Practical discussions about equity High-Yield Portfolios (HYP) for income

[Bubblesofearth]

I live off my dividends so all of this is highly relevant for me.

Dod

I've always looked on my dividend income as being for discretionary spending. I would feel very uncomfortable if essentials, e.g. the only stuff we can currently spend money on, had to be covered by divis. Our household has always been in the fortunate position where essential spending has been, or soon will be, covered by job income or pension income. Plus a cash reserve for emergencies.

Anyone totally reliant on dividend income for all expenditure is in a very vulnerable position IMO. Regardless of the share strategy being pursued, HYP or otherwise.

BoE

[Itsallaguess]

Therefore I have adopted a fairly strict HYP approach.

Not with regard to the share selection philosophy ( I hold some shares not considered to be mainstream HYP), but definitely with regard to discipline and the holding of sufficient cash reserve to take me though any crisis including this one.

A relatively recent worked example of "the HYP Strategy" didn't do this though.

It started with a lump sum of £150,000 which was notionally fully invested in 15 sectors of equal weight.

Assuming a dividend income target of £ 8,000 to £ 10,000 a year, then for a three year buffer the invested component should have been cut to around £ 120,000 to £ 125,000 and the balance held as cash or near cash.

I think you're making an important point here Alaric, and one that future 'demo-HYP' scenarios might be able to improve on...

Rather than thinking of the sort of really quite crucial 'income-reserve' that is being discussed on this thread as some sort of 'fine-print addendum' to the HYP strategy, I think it would improve things no end if we could start to think of it as being as important as any of the other guidelines that are often pointed out...

I personally think that baking in a three-year buffer-guideline might be asking a bit too much from the outset, but certainly a minimum of a one-year buffer for anyone starting a complete HYP from scratch might be a good start, and then allow some leeway for personal risk-tolerances, and where HYP investors might be starting to build a HYP, perhaps whilst still working, then proposing to at least start building that income-reserve, alongside the building of the HYP, might well be a good grounding for that section of income-seekers too...

We shouldn't just be talking about the importance of these income-reserves when all the lights are flashing red - it should be a much more prominent aspect to the whole HYP strategy, in my opinion...

Cheers,

Itsallaguess

[Itsallaguess]

Anyone totally reliant on dividend income for all expenditure is in a very vulnerable position IMO.

Regardless of the share strategy being pursued, HYP or otherwise.

Why the discrimination for 'dividend-income' though?

Aren't these just the sorts of times when the 'just sell some shares to get your income' crowd also come under the same pressure?

As I said earlier, this is a broad 'equity-investment' issue, and not necessarily something that only dividend-seekers need to worry about...

Cheers,

Itsallaguess

[kempiejon]

But if they all cut then there is not a 5 year history of increasing dividends (I presume this history must extend into the present). Even if you find a sector that is immune to the current crisis then buying anything other than a small sum is likely to contravene the diversification rule.

I see it now, yes you're right, if all the ftse100 dividend payers cut, or even threaten to cut as HYPers look for a sustainable dividend, there will be no options to short list from, I guess one could look to the FTSE250 then but a market wide suspension of dividends kills the strategy.

[moorfield]

My honest view is that if HYP in the form originally described had been a 'product' offered by the banks on a large scale it would rapidly become a misselling scandal.

It was a 'product', once. Remember The Dividend Letter?

pyads even better idea was to monetise the acronym and get out while the going was good!

[Dod101]

I live off my dividends so all of this is highly relevant for me.

Dod

I've always looked on my dividend income as being for discretionary spending. I would feel very uncomfortable if essentials, e.g. the only stuff we can currently spend money on, had to be covered by divis. Our household has always been in the fortunate position where essential spending has been, or soon will be, covered by job income or pension income. Plus a cash reserve for emergencies.

Anyone totally reliant on dividend income for all expenditure is in a very vulnerable position IMO. Regardless of the share strategy being pursued, HYP or otherwise.

BoE

Don't we know it! At my age I do not have a lot to worry about but it is very depressing to see dividends being cut all around even although for the moment (Maybe until tomorrow morning?) I have only one dividend which has been cancelled. I feel very much in the line of fire though. I have a lot of cash, sufficient for at least three years expenditure and more at the rate at which I am spending at the moment.

Dod

[OwenSwansea]

A large part of my portfolio is invested in UK Prefs, which are either cumulative, or additional shares are required to be issued in the event of a non payment of dividend.
Perhaps UK Prefs. Should be included in every HYP.

