Re: ISHARES PLC FTSE UK DIVIDEND (IUKD)

[Alaric]

In a nutshell it pays dividends by holding the top 50 high yielding stocks in the FTSE 350.

The problem is that such a selection method gives a mixture of duds and potential recoveries. Stocks can go high yield because of dramatic dividend increases, but markets have tended to see that coming and mark the price up accordingly. Thus the higher yield stocks are those where the dividends are maintained perhaps temporarily, but the price has dropped or remained static.

To see the success or otherwise of such a method, you would compare the performance in total return terms against the FTSE 350 index as a whole. The income is likely to be higher of course, but paid for by poorer capital returns. The alternative strategy would to buy the index as a whole and sell periodically to make up the shortfall in proceeds.

[OhNoNotimAgain]

The fund name is misleading as the fund selection process is based on yield, not dividends so it become vulnerable to a a value trap if the share price falls and the yield rises.

[scrumpyjack]

I don't think this board is part of the HYP section so one is allowed to make such otherwise heretical observations here.

[TahiPanasDua]

Has anyone got views on the iShares dividend ETF, IUKD? In a nutshell it pays dividends by holding the top 50 high yielding stocks in the FTSE 350. So on average a complete Carrillion style wipe out would only hit the ETF value by around 2%. The stocks it holds will naturally rotate if companies either cut or stop dividends or if their shares increase such that the yield is no longer in the highest 50. It looks on the face of it like a very hands off buy and forget annuity like income stream. I note capital performance is pretty poor, but that's of secondary importance in this kind of investment.

What's the audience view on IUKD?

Details at HL website - https://www.hl.co.uk/shares/shares-sear ... -ucits-etf

Thanks

RVF

IUKD has been described here as a bit of a clunker.

I have owned it for about 10 years during which time the capital value seems to have more or less returned to my original buying price. In its favour, it does pay out a good dividend. However, the yield is a % of a non-increasing capital sum so is effectively decreasing due to inflation. I would give IUKD a wide berth.

By comparison, City of London IT (CTY) is also a UK dividend investor. It pays out over 4.4% but increases its capital more regularly as it is not saddled with the highest yielding basket cases like IUKD. Over time, CTY's divi will rise to meet IUKD's falling payout but with a higher payout if you need to cash in for any reason. I wouldn't be seduced (again) by IUKD's current high dividend.

TP2.

[scotia]

I can see the attraction of IUKD - a 7% dividend return (as quoted on HL) is difficult to beat - albeit at the cost of a poorer total return than a simple FTSE tracker. If you also want the process to involve a minimum of fuss, then it again fits the bill. A more traditional approach would be a UK Equity Income managed fund or IT (e.g Artemis Income fund or City of London IT) - but their dividend is more modest in the 4 to 4.5% range (as quoted on the HL site).
However the downside of IUKD is the capital loss - which will ultimately result in falling dividends. Whereas historically these managed equity income investments have usually grown their dividends.
[Edit - I see another respondent has covered most of the above, while I was preparing my response]

[Arborbridge]

I owned both IUKD and UK dividend aristocrats fro some years, hoping they could eventually substitute for my own HYP when I got to old to bother.

However, I found both to fall behind in both capital, income and TR compared with other investments, so in the end I sold both as irrelevant to my needs. In particular, it didn't seem to me that the dividend increases where predicatable or rational: i.e. they did not correspond with my own directshare insvestment. I therefore suspected some jiggery pockery to offset capital against income whereas I need steadily increasing income.

I remain invested in the more mainstream ITs as there seems a clearer picture of how they function, but they just seem to perform better too. CTY has been mentioned and there are others, such as SCF, TMPL, MRC, MRCH, FGT which might be worth looking at - depending low a yield is tolerable to you, and how important TR is.

I notice that IUKD has an enormous yield at present. I haven't checked it for a while, but this is so high, there has to be some trade off with capital. If you end up in effect, paying a dividend from your own capital, that does not seem a helpful exchange

Arb.

[TahiPanasDua]

Thank you, that's a terrific answer. If I said the purpose of the purchase would be to generate a high income for maybe 6 or 7 years with a view towards hopefully returning the capital to then reinvest elsewhere, would that influence your opinion?

I wouldn't do it.

[mc2fool]

I too owned IUKD for a bit over ten years, from 29-Aug-08, bought at 820p, to 8-Apr-19, sold at 792p, a capital loss of 3.5%. IIRC it yielded some 6-7% when I bought it.

Over my period of holding I got an XIRR total return of 4.7%pa, dividends withdrawn, which I considered disappointing. However, the total return (dividend reinvested) from inception has only been a mere 3.36%pa. https://www.ishares.com/uk/individual/en/products/251807/

IUKD used to be a used as a comparison by the HYP community but was abandoned as such after its disastrous performance across the global financing crisis. You can see the effect on the capital performance in this chart vs the FTSE 350 and ISF (iShares FTSE 100 ETF).

If you want a TR comparison, for the last 5 years at least, you can get the chart of the iShares UK 350 index OEIC on HL and add IUKD, etc.

