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Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

General discussions about equity high-yield income strategies
Julian
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Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#222335

Postby Julian » May 17th, 2019, 11:11 am

Gengulphus wrote:As a general comment on this thread, could I suggest that someone interested in Luniversal's 'zoning' concept starts up a thread that is specifically about it and has a subject that clearly says what it's about? It would help those who are interested in the concept, both by bringing comments about it together in one place and by making it easier to locate them later (with thousands of threads on this board and material about it buried in a thread whose subject says it's about Vodafone, that won't necessarily be easy!). And it would help those who aren't interested in the concept, by giving them less to wade through in threads like this one...

Basically, if a side-issue to a thread's subject is worth an extended diversion, it's worth a thread of its own!

Gengulphus


As suggested by Gengulphus I'm creating a thread explicitly about this topic. I am open to suggestions for a better thread title if felt appropriate - I'm not actually sure if I can edit it at all, or outside the normal edit window, but if necessary I'm sure I could report my own post to request a thread title (subject) change.

The question is left as to how to capture the interesting discussion that has already taken place on the "Big Week for VOD" thread. Maybe people can cut & paste? Report their own or other people's posts to the mods with reassignment requests? Like I said, I'm really not sure.

P.S. I realise that discussion of moderation is against the rules but hopefully in this very specific case my brief references above might be deemed OK.

- Julian

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by LUniversal

#222340

Postby PinkDalek » May 17th, 2019, 11:23 am

I'm neither a HYPster nor a Danger Zoner but here is one of PYAD's comments on Danger Zones etc:

viewtopic.php?p=48830#p48830

Whilst here, I note that reply includes:

Here's a quote from my original article that launched HYP1 back in 2000:

...My belief is that a portfolio along these lines will generate a rising income over a long period together with a good chance of some capital growth as well...

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#222342

Postby MDW1954 » May 17th, 2019, 11:29 am

Julian wrote:
Gengulphus wrote:As a general comment on this thread, could I suggest that someone interested in Luniversal's 'zoning' concept starts up a thread that is specifically about it and has a subject that clearly says what it's about? It would help those who are interested in the concept, both by bringing comments about it together in one place and by making it easier to locate them later (with thousands of threads on this board and material about it buried in a thread whose subject says it's about Vodafone, that won't necessarily be easy!). And it would help those who aren't interested in the concept, by giving them less to wade through in threads like this one...

Basically, if a side-issue to a thread's subject is worth an extended diversion, it's worth a thread of its own!

Gengulphus


As suggested by Gengulphus I'm creating a thread explicitly about this topic. I am open to suggestions for a better thread title if felt appropriate - I'm not actually sure if I can edit it at all, or outside the normal edit window, but if necessary I'm sure I could report my own post to request a thread title (subject) change.

The question is left as to how to capture the interesting discussion that has already taken place on the "Big Week for VOD" thread. Maybe people can cut & paste? Report their own or other people's posts to the mods with reassignment requests? Like I said, I'm really not sure.

P.S. I realise that discussion of moderation is against the rules but hopefully in this very specific case my brief references above might be deemed OK.

- Julian


I'll see what I can do. Be warned, though: I'm not especially gifted at such wholesale movement...

MDW1954

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#222434

Postby Alaric » May 17th, 2019, 11:42 am

Perhaps one should consider how a share gets into high yield territory in the first place. Dividend Yield is Amount of Dividend divided by Share Price. Either the first increases or the latter reduces.

There's a lot of Companies that have increased their dividends, sometimes dramatically. They don't tend to show up in "HYP" filters because the share price rises even faster than the dividend. That leaves the HYP filter showing shares where the price has fallen. I'd suspect there are at least three types of Company caught by this filter. Those like Vodafone perhaps, that look to be sound, but will cut their dividend back towards the average. There are those that are in a downturn in a share price cycle. Then there are those like Carillion that with hindsight are on the way to oblivion. You want to avoid the complete disasters presumably and concentrate on the recovery ones.

