Lootman wrote: Gengulphus wrote:
Spet0789 wrote:Why not just sell 2% every year if you want the income?
Hey presto, a 5% income yield and I suspect the total return would still outperform a few of the usual suspects with ‘natural’ 5% yields.
Perfectly reasonable answer - if
your holding is big enough for selling 2% of it to be a cost-effective sale and
you've got the self-discipline to just get on with it each year without worrying endlessly about whether you're doing the right thing and
you don't mind the fact that selling 2% of your holding will produce an amount of 'income' that is sometimes 'cut'. Such 'cuts' are produced by the stockmarket rather than company directors, and the stockmarket tends to make significantly more volatile decisions about 'cutting' than company directors,
I think the point that Spet0789 makes is valid. ...
The way I think of it is this. We naturally divide into three groups:
1) Those with sufficient wealth that they can live off only the dividends
2) Those who are so broke they can never retire at all
3) Those in between who can't live only off their dividends but can live off a mix of dividends and capital drawdown.
It is the class of people in (3) for whom Spet's drawdown idea makes sense, ...
I don't think it does, other than possibly in a very limited way, namely that if
they're determined to live off a portfolio of individual shares, it probably makes more sense than most other policies that are consistent with living off such a portfolio. And even then, I think it would make a bit more sense still with a modification, namely that you don't sell 2% of a holding per year, but 10% every five years - and that you stagger the sales such that you only do that for about a fifth of the holdings that the policy applies to in any one year to make the 'income' produced by the sales about right. And preferably you choose the holdings you sell from to favour those that look a bit overvalued, though that needs to be tempered to ensure you're not concentrating your portfolio in its 'losers' at the expense of its 'winners' over the long term. So all in all, while I think that modification would cause it to make a bit more sense, it would be at the expense of a fair amount of complexity in the "what shall I sell this year?" decisions.
But the thing that would make more sense still (and much
more sense in many cases) if you're in group (3) is IMHO not
to be determined to live off a portfolio of individual shares. There are actually two subgroups of that group, depending on what the investor feels they need to do (*):
3a) Those who are in group (3) and don't need to start living off their investments now.
3b) Those who are in group (3) and do need to start living off their investments now.
For those in group (3a), what I think would make more sense is to defer living off their investments and instead allow their investments to grow further until they're in either group (1) or group (3b). Even if they end up being in group (3b) anyway, they should have rather more safety margin on their planned capital drawdown - and the more safety margin they have, the better the chances of riding out a serious general stockmarket fall, which is a danger even with a very good company such as Unilever (**).
For those in group (3b), what I think would usually make more sense would be a portfolio consisting of no more than a handful of holdings in ITs or other funds. That has a costs advantage because the individual holdings are larger, and the advantage can be quite noticeable for the total amounts of capital likely to be involved for someone in group (3b). E.g. someone with £300k in capital from which they want to take 5% (£15k) per year in dividends and capital gains really doesn't want it to be split into 20 holdings of £15k each, because a sale of 2% of a holding will be worth about £300 - a rather cost-ineffective amount to trade. If they want to harvest capital gains as well as dividends, it's better to have it split into maybe four IT/fund/etc holdings of £75k each, for which a 2% sale is worth £1.5k and is at least reasonably cost-effective.
I've chosen £15k extra income as an amount that supplements a state pension up to somewhere in the region of an average salary. Individual circumstances might make the investor need more than that, such as not getting a state pension for some reason. I don't totally exclude the possibility that it could be a large enough amount that the capital could be split 20ish ways with 2%ish sales of holdings being reasonably cost-effective, but I'm pretty certain that only a very small fraction of group (3b) would be affected by that.
(*) It's the investor's decision what constitutes a "need" of theirs rather than just a "desire", so my advice can only be conditional - i.e. of the form "If you're in group (3) and you feel you need to retire now, I suggest you put your capital into a spread of no more than a handful of ITs or other funds; if you don't, I suggest you keep the day job for the time being. Your decision which of those two suggestions applies to you - I cannot make decisions about what you feel you need for you!"
(**) E.g. on 7 April 2008 (I went for the 6th, but that was a Sunday), its share price was 1697p, by 6 April 2009, it had dropped to 1305p. So an investor who planned their capital drawdown a year ahead on the basis of selling a fixed percentage of their holding would have faced about a 23% stockmarket-imposed 'cut' to that particular item of 'income', or one who planned it on the basis of selling a fixed sum's worth of their holding would have found themselves having to sell about 1.3 times as many shares as they were planning. And Unilever would probably have been at the better-behaved end of the spectrum of outcomes from their portfolio.