Selection of underperforming shares

[Itsallaguess]

If one assumes that someone starts investing when they are 30, retires at age 60 and lives to be 90, how likely will it be that the exact same strategy will be relevant throughout that period?

That's like saying that the methodology chosen in 1959 will still meet your needs today.

I believe that TJH might assert that that is exactly what he did. But I'm not sure that a majority of folks are as smart and diligent as he is.

Apologies for the late reply here Lootman, but I'm glad that you've mentioned Terry because I think he's a great example that helps to explain why I think income-investing *is* such a great single-strategy for 'lifetime investing', as it's clear that when we see what Terry has achieved, we see that we are able to tweak what is essentially a simple strategy to suit our particular investment styles and needs as individuals.

I note your comments regarding the potential to 'change tack' at different stages of our investment lifetimes, but I also notice that you recently posted on a 'Centrica' thread regarding how a potential 'alternative strategy', revolving around a more 'growth investment' style, might sometimes be more suitable -

I am of the opinion that not everything worth knowing can be represented numerically. Some useful things are known but cannot be proven. And the ability to perceive that Centrica was a dog before the numbers showed it, was profitably useful.

I think HYP appeals more to left-brained investors, who believe that everything worthwhile can be measured and proven. But there is another whole style of investing that ignores numbers and everything that is published, on the basis that it is priced in and so cannot give you an edge. Rather a qualitative investor relies on less rigid and linear thought processes.

The skills I am describing are perhaps more commonly used with growth investing, where successful analysis is more about where success and growth will be found in the future. Value investing, like HYP, is more a numbers game. But no accountant ever predicted the rise of Apple, Amazon, Facebook etc. That took a different set of skills.

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=18779&p=240634#p240634

Now, there's no denying that you're confident in your ability to use such 'qualitative' processes with which to invest in this way, and I've heard many other investors over the years describe more or less the same thoughts, but what's always been missing from such conversations is anything that we might describe as a 'method', or a 'process', so whilst no-one is in a position to deny that you clearly see some merit in such an approach, it really doesn't help anyone who might be interested in it to actually learn anything about it, or how they might begin to incorporate such a strategy into their investment lives...

There's no blueprint Lootman, just a 'sense of smell' that some people seem to have, and then like to suggest that others go and 'get it'.....

Which brings us back to income as a strategy, because I think that whilst it's got some flaws, and whilst it's got some aspects that may need tweaking for individual investors who might prefer to do things slightly differently, depending on their own personal tastes, it does at least provide a 'good enough' blueprint for most 'interested investors' to get their heads around, even from an almost 'standing start'.

I personally think that the combination of those particular aspects, and the fact that as a strategy it's got *lots* of avenues for additional flexibility, means that it really is the type of strategy that *can* be used from the outset and then onwards throughout an investment lifetime, without the need to have to think about 'jumping ship' at different points, and especially towards 'ships' that sound enticing when we read of other investors using them, but lack the substance that might actually enable such alternative approaches to be described or followed, other than in a relatively 'vague' way...

Cheers,

Itsallaguess

[tjh290633]

If one assumes that someone starts investing when they are 30, retires at age 60 and lives to be 90, how likely will it be that the exact same strategy will be relevant throughout that period?

That's like saying that the methodology chosen in 1959 will still meet your needs today.

I believe that TJH might assert that that is exactly what he did. But I'm not sure that a majority of folks are as smart and diligent as he is.

Apologies for the late reply here Lootman, but I'm glad that you've mentioned Terry because I think he's a great example that helps to explain why I think income-investing *is* such a great single-strategy for 'lifetime investing', as it's clear that when we see what Terry has achieved, we see that we are able to tweak what is essentially a simple strategy to suit our particular investment styles and needs as individuals.

My approach has changed over the years. Initially it was unit trusts, and yes, I did aim for higher income after a while, buying commodity and natural resources funds among others. It's only really since 1987 that I have been following my approach with equities when PEPs began. Probably my longest holdings have been what is now JPM Natural Resources, Marks & Spencer and indirectly AstraZeneca out of ICI, both the two latter inherited from my mother, all 3 in 1970.