It may be logical to perhaps expect that a Company whose dividend is expected to increase faster than the FTSE 100 average would have a premium on its share price such that the running dividend yield was below that of the average.

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#222443

Postby MDW1954 » May 17th, 2019, 12:01 pm

Moderator Message:
This has now been done, and this thread has now been locked. -- MDW1954

Thread now relocated from HYP-P to HY-General and unlocked so that anybody who wishes can discuss it away from the narrow remit of HYP-P board. -- dspp

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#222464

Postby PinkDalek » May 17th, 2019, 1:14 pm

For anyone interested, the High Yield Portfolios (HYP) - Practical split out version is here:

Specific discussion of Luni's zones, moved from earlier Vodafone thread
viewtopic.php?p=222355#p222355

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by LUniversal

#222493

Postby Itsallaguess » May 17th, 2019, 3:47 pm

PinkDalek wrote:
I'm neither a HYPster nor a Danger Zoner but here is one of PYAD's comments on Danger Zones etc:

https://www.lemonfool.co.uk/viewtopic.php?p=48830#p48830


I'd like to note that in Pyad's linked post above, he has this view of the ZONE theory -

The other weakness in the above is the mention of "In this market, too high a yield should maybe be looked at with more suspicion" implying things are different now.

In my view, this time it's not different. It never is for the HYP strategy.

There is no "this market", there is only "the market".

Sure you need to look closely at a very HY share but you always did, not just in "this market". However it is wrong in my view is to reject it automatically on the sole ground that it is very HY.

That's what the zones idea does and I think it flawed.



I personally think that the focus above on the 'this market' idea actually confuses the issue, and if we remove that side-issue from the above passage, then Pyad seems to simply be saying the following -

1. You need to look closely at a very high-yield share.

2. You always needed to do this.

3. It's 'wrong' to simply 'reject' something automatically, just because it's a very high-yield share.

4. Because of the above, the ZONAL idea is flawed.

So with the above points split out from Pyad's view of the ZONAL subject, then it seems that we're left with the idea that we simply 'don't need' the ZONAL idea for self-protection, so long as we do some additional, potentially difficult and laborious, hard investigations into potential very-high-yield investments, and doing so should highlight those very-high-yield investment options that might look too risky, and leave some that don't look as risky, and which might warrant investing in for income.

That all seems fair enough, and is difficult to argue against on the face of it.

Except.....

Hands up who actually *does* this 'additional due-diligence' when venturing into very-high-yield territory?

If we decide that we either can't, or we've not got enough time available, or that we simply don't have the experience to carry out such additional checks, then what do we do then? The HYP instruction manual seems very light indeed in this area of income-investment....

The options seem to be -

a. We simply don't invest in very-high-yield options, given that we're not willing to put the additional work in to separate the wheat from the chaff...

or

b. We perhaps look for alternative pointers as to where such danger lies....

And when Luni can demonstrate that his 'Danger Zone' theory can indeed highlight the future potential for dividend-issues, as shown in the link below, then I think it becomes a useful *option* for people who may simply not want to, or are not able to carry out the additional due-dilligence that Pyad insists is required on very-high-yield shares -

From Luni -

Meanwhile, here is a later example of zones in action-- the last of my monthly yield lists, calculated on Dec. 23, 2016.

At that point my database held 195 past and present HYP-able shares, but only 71 had good enough five-year dividend records and yielded enough (90% or more of the All-Share yield, then 3.5%) to be potentially eligible for one of my 'sturdometer' monthly portfolios. Of these 52 were in the Optimal Zone and 19 in the red zones, as below:

From a quick check of what has befallen their payouts since, 14 of 19 red-zoners came to grief: suspending, passing or freezing the rate. Two, Carillion and Interserve, were wipeouts.

