren't you penalising the relative growth in capital value of the IT's by using the current yield.

I estimate your yield vs unit price in year 1 below. No doubt I've done it wrong and someone will correct me.

6.29% running yield on a 0.9 unit price. yield on 1.0 unit price = 6.29 x 0.90 = 5.661%
vs
4.29% running yield on a 1.15 unit price. yield on 1.0 unit price = 4.29 x 1.15 = 4.934%

So the HYP is still higher but much closer (0.727 vs 2.0). Gives a more optimistic projection of when the IT's dividends may outstrip the HYP's. Of course it would take further time to top the cumulative dividends paid by the HYP. Same old Jam today vs Jam tomorrow.

Itsallaguess
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Re: Income IT’s v HYP – 5 years on

#216776

Postby Itsallaguess » April 23rd, 2019, 10:41 am

funduffer wrote:
So over 5 years of investing in income generating IT’s and a HYP, what have I learnt? Here are a few lessons:

• IT’s take little work, and on the whole are reliable producers of income
• A HYP is more work, but perhaps more interesting if you enjoy investigating companies.
• A HYP is more volatile, with dividend cuts, specials, and corporate actions occurring regularly. Even Doris with her non-tinkering HYP needs to stay awake.
• A HYP can generate more income (higher yield) than IT’s, but probably at the expense of a lower income growth rate. It will be interesting to compare again after 10 years!
• The IT portfolio has more closely followed the FTSE AS on capital value, whereas the HYP has fallen behind particularly from 2017 onwards. I think this has probably been a general trend for FTSE high yield shares over this period.


Brilliant review funduffer, and a succinct analysis of the HYP/IT conversation that many of us seem to be having with ourselves over recent years.

I've seen very similar results when comparing my own HYP/IT split, and have decided that whilst I do enjoy the investigative side of HYP management, I really don't enjoy what seems like the too-regular downsides, where HYP components tend to stumble with a regularity that I'm either too unlucky to keep away from, or that's simply part and parcel of the single-share income-approach, and one that we need to either suck up and deal with, or manage the situation using a different approach..

I'm currently 60% HYP / 40% IT's, and I'm likely to only ever head in the IT direction from this point out. That'll be a gradual development, implemented by simply not topping up further single-share HYP components, and I'm really quite comfortable with that position. I'm still working, so there's hopefully plenty of time for me to tweak my additional capital and accumulated dividends into a more IT-oriented position in my income-portfolio.

Thanks again for your review - I look forward to your 10-year one, but in the meantime it's great to hear that such a similar income-investment approach to my own is providing you with a good level of income to help with your retirement.

Cheers,

Itsallaguess

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Re: Income IT’s v HYP – 5 years on

#216936

Postby funduffer » April 24th, 2019, 8:21 am

nmdhqbc wrote:
funduffer wrote:Perhaps more important, is the HYP (currently at 6.29%) has a much higher yield than the IT's (4.29%), and this has been the case throughout the 5 year period. If income is vital to you, HYP will give you more bang for your buck!


6.29% and 4.29% seem to be the running yields. Are those the right things to compare? Aren't you penalising the relative growth in capital value of the IT's by using the current yield.

I estimate your yield vs unit price in year 1 below. No doubt I've done it wrong and someone will correct me.

6.29% running yield on a 0.9 unit price. yield on 1.0 unit price = 6.29 x 0.90 = 5.661%
vs
4.29% running yield on a 1.15 unit price. yield on 1.0 unit price = 4.29 x 1.15 = 4.934%

So the HYP is still higher but much closer (0.727 vs 2.0). Gives a more optimistic projection of when the IT's dividends may outstrip the HYP's. Of course it would take further time to top the cumulative dividends paid by the HYP. Same old Jam today vs Jam tomorrow.


nmdhqbc,

You are broadly correct. In Year 1 the historic yields were 4.5% for the HYP, and 3.9% for the IT's (although there are some dividend drag effects), so a lot of the difference currently is due to the changes in capital value.