For a long time JPMNR did not pay a dividend, after some good returns intially, but it has given me 11.75% XIRR over the 49 years. I milked it for capital to put into PEP and ISA on four occasions. MKS has given me 8.32% XIRR, but was much better in the early years when they kept having scrip issues to keep the share price down. The increase was about 12-fold in the number of shares held. AZN began as a 50/50 split of ICI and romped away. 16.14% XIRR so far. Of course none of these have been high yielders except for JPMNR in its early years up to 1995.

I knew very little about investing back in the 1970s, used to read the IC for a while and the daily press, of course. The ideas gradually germinated, particularly in the last 30 years. Lots of lessons learned along the way, and a few major market setbacks to ride out. I doubt that anybody is clever enough to formulate a plan at an early age and carry it through, but someone who had been pointed at a suitable collection of ITs might well be very successful without changing tack.

TJH

[IanTHughes]

AZN began as a 50/50 split of ICI and romped away. 16.14% XIRR so far. Of course none of these have been high yielders except for JPMNR in its early years up to 1995.

I started my HYP in Feb 2012 with AZN as one of my 4 first purchases. At a yield of 5.64% it was certainly high yield and XIRR since then is 17.95%.


Ian

[Itsallaguess]

I knew very little about investing back in the 1970s, used to read the IC for a while and the daily press, of course.

The ideas gradually germinated, particularly in the last 30 years. Lots of lessons learned along the way, and a few major market setbacks to ride out.

I doubt that anybody is clever enough to formulate a plan at an early age and carry it through, but someone who had been pointed at a suitable collection of ITs might well be very successful without changing tack.

Thanks Terry - the bottom line is that you've gone through an investment lifetime and now have a strong income-based strategy that is describable, followable, and is replicable, and has strong documented evidence to prove its worth.

If I was starting out now, and thinking of standing on the shoulder of giants to help show me the way, then I would very much prefer to choose one that knew where they were pointing, and who could describe the path ahead in some detail...

Cheers,

Itsallaguess

[Alaric]

So what is the problem for an HYP?

The self delusion of congratulating yourself on income receipts when all that's happened is that your capital is being returned to you.

(The context is that it has been observed that Aviva has increased its dividend over the last five years, however the share price is only about 80% of what it was five years ago. In terms of total return it's underperformed the FTSE 100 and even other shares in the same or similar lines of business).

So there's a question. How much lower a total return can be tolerated in exchange for not having the administration headache of having to sell to meet an income requirement? So if you want a 5% "income" return would you employ a strategy of buying a FTSE 100 tracker at 4.5% and periodically selling to make up the missing 0.5%, rather than fish for dividend yields of more than 4.5%?

[IanTHughes]

So what is the problem for an HYP?

The self delusion of congratulating yourself on income receipts when all that's happened is that your capital is being returned to you.

If that was the reality then it would be a "Return of Capital" and not a "Dividend". As far as I am aware "Dividends" must be paid out of Earnings or Retained Earnings? Am I wrong to believe that?


Ian

[Alaric]

. As far as I am aware "Dividends" must be paid out of Earnings or Retained Earnings? Am I wrong to believe that?

Unless you want to nit pick over accounting definitions, the concept of paying dividends out of capital includes paying out retained earnings. If you believe that dividends of necessity come from current profits, then you are mistaken.

[IanTHughes]

. As far as I am aware "Dividends" must be paid out of Earnings or Retained Earnings? Am I wrong to believe that?

Unless you want to nit pick over accounting definitions, the concept of paying dividends out of capital includes paying out retained earnings. If you believe that dividends of necessity come from current profits, then you are mistaken.

Really?

https://www.slideshare.net/yakshikavats ... ompany-law

3. Provisions governing declaration and payment of dividend • The provisions governing declaration and payment of dividend by a company are provided in the Companies Act, 1956 (referred to as “Act”) and the Rules made there under including the Companies (Transfer of Profits to Reserve) Rules, 1975, Companies (Declaration of Dividend out of Reserves) Rules, 1975. • The Companies Act allows dividends to be paid out of three sources namely (a) Profits of the company for the year for which dividends are to be paid. (b) Undistributed profits of the previous financial years. (c) Moneys provided by the Central Government or a State Government for the payment of dividends in pursuance of a guarantee by the Government concerned.