Only eight of 52 in the OZ misbehaved similarly, and on the whole, the red yielders have suffered worse: only Pearson among them has begun to restore a cut dividend. (AstraZeneca, Shell and BBA Aviation pegged the dividend in dollars, but it grew in sterling terms.) The worst that befell 'Goldlilocks' yielders was Provident Financial's pass, which it began to mend before becoming a bid prospect. Otherwise the OZ saw five freezes and two serious 'rebasings' but no busts.


https://www.lemonfool.co.uk/viewtopic.php?f=15&t=17704&p=222398#p222398

So it's great for Pyad to knock the idea with a view that 'obviously' tougher checks need to be made on very-high-yield share options, but beyond that there seems to be very little detail on how to actually do that, and what 'good' or 'bad' might look like after carrying out such detailed checks....

If the HYP Strategy contained details of what these 'additional checks' needed to be, then I think that would go some way towards helping followers of the HYP strategy not having to seek out alternative methods of highlighting such risks, but in the absence of those additional guidelines, and in specific recognition of Luni's results above, then I think there's a useful part for the 'Danger Zone' theory to play in our selection-strategies, even if it's simply as an additional check-off during the final selection processes.

Yes, it might remove what could turn out to be a few relatively 'safe' options, but if it also removes the bulk of the 'unsafe' options, then it might well provide a benefit to those who would prefer to stay in the centre-lane of the income-investing highway, and well outside that risky third-lane rat-run.....

Cheers,

Itsallaguess

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by LUniversal

#222583

Postby moorfield » May 17th, 2019, 11:05 pm

Itsallaguess wrote:I'd like to note that in Pyad's linked post above, he has this view of the ZONE theory -

[i]The other weakness in the above is the mention of "In this market, too high a yield should maybe be looked at with more suspicion" implying things are different now.


I think in terms of boundary conditions, rather than zones, with my shambolic ramblings in The Other Place. The physicists and mathematicians here might clock what I'm getting at, perhaps.

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#222930

Postby 88V8 » May 19th, 2019, 9:50 am

The Zones are a guide to risk.

Luni has a (pretty senior) accountancy background and knows well how to rummage through the entrails of company accounts, yet for the average Dorisian investor he does not advocate a dissecting approach.

Instead he propounded and developed a very simple methodology, almost a stock filter, based on dividend history and historic yield, with the intention - and this is key - that is could be automated.

Now, one respect in which this falls down in some people's eyes, is that the Zones have boundaries, and naturally some shares will move across those boundaries so that one week a share might be In and the next week Out. And then In again.

Unfortunately this was highlighted during a period when he helpfully posted weekly model portfolios and yes, some shares did appear then not then again in a sort of Punch & Judy effect which caused much clucking.
That is the nature of automation, in the same way that any filter will select or not, depending on the set parameters.

I think the Zones idea sound. One can debate all day where the boundaries should fall, and on TMF we did. Preferentially, he stayed within 90% & 150% of the FTSE average yield. No point going below 90% and too risky about 150%. This was his Goldilocks Zone.
Above that the adventurous might venture to 160% which was the Danger Zone.

Despite the boundaries debate, I believe the principle is sound, along with his advice - don't chase the yield. And I wish I had more often heeded it.

Now, where this reliance on historic data can fall down is that it looks only backwards. Both Interserve and Carillion had stonking dividend records, until they didn't.

V8

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#222954

Postby Alaric » May 19th, 2019, 12:21 pm

88V8 wrote:I think the Zones idea sound. One can debate all day where the boundaries should fall, and on TMF we did. Preferentially, he stayed within 90% & 150% of the FTSE average yield. No point going below 90% and too risky about 150%. This was his Goldilocks Zone.


If investing for future income, say retirement in 20 years time, there's no real disadvantage in looking below the FTSE average, provided that is, the dividend growth rate is well above average. In fact the market "as a whole" may realise this, as the price growth of shares with dividend increases seems to exceed the growth of dividends themselves, with the result that the running yield drifts downwards.

For someone intent on receiving immediate income, there's the possible option of balancing a lower yield, high dividend growth with something fixed at a high yield like a corporate bond or preference share. Investment Grade Corporate Bonds have yields comparable to the FTSE average though.

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#222997

Postby Dod101 » May 19th, 2019, 4:31 pm

88V8 wrote:The Zones are a guide to risk.