Owen.

[Dod101]

You know what? In an idle moment (of which I have plenty at the moment) I am beginning to wonder if this HYP business is all that it is cracked up to be.

Dod

Dod, would you care to expand on your concern? What is it about " this HYP business " that is concerning you..(other than the major issue of dividends being cancelled).

Wizard has said most of what I would say in reply so I think there is no need to repeat that. All of this is highly relevant, not just for people in my position but probably more so for those who have taken cash under the 'pension freedoms'. Were enough of them to be really suffering then it would become a misselling scandal in the way that Wizard describes and we could see bail outs there as well or some rather expensive compensation. I have long thought that a DB pension is undervalued by those lucky enough to have one.

When I started out in retirement I knew what I was getting myself into and have survived quite well up to this point. I anticipate that I will survive this as well. Some of my colleagues in the same position, however, got themselves into financial trouble quite early on in retirement without any help from a financial crisis. A substantial lump sum in lieu of a pension is a dangerous thing in the wrong hands.

As far as the actual investments are concerned, to rely on individual company shares is folly I think. I have over the years got quite a number of income ITs as well as Growth ones and some bond funds. That mix will help me but anyone relying purely on individual equities is taking on board a huge amount of risk and I think it is that which bothers me most about the pyad HYP as discussed on this Board. The HYP is or should be I think but one plank in a high yield strategy but that is not encouraged by the exclusive nature of this Board and the fervour with which some advocates (who are strangely silent at this juncture) proclaim the pyadic HYP, Strategic Ignorance and all. And a cash cushion needs to be stressed at least as much as all the other 'rules' or guidance and I am not sure it is.

Dod

[moorfield]

Perhaps UK Prefs. Should be included in every HYP.

Be careful Owen, that's dangerous talk here.

But let's revisit that and see how people feel about welcoming prefs into the fold in future once the Big Boys/Girls have furloughed their divis.

[vrdiver]

On a practical point, we're entering a busy reporting season when lots of dividends would normally be declared. Combine this with the current uncertainty around any return to normality and many boards will be declaring a suspended dividend, so the news flow seems relentless re divi cuts.

Not having a crystal ball, the only way to see what happens next is to review it from say, this time next year. If CV19 turns out to be a mild infection, widely spread throughout the population (confirmed once mass testing is introduced) then we will be back in business; if, on the other hand, it's a repeat of the Spanish flu, then all classes of equity will be being hammered and only those with gold (or baked beans) under the bed will come out OK.

Looking at the FTSE100 (5510 as I write) it still seems volatile, but no longer in free-fall. Perhaps this suggests a view that we will be getting over this in a reasonable amount of time (whatever that is!)?

For HYP retirees (like me, too) then the unsung Income Reserve and Cash Buffer are about to be called into play. In my case, a 25% IR (£3 for me, £1 reinvested) will mop up some of the dividend cuts, but assuming a much greater than 25% reduction in dividends, the cash buffer is also going to have to get involved.

The risk that worries me most is not the dividend cuts or the cash buffer running out, but whether or not my specific portfolio will suffer too many single company failures that put a real long-term dent in my income. Like others have said, these worries aren't confined to the HYP strategy!

VRD

[moorfield]

That mix will help me but anyone relying purely on individual equities is taking on board a huge amount of risk and I think it is that which bothers me most about the pyad HYP as discussed on this Board.

Yes, and No.

You might recall this poll here from 2017 which revealed that the majority of respondents hold more than 25 shares in their HYPs. So they are addressing systematic risks in a conventional matter. The larger risks I suggest come from folks themselves, and three oft repeated mistakes spring to (my) mind immediately - the temptation of too high yielding shares, an unwillingness to include low yielding shares (provided that overall portfolio yield remains high), and an obsession with tinkering and "news".

[monabri]

As far as the actual investments are concerned, to rely on individual company shares is folly I think. I have over the years got quite a number of income ITs as well as Growth ones and some bond funds. That mix will help me but anyone relying purely on individual equities is taking on board a huge amount of risk and I think it is that which bothers me most about the pyad HYP as discussed on this Board. The HYP is or should be I think but one plank in a high yield strategy but that is not encouraged by the exclusive nature of this Board and the fervour with which some advocates (who are strangely silent at this juncture) proclaim the pyadic HYP, Strategic Ignorance and all. And a cash cushion needs to be stressed at least as much as all the other 'rules' or guidance and I am not sure it is.