However if I look, over the 5 years, at the accumulated dividends as a proportion of capital invested, it is 25% for the HYP and 20% for the IT's, so I think it is true that a HYP will generally yield more.

Thanks for the comment.

Itsallaguess
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Re: Income IT’s v HYP – 5 years on

#216961

Postby Itsallaguess » April 24th, 2019, 10:28 am

funduffer wrote:
So over 5 years of investing in income generating IT’s and a HYP, what have I learnt? Here are a few lessons:

• IT’s take little work, and on the whole are reliable producers of income
• A HYP is more work, but perhaps more interesting if you enjoy investigating companies.
• A HYP is more volatile, with dividend cuts, specials, and corporate actions occurring regularly. Even Doris with her non-tinkering HYP needs to stay awake.
• A HYP can generate more income (higher yield) than IT’s, but probably at the expense of a lower income growth rate. It will be interesting to compare again after 10 years!
• The IT portfolio has more closely followed the FTSE AS on capital value, whereas the HYP has fallen behind particularly from 2017 onwards. I think this has probably been a general trend for FTSE high yield shares over this period.

Overall, I intend to stick with both the HYP and IT’s, at least until I draw my state pension in 4 years’ time. At that point, I may switch entirely to IT’s - but the jury is still out.

On the other hand, HYP is fun and IT’s are boring! I do enjoy reading the blogs and researching my next top-up, so I may continue with both portfolios just for this!


I meant to add this to my earlier post funduffer -

Given your experience with both HYP and IT income-investment, I'd be interested to hear your thoughts on which way you might advise someone who's looking to set out themselves on an equity income-investment journey.

If you had an aunt, for instance....

For the sake of this scenario, I suppose we should give her a name, so let's call her Doris....

If your Aunt Doris came to you asking for advise on equity income-investment, and it was clear that she would like nothing better than to simply invest a lump of capital into the stock-market and forget about it for the next 25 years, and after discussing this with you it was clear that she wasn't really all that interested in chasing for the highest yields available, and she would very much prefer to prioritise the 'fire and forget' side of things, and simply taking advantage of what would hopefully be a relatively high income, with a long-term objective of growing that income over a number of years, which of the two approaches would you recommend?

I only ask because your list above seems to be another example of someone who enjoys the HYP side of things *because* it involves an amount of personal-input into the process, over and above that which is generally required with an income-IT approach, and as this aligns with my personal view too, I can fully understand where you're coming from. I enjoy it too..

But then I'm reminded that HYP wasn't 'supposed' to be like that - it was intended as a fire-and-forget approach, but seems to be enjoyed by income-investors who see that it needs more work than that....

Would you say that the income-IT approach would clearly suit Aunt Doris more than the HYP approach, given your experiences above?

Cheers,

Itsallaguess

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Re: Income IT’s v HYP – 5 years on

#216971

Postby Alaric » April 24th, 2019, 11:56 am

funduffer wrote:However if I look, over the 5 years, at the accumulated dividends as a proportion of capital invested, it is 25% for the HYP and 20% for the IT's, so I think it is true that a HYP will generally yield more.


On a total return basis as demonstrated by the unit values, isn't it the case that the higher dividends on the HYP approach are offset by lower capital values? That actually makes sense, as the selection of a subset of stocks for a HYP may not perform better than the "whole market" approach implied by a selection of ITs.

But perhaps investors would want an element of "return of capital" if investing for lifetime income.

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Re: Income IT’s v HYP – 5 years on

#216972

Postby Alaric » April 24th, 2019, 12:00 pm

Itsallaguess wrote:Would you say that the income-IT approach would clearly suit Aunt Doris more than the HYP approach, given your experiences above?


An advantage of ITs as opposed using a stock buying approach or income ETFs can be that the calculation and judgement of income sustainability are done as part of the management process of the ITs.