4. Determination of Dividend • Section 205 of the Act only prescribes that dividend shall be paid out of profits of the company.

Ian

[Alaric]

Companies can and do pay dividends out of money they don't have. Accountancy is a creative art after all.

A Company's capital base includes its retained earnings and for long established Companies that's likely to exceed the original share capital.

A very simplified example.

Share capital 1000, retained earnings 9000, net worth 10000, share price £ 1.

No profit, but a dividend of 500 (5% dividend yield)

Likely result

Share capital 1000, retained earnings 8500, net worth 9500, share price 95p

[IanTHughes]

Whoops!

It has been pointed out to me that I inadvertently used India's Company's Act.

Here is the UK's

https://www.rossmartin.co.uk/companies/ ... -dividends

A company may only make a distribution out of profits consisting of:
- accumulated, realised profits, so far as not previously utilised by distribution or capitalisation,
- less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

Dividends can only be paid out of profits


Ian

[Alaric]

Dividends can only be paid out of profits

As you quote, the word "accumulated" is in there. Doesn't have to be current year and often isn't. Vodafone is a recent example where dividends have exceeded current year profits. That was cited as a sign that a dividend cut was possible.

[PinkDalek]

As you quote, the word "accumulated" is in there. ...

Which is what ITH indicated earlier:

As far as I am aware "Dividends" must be paid out of Earnings or Retained Earnings?

[Dod101]

The self delusion of congratulating yourself on income receipts when all that's happened is that your capital is being returned to you.

(The context is that it has been observed that Aviva has increased its dividend over the last five years, however the share price is only about 80% of what it was five years ago. In terms of total return it's underperformed the FTSE 100 and even other shares in the same or similar lines of business).

Surely what you mean is that there is not much point in happily accepting increases in dividends when at the same time the capital value of the share is being eroded? That is what I try to avoid anyway, because I happen to think that one cannot ignore capital. Besides, capital erosion, especially when the dividend is being increased is certainly a sign that the market is not happy and often the market is more right than I am.

Dod

[IanTHughes]

Dividends can only be paid out of profits

As you quote, the word "accumulated" is in there. Doesn't have to be current year and often isn't. Vodafone is a recent example where dividends have exceeded current year profits. That was cited as a sign that a dividend cut was possible.

Which of course is why I clearly stated:

As far as I am aware "Dividends" must be paid out of Earnings OR Retained Earnings?

Ian

[Alaric]

Surely what you mean is that there is not much point in happily accepting increases in dividends when at the same time the capital value of the share is being eroded?

Absolutely, although it appears a controversial view when expressed on HYP - Practical. One of the ways this happens is where the dividends exceed profits, so are being financed out of retained earnings. It's not unknown for managements to do this, perhaps hoping to support the share price with the dividends.

Besides, capital erosion, especially when the dividend is being increased is certainly a sign that the market is not happy and often the market is more right than I am.

That appears to be the market's view on Aviva.

By contrast Legal & General's price today is around the same as it was five years ago, notwithstanding the increase in dividends. Total Return over five years is quoted as 5.58% as against FTSE 100 of 6.29%. Total Return is a little lower than the FTSE which if you were an out and out dividend seeker might be a price worth paying.

If five years ago, you made a choice between Aviva and Legal & General, the latter would with hindsight have been the better one.

[kempiejon]

By contrast Legal & General's price today is around the same as it was five years ago, notwithstanding the increase in dividends. Total Return over five years is quoted as 5.58% as against FTSE 100 of 6.29%. Total Return is a little lower than the FTSE which if you were an out and out dividend seeker might be a price worth paying.

If five years ago, you made a choice between Aviva and Legal & General, the latter would with hindsight have been the better one.

I hold both those shares. Aviva originally bought for value. Some sold and more bought for income, a longer history with me than LGEN which been in my HYP sine 2016. Aviva has a patchy income past in my portfolio; as a whole my HYP offers me about the FTSE100 yield of 4.5%, throws off Income to reinvest and show an internal rate of return of around 10%. The FTSE TR of 6.29% is less than I would have guessed flattering my results I think but perhaps these past 5years my return has been below my long term level I don’t have that calculation.