Dod

That's what I thought your question was steering towards - that is, a consideration of risk levels in investing in individual companies in terms of both share price falls & dividend risk (beyond "normal" market conditions) and to have backup plans in the form of cash reserves and other investment paths. Sensible...but as it is exactly the route I've gone down I would say that.

[Arborbridge]

I live off my dividends so all of this is highly relevant for me.

Dod

I've always looked on my dividend income as being for discretionary spending. I would feel very uncomfortable if essentials, e.g. the only stuff we can currently spend money on, had to be covered by divis. Our household has always been in the fortunate position where essential spending has been, or soon will be, covered by job income or pension income. Plus a cash reserve for emergencies.

Anyone totally reliant on dividend income for all expenditure is in a very vulnerable position IMO. Regardless of the share strategy being pursued, HYP or otherwise.

BoE

Bully for you, mate: asd you say, you are fortunate. An increasing number of people are given a pension pot, not a final salary scheme and have to take the risk themselves of that pot not being big enough to fund retirement. It's the new normal, unfortunately, brought on us by corporate mishandling amongst other things - but that's a wider discussion than we can have here.

In my case, I decided to take the risk inherent in HYP type investments instead of surrendering my pension pot to an insurance company. I haven't regretted it yet. It's much too early to quote Scott: "We took risks. We knew we took them, and things turned out against us".

I'm more than anything, looking forward to how events unfold in the next year or so, because this will demonstrate whether or not the HYP system (as mine is set up) is robust enough for me.

Arb.

[moorfield]

I'm more than anything, looking forward to how events unfold in the next year or so, because this will demonstrate whether or not the HYP system (as mine is set up) is robust enough for me.

I do agree. We will see some of the pain of dividend cuts in folks' 2020 reports, but subsequent reports of 2021, 2022 will be a more interesting assessment of the HYP system.

[idpickering]

You know what? In an idle moment (of which I have plenty at the moment) I am beginning to wonder if this HYP business is all that it is cracked up to be.

Dod

Dod, would you care to expand on your concern? What is it about " this HYP business " that is concerning you..(other than the major issue of dividends being cancelled).

Wizard has said most of what I would say in reply so I think there is no need to repeat that. All of this is highly relevant, not just for people in my position but probably more so for those who have taken cash under the 'pension freedoms'. Were enough of them to be really suffering then it would become a misselling scandal in the way that Wizard describes and we could see bail outs there as well or some rather expensive compensation. I have long thought that a DB pension is undervalued by those lucky enough to have one.

When I started out in retirement I knew what I was getting myself into and have survived quite well up to this point. I anticipate that I will survive this as well. Some of my colleagues in the same position, however, got themselves into financial trouble quite early on in retirement without any help from a financial crisis. A substantial lump sum in lieu of a pension is a dangerous thing in the wrong hands.

As far as the actual investments are concerned, to rely on individual company shares is folly I think. I have over the years got quite a number of income ITs as well as Growth ones and some bond funds. That mix will help me but anyone relying purely on individual equities is taking on board a huge amount of risk and I think it is that which bothers me most about the pyad HYP as discussed on this Board. The HYP is or should be I think but one plank in a high yield strategy but that is not encouraged by the exclusive nature of this Board and the fervour with which some advocates (who are strangely silent at this juncture) proclaim the pyadic HYP, Strategic Ignorance and all. And a cash cushion needs to be stressed at least as much as all the other 'rules' or guidance and I am not sure it is.

Dod

I think this enforced isolation has caused to much angst and overthinking hereabouts. I do not hold ITs or any other funds, and am aware of the risks of holding individual shares. I have 28 in my HYP, and imho that is sufficient diversification for my needs. Imho there’s to much off topic chat in this thread for this board, and it should’ve been started on the other board. I’ve said my bit, and that’s it. No more from me in this thread.

Ian.

[Dod101]

That mix will help me but anyone relying purely on individual equities is taking on board a huge amount of risk and I think it is that which bothers me most about the pyad HYP as discussed on this Board.

Yes, and No.

You might recall this poll here from 2017 which revealed that the majority of respondents hold more than 25 shares in their HYPs. So they are addressing systematic risks in a conventional matter. The larger risks I suggest come from folks themselves, and three oft repeated mistakes spring to (my) mind immediately - the temptation of too high yielding shares, an unwillingness to include low yielding shares (provided that overall portfolio yield remains high), and an obsession with tinkering and "news".