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Re: Income IT’s v HYP – 5 years on

#216979

Postby Gengulphus » April 24th, 2019, 12:36 pm

A couple of detailed comments on this:

funduffer wrote:For income, the 5-year performance is as follows:



Overall, HYP income per unit has grown by 19% over 5 years, and that from the IT’s by 26%, both easily outstripping inflation. This is slightly flattering as the Base year (2014-15) is still subject to some dividend drag, making the growth rate seemingly higher in the next year. ...

Given that you made most of your investments in 2014 and so you quite rightly identify 2014-2015 as the year mainly affected by dividend drag, it seems worth try looking at the dividend growth without taking that year into account. And done that way, one finds that the HYP income per unit has risen 19% from 1.00 to 1.19, while the IT income per unit has risen 3% from 1.22 to 1.26...

There is however a better way to eliminate dividend drag from income-per-unit growth records, which is to look at the dividends that have gone ex-dividend during the year rather than the dividends that have been paid during the year: going ex-dividend can start happening right from the date of purchase and so isn't subject to dividend drag. I do realise though that re-attributing all the dividends to their ex-dividend date rather than their ex-dividend date would be a substantial bit of work - I'm definitely not asking you to do that work, just saying that it's something you could do.

There are also two closely-related effects that I might describe as 'dividend jitter' that apply regardless of whether one attributes them to ex-dividend dates or payment dates. The first is that due to a year being 1 or 2 days longer than an exact number of weeks, payment dates tend to drift earlier in the calendar by 1 or 2 days each year until that's built up to the point that it's going to be 7 days, at which point they instead jump later by 5 or 6 days. Ex-dividend dates have an even stronger tendency to do that, due to the LSE strongly encouraging ex-dividend dates to be Thursdays (with only a few exceptions due to bank holidays): payment dates only have an apparent liking of many companies to keep their payment day on the same day of the week and some companies only avoid trying to pay dividends on weekends (which leads to less drifting and jumping but still a bit). For most year ends that you could pick for your portfolio, that dividend jitter can lead to a company's dates drifting back to the previous portfolio year and jumping forward to the next portfolio year - the former resulting in a company paying one time more than the usual 2 or 4 times for a portfolio year and the latter in it paying one time less than usual. Especially if that results in a company being attributed two finals and an interim in one portfolio year and just an interim in the next, or vice versa, that can produce a surprisingly high or low year-on-year percentage change to the portfolio income due to just a single company.

For fairly obvious reasons, that first type of dividend jitter doesn't normally cause dividends to cross calendar year boundaries, and for dividends paid by UK companies, it also doesn't normally cause them to cross UK tax year boundaries. But there's a second form: when there's a significant change to the UK tax regime on dividends, it's not especially unusual for UK companies to pull a dividend back to the previous tax year for just a single year to beat the tax rise, or delay one to take advantage of the tax fall. That too can result in a half-yearly-paying company paying three dividends in one tax year and just one in the next or preceding tax year. I know some companies did do that for the Income Tax rises on dividend income that came into effect for the 2016/17 tax year - which does make me wonder whether one or more of your ITs did it - it could help to explain the IT portfolio's big rise for 2015-16 followed by the fall for 2016-17, which definitely strikes me as likely to be due to an anomaly of some sort in the light of ITs generally trying to 'smooth' the income they pay. Just one quarterly dividend from one IT being shifted from 2016-17 to 2015-16 would increase the portfolio 2015-16 income by very roughly a quarter of an eighth, i.e. about 3%, and decrease the portfolio 2016-17 income by very roughly the same percentage, so modify the year-on-year percentage change between those two years by very roughly 6%... (In the period you cover, there has also been the reduction in the 'dividend allowance' from £5k to £2k for the 2018/19 tax year, but I'm not aware of any company having jittered its dividends for that. I'd guess that's because it affects fewer taxpayers than the 2016/17 change and potentially affects those it does by a lot less - in particular, the 2016/17 change affected the tax rate that applied to all of an investor's dividend income other than any covered by their personal allowance, which could be all but £5k of it for those with sufficiently high taxable income, while the 2018/19 change affected the tax rate that applied to at most £3k of an investor's dividend income.)