Now, where this reliance on historic data can fall down is that it looks only backwards. Both Interserve and Carillion had stonking dividend records, until they didn't.


I agree with pretty well all that V8 has said in his post, but particularly the above. The Zones are only a guide. No one should simply take shares lying within 90%/150% of the FTSE and buy without further examination, but they make a good starting point. Nor does it mean that one should automatically reject shares lying outside these parameters although shares yielding much above 150% need to be looked at very carefully. Obviously the tobaccos or at least Imperial is well over that at the moment. 'If in doubt, reject' is a good motto.

Interserve and Carillion had good dividend records but they were in the wrong industry, and at least for Carillion the writing was on the wall for quite some time before disaster struck, just as it was, in an earlier era, for most of the banks. Culture, general trustworthiness and 'feel' , or what some call 'smell' are also vitally important. That can only come I guess with some experience and in the meanwhile the zone theory will help a lot as a pointer in the right direction.

Dod

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#223238

Postby Gengulphus » May 20th, 2019, 6:28 pm

Alaric wrote:If investing for future income, say retirement in 20 years time, there's no real disadvantage in looking below the FTSE average, provided that is, the dividend growth rate is well above average. In fact the market "as a whole" may realise this, as the price growth of shares with dividend increases seems to exceed the growth of dividends themselves, with the result that the running yield drifts downwards.

Of course 'the market' realises that - and that applies equally well to the market "as a whole" and to any market participants who have done any real thinking about it. Or rather, both realise that with a clarification: "the dividend growth rate is well above average" needs to be read as "the dividend growth rate is well above average and remains so for sufficiently long into the future".

The disagreement is about how confident one can be about how long the dividend growth rate will remain well above average. Some believe they can be very confident about it, and end up being bitten by companies whose dividend growth rate collapses (and quite possibly turns negative) earlier than they thought. Others don't feel so confident about it, go for high dividend yields and end up being bitten by companies whose dividend yield collapses (and quite possibly drops to zero) earlier than they thought.

I.e. when going for good future income, it's a matter of what aspect of future performance you take the risk of being overconfident about - the dividend yield or the dividend growth rate? If you feel better able to judge one than the other (and are confident that you're assessing your own abilities correctly!), base your future income strategy around that one. But it should come as no surprise that others feel the opposite way - and quite possibly entirely justifiably so: there's no reason why different investors should have the same abilities...

Gengulphus

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#223269

Postby Lootman » May 20th, 2019, 9:13 pm

Gengulphus wrote:when going for good future income, it's a matter of what aspect of future performance you take the risk of being overconfident about - the dividend yield or the dividend growth rate? If you feel better able to judge one than the other (and are confident that you're assessing your own abilities correctly!), base your future income strategy around that one. But it should come as no surprise that others feel the opposite way - and quite possibly entirely justifiably so: there's no reason why different investors should have the same abilities...

Which of course is why many investors stop trying to second guess the future and simply buy index funds. And nothing wrong with that.

Except that the theme of this board is that somehow high yield is a driver for better returns. You claim "justifiably so". But if nobody knows anything, as you also suggest, than what is the basis for anyone knowing that?

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#223363

Postby Alaric » May 21st, 2019, 9:33 am

Lootman wrote:Except that the theme of this board is that somehow high yield is a driver for better returns. You claim "justifiably so". But if nobody knows anything, as you also suggest, than what is the basis for anyone knowing that?


Provided that it is "total return" that is being considered, I would suspect it's the shares with high rates of growth of dividend that have given the better returns.

Notwithstanding the derision which advocacy of looking at past prices causes in some quarters, I consider it valid to look at the share price history. In many cases, it appears that a stock has drifted into high yield territory because its share price has been collapsing, so if you looked back at return achieved over the last five years it's not fantastic.

I am a sceptic about the mantra that past performance is no good to the future. Perhaps, but they aren't statistically independent either, particularly as applied to the culture, results and performance of a single company.