What you call too high yielding shares are not making much difference at the moment but in normal times I certainly agree.

I am very happy to hold lower yielding shares if as is usually the case the lower yield is compensated for by more security. That remains to be seen. Will Unilever and Diageo for instance, maintain their dividends?

I am not obsessed with tinkering and news but like most people I do keep up with the investment news as far as I can.

I am thinking that the biggest mistake, as I may have already said, is to view a HYP as the all encompassing answer to investing and I think that diversification into ITs and bonds is very important. Instead of bonds maybe I should say fixed interest which would in my book embrace Prefs, although I do not hold any.

Dod

[Wizard]

Dod, would you care to expand on your concern? What is it about " this HYP business " that is concerning you..(other than the major issue of dividends being cancelled).

Wizard has said most of what I would say in reply so I think there is no need to repeat that. All of this is highly relevant, not just for people in my position but probably more so for those who have taken cash under the 'pension freedoms'. Were enough of them to be really suffering then it would become a misselling scandal in the way that Wizard describes and we could see bail outs there as well or some rather expensive compensation. I have long thought that a DB pension is undervalued by those lucky enough to have one.

When I started out in retirement I knew what I was getting myself into and have survived quite well up to this point. I anticipate that I will survive this as well. Some of my colleagues in the same position, however, got themselves into financial trouble quite early on in retirement without any help from a financial crisis. A substantial lump sum in lieu of a pension is a dangerous thing in the wrong hands.

As far as the actual investments are concerned, to rely on individual company shares is folly I think. I have over the years got quite a number of income ITs as well as Growth ones and some bond funds. That mix will help me but anyone relying purely on individual equities is taking on board a huge amount of risk and I think it is that which bothers me most about the pyad HYP as discussed on this Board. The HYP is or should be I think but one plank in a high yield strategy but that is not encouraged by the exclusive nature of this Board and the fervour with which some advocates (who are strangely silent at this juncture) proclaim the pyadic HYP, Strategic Ignorance and all. And a cash cushion needs to be stressed at least as much as all the other 'rules' or guidance and I am not sure it is.

Dod

I think this enforced isolation has caused to much angst and overthinking hereabouts. I do not hold ITs or any other funds, and am aware of the risks of holding individual shares. I have 28 in my HYP, and imho that is sufficient diversification for my needs. Imho there’s to much off topic chat in this thread for this board, and it should’ve been started on the other board. I’ve said my bit, and that’s it. No more from me in this thread.

Ian.

My bold.

I do not know your personal circumstances Ian and would not be so impolite as to ask. But surely the point of this thread is the generality not the personal. I also agree this thread would be better on strategy as it would allow a fuller (and therefore better IMHO) discussion, but Dod was explicit in saying why he thought it reasonable to post it here.

[Dod101]

Well I do not mind where the thread is actually but I started it here because it is primarily on matters related to a HYP and usually we get a better response on this thread. Incidentally I am very grateful for that as I, at least, have found many of the comments helpful.

If someone would prefer that it is now transferred elsewhere then let them appeal to a mod to do so but these are extraordinary times and maybe they have better things to worry about.

Dod

[Bubblesofearth]

Bully for you, mate: asd you say, you are fortunate. An increasing number of people are given a pension pot, not a final salary scheme and have to take the risk themselves of that pot not being big enough to fund retirement. It's the new normal, unfortunately, brought on us by corporate mishandling amongst other things - but that's a wider discussion than we can have here.
Arb.

So what you are basically saying is that if your pension and other income streams are not enough to live on in retirement then that's someone else's fault?

One of the reasons I'm 'fortunate' is that I've spent most of my life living within my means, quite often sacrificing things I would like to do so as to shore up my finances for the future. A lot of people don't do that and then complain about external circumstances.

It's about taking responsibility.
BoE

[Bubblesofearth]

Why the discrimination for 'dividend-income' though?

Aren't these just the sorts of times when the 'just sell some shares to get your income' crowd also come under the same pressure?

As I said earlier, this is a broad 'equity-investment' issue, and not necessarily something that only dividend-seekers need to worry about...

Cheers,

Itsallaguess

Agreed. I mentioned dividend income because that is the topic of the OP. But, yes, anyone having all their retirement wealth in shares is vulnerable to the inevitable volatility. Most understand that for capital but there does seem to be a bit of a blind spot hereabouts when it comes dividends. We often hear how they are far less volatile than cap values. Maybe this will prove to be one of those occasions where that's not the case?

BoE