Unfortunately, I don't know of any way of correcting income histories for dividend jitter short of the tedious process of looking through each company's record for the 'wrong' number of dividends being paid in a portfolio year, then looking at the cases one finds to decide whether each is just dividend jitter or a more permanent change (e.g. due to a company shifting from half-yearly payments or deciding that it can pay an interim dividend more quickly), and applying appropriate adjustments to shift the cases where it's just dividend jitter into the 'right' portfolio year.

funduffer wrote:Lessons Learned

So over 5 years of investing in income generating IT’s and a HYP, what have I learnt? Here are a few lessons:

• IT’s take little work, and on the whole are reliable producers of income
• A HYP is more work, but perhaps more interesting if you enjoy investigating companies.
• A HYP is more volatile, with dividend cuts, specials, and corporate actions occurring regularly. Even Doris with her non-tinkering HYP needs to stay awake.
• A HYP can generate more income (higher yield) than IT’s, but probably at the expense of a lower income growth rate. It will be interesting to compare again after 10 years!
• The IT portfolio has more closely followed the FTSE AS on capital value, whereas the HYP has fallen behind particularly from 2017 onwards. I think this has probably been a general trend for FTSE high yield shares over this period.

Well, I strongly suspect Doris (who incidentally is neither known to have owned a HYP nor known not to have owned one) employed a discretionary broker, with instructions not to bother her with such matters but just deal with them, while otherwise leaving the portfolio alone. She was certainly wealthy enough to be able to employ a tax accountant, and willing to do so, without complaining about his "eyewateringly high fees", so would probably have had exactly the same attitude about employing someone to "stay awake" for her!

Which is actually pretty much what you're doing as well in your IT portfolio, in somewhat modified form. It's almost certainly affected by even more dividend cuts, specials, and corporate actions than your HYP, but you employ the ITs' managers to do the "staying awake" for you, so you can close your eyes to them and snooze away! And the ITs' managers' fees are highly likely to be "eyewateringly high", but that's where the modification comes in: you're clubbing together with the other shareholders of each IT to share the fees between you. That has the plus side that it reduces your share of the fees to an affordable level for those other than the super-wealthy, the minus side that it reduces your control over the investment policy to selecting between the policies that other people think they can sell to the public rather than making it one tailored to your own preferences. For instance, if you have ethical objections to investing in some but not all of the tobacco, alcohol, gambling, defence, mining and 'big oil' industries, you're probably going to find your choice of ITs and other funds restricted to 'ethical' ones that refuse to invest in any of them and others that invest in all of them - neither of which really matches your preferences. Or someone super-wealthy like Doris can if they like instruct their discretionary broker to leave the shareholdings alone apart from choosing suitable reinvestments for capital returned by takeovers and other corporate actions, whereas I doubt very much that any IT or other fund offers the public such an investment policy. (Not saying Doris did that, by the way - I have no information at all about her discretionary broker, not even that they existed. Just that she could have done it if she wanted.)

The point of all that is to say that to a fair extent, the comparison between your HYP and your IT portfolio is a comparison of management styles rather than of investment selection methods. In particular, just about any portfolio of individual shareholdings will be more work dealing with dividend cuts, specials, and corporate actions than one of funds, but will cost less in the way of management fees (or one might regard it as having management fees taken more from the investor's time and effort and less from the investor's money) and allow more control by the investor. And the volatility difference (if it's real - the points I've made above in the first section of this reply mean I cannot be certain about that) is also a difference of management styles to at least some extent: at 20 shareholdings, your HYP is using a considerably more "small number of big eggs in the basket" management style than your ITs' underlying portfolio of shareholdings.