If the "high income portfolio" is driven by a need for an income higher that the market averages for income, it may be regarded as satisfactory if it achieves this, regardless of under performing against market averages for total return. But how much under performance should be tolerated? In the limit it would be possible to buy a tracker and get the "income" with asset sales. A return of 4.0% to 4.5% on FTSE 100 with probable increases is a much higher outcome than indexed Gilts at next to nothing in running income and only RPI increases, or if there is an income (on older issues) it's at the cost of capital losses.

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#223380

Postby Lootman » May 21st, 2019, 10:07 am

Alaric wrote:If the "high income portfolio" is driven by a need for an income higher that the market averages for income, it may be regarded as satisfactory if it achieves this, regardless of under performing against market averages for total return. But how much under performance should be tolerated?

For me the answer would be that ultimately what I need is not so much "income" but rather cashflows. And once freed from feeling an obligation to maximise income then total return actually becomes the more important metric. After all, if my income does fall below what I need, I might then draw down some capital.

It is on that basis that the much-quoted "4% a year" drawdown number is used. If that is sustainable from total return then it doesnt much matter how it is sourced, taxes aside.

The real danger with a HYP approach is for people who don't quite have enough to retire on a tracker's income, and therefore elevate their risk profile by reaching for yield in the hope that will bridge the gap. You should probably only use HYP if you don't need to :D

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#223455

Postby Gengulphus » May 21st, 2019, 4:03 pm

Lootman wrote:
Gengulphus wrote:when going for good future income, it's a matter of what aspect of future performance you take the risk of being overconfident about - the dividend yield or the dividend growth rate? If you feel better able to judge one than the other (and are confident that you're assessing your own abilities correctly!), base your future income strategy around that one. But it should come as no surprise that others feel the opposite way - and quite possibly entirely justifiably so: there's no reason why different investors should have the same abilities...

Which of course is why many investors stop trying to second guess the future and simply buy index funds. And nothing wrong with that.

Except that the theme of this board is that somehow high yield is a driver for better returns. You claim "justifiably so". But if nobody knows anything, as you also suggest, than what is the basis for anyone knowing that?

Your reading comprehension is letting you down - a statement that something is quite possibly the case is not a claim that it is the case, so any such claim arises from your own mind, not mine. So does the suggestion that nobody knows anything - all I suggested is that I have no knowledge of what abilities any reader has, so they'll have to judge that for themselves.

Since your question is therefore based entirely on arguments you have dreamt up for yourself, I see no point in trying to answer it for you - that's for you to do. I'll leave you to it - but please don't put the words of your answer into my mouth.

Gengulphus

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#223474

Postby Lootman » May 21st, 2019, 5:59 pm

Gengulphus wrote:
Lootman wrote:
Gengulphus wrote:when going for good future income, it's a matter of what aspect of future performance you take the risk of being overconfident about - the dividend yield or the dividend growth rate? If you feel better able to judge one than the other (and are confident that you're assessing your own abilities correctly!), base your future income strategy around that one. But it should come as no surprise that others feel the opposite way - and quite possibly entirely justifiably so: there's no reason why different investors should have the same abilities...

Which of course is why many investors stop trying to second guess the future and simply buy index funds. And nothing wrong with that.

Except that the theme of this board is that somehow high yield is a driver for better returns. You claim "justifiably so". But if nobody knows anything, as you also suggest, than what is the basis for anyone knowing that?

Your reading comprehension is letting you down - a statement that something is quite possibly the case is not a claim that it is the case, so any such claim arises from your own mind, not mine. So does the suggestion that nobody knows anything - all I suggested is that I have no knowledge of what abilities any reader has, so they'll have to judge that for themselves.

Since your question is therefore based entirely on arguments you have dreamt up for yourself, I see no point in trying to answer it for you - that's for you to do. I'll leave you to it - but please don't put the words of your answer into my mouth.