There is of course an interaction between the management style and the share selection method. It is possible for a private investor to run a portfolio containing more than 20 shareholdings (and I do - my HYP has about 40). And some do even go up to a hundred or two, which is probably what your ITs' combined underlying portfolios contain, but that's an extreme that most private investors would find a prohibitive amount of work, or at the very least highly undesirable. And it would be possible to apply an IT's management style to a HYP-like underlying portfolio, but the portfolio would have to be very big for the many quite small adjustments to portfolio holdings that ITs typically make to be cost-effective, and again, I suspect most individual investors would consider running a portfolio that way too much work...

To try to bring this to a conclusion, I think the choice basically comes down to investor preferences: cost in time vs cost in fees vs control. ITs offer only limited control over investment policy and costs more in money than in time, portfolios of individual shareholdings offer costs more in time than in money and a great deal of control over investment policy (including whether share selection is by HYP methods or something else), though still some restrictions on it because of the time costs becoming prohibitively large. (And just to be clear, I'm not trying to say what preferences anybody else should have - just pointing out that taking a good hard look at one's own preferences about such matters is a useful thing to do when deciding on one's investment strategy.)

Gengulphus

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Re: Income IT’s v HYP – 5 years on

#216996

Postby spasmodicus » April 24th, 2019, 2:22 pm

Well, I strongly suspect Doris (who incidentally is neither known to have owned a HYP nor known not to have owned one) employed a discretionary broker, with instructions not to bother her with such matters but just deal with them, while otherwise leaving the portfolio alone. She was certainly wealthy enough to be able to employ a tax accountant, and willing to do so, without complaining about his "eyewateringly high fees", so would probably have had exactly the same attitude about employing someone to "stay awake" for her!

https://web.archive.org/web/20070104152420/http://www.fool.co.uk/news/investing/high-yield/2006/12/20/doris.aspx

Blimey, Gengulphus, I had been labouring under the misaprehension that Doris was one half of the heaving throng from the terraces of Neasden F.C. , namely Sid and Doris Bonkers. This was compounded by Sid’s own involvement in the British Gas share privatisation in the 1980s, which I took to represent the couple’s early experience with investment in the stock market, after which Doris wanted a piece of the action for herself. Having read your link to the TMF post, I can now see that my entire attitude towards HYP may have been distorted by this misunderstanding.

Joking apart, the Doris in your link comes over as being considerably better educated and more sophisticated that the one in my imagination, to the extent of hiring a professional to make decisions of what to buy and carrying out all those irksome toppings up, rebalancings and unitisations for her!

S
(I'm sick as a parrot)

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Re: Income IT’s v HYP – 5 years on

#217093

Postby toofast2live » April 24th, 2019, 8:34 pm

Simples.

If your spouse, like mine, has as much interest in HYP as in paint drying get a few ITs under your belt.

HYP1 is now a grossly distorted portfolio, uniquely aided by the stupid distortions of dot-com. A once in a lifetime opportunity to invest in beaten up old defensives...

Ironically, it has become just as distorted as those dot commers. And as for it’s originator going for bragging rights against the FTSE100 over the last 19 years....

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Re: Income IT’s v HYP – 5 years on

#217102

Postby funduffer » April 24th, 2019, 9:15 pm

Itsallaguess wrote:

Given your experience with both HYP and IT income-investment, I'd be interested to hear your thoughts on which way you might advise someone who's looking to set out themselves on an equity income-investment journey.

If you had an aunt, for instance....



Interesting you should ask about such an aunt. I don’t have such an aunt, but I do have a sister, who wants to generate income from a modest capital sum. She has no interest and very little understanding of the stock market. She does have a cash sum as backup, I hasten to add.

I had no hesitation in advising to invest in IT’s - 2 in fact, CTY and MYI.

I told her to forget about them, and just check the dividends appear in her bank account every 3 months!