Hmm, perhaps my error was more that the words of yours that I requoted are not identical to the words you wrote here:

"The disagreement is about how confident one can be about how long the dividend growth rate will remain well above average. Some believe they can be very confident about it, and end up being bitten by companies whose dividend growth rate collapses (and quite possibly turns negative) earlier than they thought. Others don't feel so confident about it, go for high dividend yields and end up being bitten by companies whose dividend yield collapses (and quite possibly drops to zero) earlier than they thought."

I think you are quite right both that degrees of confidence can vary and also that they may not be reliable predictors. It's not a huge logical leap from there to an acceptance both that any of us can be wrong and that there is no real way of knowing who is right.

Unless you do have a way of predicting that in which case I'm sure everyone here is all ears! My own view, and it is just a view, is that Alaric's analysis is probably more prudent than reaching for yield and hoping for the best, on balance.

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#223525

Postby 88V8 » May 21st, 2019, 10:47 pm

Lootman wrote:You should probably only use HYP if you don't need to :D


Hehheh how true. What with wonky Sturdies and faded Dividend Champions, reaching for yield has cost me a lot of money. Fortunately, we have a lot of money and a lot of spare income.

Our portfolio income as a whole has been saved by my Fixed Income - Prefs etc - which I bought at the tail-end of the 7=8% yield era. That gave us a lot of bang for buck, and hopefully I'll get out of it before the next bank crash, which of course I will forecast with pinpoint accuracy.

If I'd had to rely on equities, in terms of TR we might have been better with a tracker. And if I costed the hours I've spent fiddling with my HYPish and reading TMF/TLF, definitely better with e tracker.

V8

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#223636

Postby tjh290633 » May 22nd, 2019, 12:08 pm

88V8 wrote:
Lootman wrote:You should probably only use HYP if you don't need to :D


Hehheh how true. What with wonky Sturdies and faded Dividend Champions, reaching for yield has cost me a lot of money. Fortunately, we have a lot of money and a lot of spare income.

Our portfolio income as a whole has been saved by my Fixed Income - Prefs etc - which I bought at the tail-end of the 7=8% yield era. That gave us a lot of bang for buck, and hopefully I'll get out of it before the next bank crash, which of course I will forecast with pinpoint accuracy.

If I'd had to rely on equities, in terms of TR we might have been better with a tracker. And if I costed the hours I've spent fiddling with my HYPish and reading TMF/TLF, definitely better with e tracker.

V8

I've done a lot better than any tracker following HYP principles, without having any fixed interest.

But I do not rely on it, just withdrawing the odd amount to fund a major cruise. Currently I plan to withdraw the cash from my Cash ISA in preference.

TJH

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Re: Dividend zoning ("danger zones" etc) e.g. as previously explored by Luniversal

#223708

Postby Lootman » May 22nd, 2019, 4:04 pm

tjh290633 wrote:
88V8 wrote:
Lootman wrote:You should probably only use HYP if you don't need to :D

Hehheh how true. What with wonky Sturdies and faded Dividend Champions, reaching for yield has cost me a lot of money. Fortunately, we have a lot of money and a lot of spare income.

Our portfolio income as a whole has been saved by my Fixed Income - Prefs etc - which I bought at the tail-end of the 7=8% yield era. That gave us a lot of bang for buck, and hopefully I'll get out of it before the next bank crash, which of course I will forecast with pinpoint accuracy.

If I'd had to rely on equities, in terms of TR we might have been better with a tracker. And if I costed the hours I've spent fiddling with my HYPish and reading TMF/TLF, definitely better with e tracker.

I've done a lot better than any tracker following HYP principles, without having any fixed interest.

You have, although it seems that a good number here have not. It may depend on when you started out, how good a share picker you are and, at least in your case, the adred strateegies you use which are not part of a bog-standard HYP e.g. the top-slicing and re-balancing.

So I do think HYP bears additional risk compared to a tracker, which of course also means that with a favourable tailwind it can out-perform like any higher risk strategy can. The issue is more about safety. And whilst fixed income can add safety, stability and income, I share your dislike for it. I'd rather be mostly invested in equities and drawdown some capital as needed. That said my equity portfolio is much more broadly diversified than a HYP.


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