FD

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Re: Income IT’s v HYP – 5 years on

#217107

Postby funduffer » April 24th, 2019, 9:39 pm

Gengulphus wrote:
There are also two closely-related effects that I might describe as 'dividend jitter' that apply regardless of whether one attributes them to ex-dividend dates or payment dates. The first is that due to a year being 1 or 2 days longer than an exact number of weeks, payment dates tend to drift earlier in the calendar by 1 or 2 days each year until that's built up to the point that it's going to be 7 days, at which point they instead jump later by 5 or 6 days. Ex-dividend dates have an even stronger tendency to do that, due to the LSE strongly encouraging ex-dividend dates to be Thursdays (with only a few exceptions due to bank holidays): payment dates only have an apparent liking of many companies to keep their payment day on the same day of the week and some companies only avoid trying to pay dividends on weekends (which leads to less drifting and jumping but still a bit). For most year ends that you could pick for your portfolio, that dividend jitter can lead to a company's dates drifting back to the previous portfolio year and jumping forward to the next portfolio year - the former resulting in a company paying one time more than the usual 2 or 4 times for a portfolio year and the latter in it paying one time less than usual. Especially if that results in a company being attributed two finals and an interim in one portfolio year and just an interim in the next, or vice versa, that can produce a surprisingly high or low year-on-year percentage change to the portfolio income due to just a single company

Gengulphus


You are correct that both my HYP and IT’s have suffered from dividend jitter, as you put it.

Besides some companies changing a dividend payment date over a tax year end as you describe, there are other causes of jitter:

Changing the number of dividends per year (Eg 2 to 4)

Changing from unequal to equal dividends (IT’s especially)

Specials that appear once (HYP shares, rather than IT’s)

All these effects have occurred in the data I have provided, but you are correct, I have not got the time or inclination to correct for them. The data is raw I.e. dividends as received in the time periods described.

I don’t think it changes any of the conclusions though.

FD

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Re: Income IT’s v HYP – 5 years on

#217109

Postby funduffer » April 24th, 2019, 9:43 pm

Alaric wrote:
funduffer wrote:However if I look, over the 5 years, at the accumulated dividends as a proportion of capital invested, it is 25% for the HYP and 20% for the IT's, so I think it is true that a HYP will generally yield more.


On a total return basis as demonstrated by the unit values, isn't it the case that the higher dividends on the HYP approach are offset by lower capital values? That actually makes sense, as the selection of a subset of stocks for a HYP may not perform better than the "whole market" approach implied by a selection of ITs.

But perhaps investors would want an element of "return of capital" if investing for lifetime income.


This is true for my particular portfolios over this particular time period. It may be generally true, but I don’t know.

I am not too concerned over total return, nor capital value, as the portfolio will be left to my family. They will get what they get. Boosting my income is my main objective.

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Re: Income IT’s v HYP – 5 years on

#217119

Postby kempiejon » April 24th, 2019, 10:21 pm

funduffer wrote:Interesting you should ask about such an aunt. I don’t have such an aunt, but I do have a sister, who wants to generate income from a modest capital sum. She has no interest and very little understanding of the stock market. She does have a cash sum as backup, I hasten to add.

I had no hesitation in advising to invest in IT’s - 2 in fact, CTY and MYI.

I told her to forget about them, and just check the dividends appear in her bank account every 3 months!

FD


I hold both those ITs but buying today with a lump sum for Auntie Doris I'd be just as happy to suggest slinging it into a FTSE100 tracker/ETF yielding about the same as the 4.3% offered by that pair. Last time I looked at a graph I noticed that CTY hadn't outdone that index TR until about 10 years in.
My HYP is currently offering me 4.9%, I also hold Murray Income MUT (4.6%) as well as the others and the HYP is better income but clearly a bit more work than a couple of ITs as I'm building so buying regularly.

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Re: Income IT’s v HYP – 5 years on

#217225

Postby Arborbridge » April 25th, 2019, 12:34 pm

Alaric wrote:
funduffer wrote:However if I look, over the 5 years, at the accumulated dividends as a proportion of capital invested, it is 25% for the HYP and 20% for the IT's, so I think it is true that a HYP will generally yield more.


On a total return basis as demonstrated by the unit values, isn't it the case that the higher dividends on the HYP approach are offset by lower capital values? That actually makes sense, as the selection of a subset of stocks for a HYP may not perform better than the "whole market" approach implied by a selection of ITs.

But perhaps investors would want an element of "return of capital" if investing for lifetime income.


You might well correct, but what some investors want is a steady income which rises with inflation, and a capital base which does something similar. The capital is the seed corn and just needs to keep on giving the bread. As FD says, if investing in high yield implies that one's children end up with slightly less capital than they might have done - so be it!

Nice analysis and record keeping Funduffer - I'm full of admiration.
Arb.

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Re: Income IT’s v HYP – 5 years on

#217310

Postby Gengulphus » April 25th, 2019, 5:24 pm

funduffer wrote:Besides some companies changing a dividend payment date over a tax year end as you describe, there are other causes of jitter:

Changing the number of dividends per year (Eg 2 to 4)

Changing from unequal to equal dividends (IT’s especially)

Specials that appear once (HYP shares, rather than IT’s)

Agreed about the first two of those being further forms of 'dividend jitter', and I probably should have thought of them: Unilever in 2009/10 and Imperial Tobacco/Brands in 2014/15 are examples I've seen and remember of the first, and Rio Tinto in 2001/02 an example of a variant of the second from the fairly early days of HYP1 that has stuck in my memory. It shifted to a policy of making each year's interim half the previous year's total, then choosing the final to make the total for the year what they thought it should be, and a result was that HYP1 (whose portfolio year takes in the year's interim and the previous year's final) saw an unusually big increase from Rio Tinto in its year 2 (when the new policy first affected the year's interim, increasing it quite a lot) and then a reduction in its year 3 (when the new policy first affected the previous year's final, decreasing it quite a lot).

Once-only specials are however not quite what I had in mind as 'dividend jitter'. The two causes I gave and the first two above all involve the company basically continuing to pay the same amount of income as one might have expected: it's just that the timing of some payments shifts by amounts ranging from a day up to a few months and the result is that some payments are 'jittered' from one portfolio year to an adjacent one, in a way that will vary according to the portfolio year end. (For example, if HYP1's year end had been June 30th rather than November 13th, it would have seen Rio's contribution to its income rising steadily from its year 1 to its year 8, as shown in the "Total" column of the RIO link above, and the Unilever link shows the effect of the payment frequency change in its chart but the Imperial Brands link's chart doesn't.)

On the other hand, if once-only specials should be treated as income at all (which IMHO they generally shouldn't if they're accompanied by share consolidations, other than for tax purposes), they are pretty clearly additional income on top of what one might have expected, rather than just being re-timed income, and they'll show up as a one-off spike in the company's contributions to totals for portfolio year totals no matter what the portfolio's year end is. That makes them rather different from what I meant by 'dividend jitter'.

By the way, none of this is meant as correcting you - more as correcting myself, specifically for having been less than entirely clear about what I meant by 'dividend jitter'!

Gengulphus

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Re: Income IT’s v HYP – 5 years on

#217319

Postby Gengulphus » April 25th, 2019, 5:40 pm

funduffer wrote:All these effects have occurred in the data I have provided, but you are correct, I have not got the time or inclination to correct for them. The data is raw I.e. dividends as received in the time periods described.

I don’t think it changes any of the conclusions though.

I'm afraid that, while I agree for most of the conclusions, I don't for the conclusions about volatility. Basically, dividend jitter adds in some pretty random extra volatility. Unless one has a good idea of how big that 'noise' volatility is and that its effects are small compared with the volatility one is observing in the raw data, one cannot really conclude anything about how the two strategies compare on volatility. Not suggesting that you have to correct for dividend jitter, but not having the time or inclination to correct for it or at least get a good idea how much it is basically means not having the time or inclination to draw reasonably safe conclusions about volatility...

Gengulphus


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