But it wasn't only the capital performance that suffered. If you go to the above iShares.com link and look up the distributions and sum them up you'll see that the dividends have still not recovered to the 2007 level. And it's not been a smooth increase since the crash either.

Year DPS (p)
2006 48.58
2007 53.62
2008 57.21
2009 28.33
2010 34.93
2011 37.31
2012 37.57
2013 37.34
2014 41.41
2015 49.60
2016 43.67
2017 47.26
2018 50.57

Now, of course there's no way of knowing it'll behave similarly going forward, but the history doesn't give confidence that it'll provide a reliable annuity, let alone give you your capital back or close to.

IUKD tracks the FTSE UK Dividend+ Index, and you can find how that is constructed and calculated at https://research.ftserussell.com/products/downloads/FTSE_UK_Dividend_Plus_Index.pdf. Note it works on forecast dividends, not historic ones, and the index is yield weighted.

I note they're up to "V2.7" of the methodology. I do remember they changed it after the 2008/9 crash but I don't remember how....

[Alaric]

Note it works on forecast dividends, not historic ones, and the index is yield weighted.

Perhaps the return would more closely follow that of the FTSE100/350 if they choose the stocks by dividend yield, but the proportions by market capitalisation. So it would be an index of the 50 highest yielding stocks out of the 350.

[monabri]

Thanks, that's part of the proposal. A high annuity like income for the medium term with no fuss, with a view to return the capital to eventually reinvest for a lower yield and/or better total return. Perhaps, and it's a gamble, the very high yielding stocks might just start to perform better once/if general sentiment towards "value" investments returns to fashion.

I think that would be my view as well...especially the latter point you make. I'm guessing,though, that IUKD would not be your only holding, thus mitigating risk further.

As you mention earlier, I'd rather have £0000 invested in IUKD than the same sum in an individual very HY share. Yes, there are some shares that a HYP Practical holder would rule out ..but the fund does contain many HYP Practical stalwarts but at lower percentages.

[Itsallaguess]

If I said the purpose of the purchase would be to generate a high income for maybe 6 or 7 years with a view towards hopefully returning the capital to then reinvest elsewhere, would that influence your opinion?

I wouldn't do it.

I agree - neither would I.

One of the advantages of a self-selected HYP, even one fishing in what might be seen as the more 'turbulent waters' of the ultra-high-yield market, is that the investor can choose additional safety-level metrics as part of their self-select process.

My concern with an ETF like IUKD is that the investment model is primarily based on the single 'high yield' metric, with almost no regard for those extra potential safety and diversification checks that might accompany a self-select high-yield portfolio.

We can see this when we look at the current make-up of the IUKD holdings, where almost 50% of the ETF is invested in just two UK sectors, with Financial Services representing almost 30% of the holdings, and the Cyclical Consumer sector representing 20% -



Image source - http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P000027DI&tab=3&InvestmentType=FE

I have always considered that one of the big strengths of the classic HYP approach, with invested capital evenly spread across a number of shares and sectors, allowed for the likelihood that market cycles will often cause sectors within those markets to ebb and flow, with some sectors seeing growth whilst some other sectors perhaps come under a bit of pressure. On the whole, it's envisaged that the even spread of investment capital across many market sectors will generally allow those sectors going through strong periods to balance out the effects of those that might comparatively suffer during those market-cycle movements.

What worries me about the IUKD approach, where a single 'high yield' metric is primarily used at any given time, is that this is likely to lead to the ETF always 'chasing' the current 'out of favour' sectors at any point in those market cycles. Seeing that 50% of IUKD capital is currently invested in the Financial Services and Cyclical Consumer sectors, those concerns seem to be valid.

On the face of it, I can see the attraction of this ETF, but given the above concern, and other more direct concerns that mean the ETF ends up investing in specific high-yield holdings that I personally wouldn't spend 2 minutes looking at, then I have to fully agree with TahiPanasDua in that I couldn't think it a suitable investment vehicle for the investment plan proposed.

Cheers,

Itsallaguess

[tjh290633]

I too owned IUKD for a bit over ten years, from 29-Aug-08, bought at 820p, to 8-Apr-19, sold at 792p, a capital loss of 3.5%. IIRC it yielded some 6-7% when I bought it.

Over my period of holding I got an XIRR total return of 4.7%pa, dividends withdrawn, which I considered disappointing. However, the total return (dividend reinvested) from inception has only been a mere 3.36%pa. https://www.ishares.com/uk/individual/en/products/251807/

IUKD used to be a used as a comparison by the HYP community but was abandoned as such after its disastrous performance across the global financing crisis. You can see the effect on the capital performance in this chart vs the FTSE 350 and ISF (iShares FTSE 100 ETF).

If you want a TR comparison, for the last 5 years at least, you can get the chart of the iShares UK 350 index OEIC on HL and add IUKD, etc.

But it wasn't only the capital performance that suffered. If you go to the above iShares.com link and look up the distributions and sum them up you'll see that the dividends have still not recovered to the 2007 level. And it's not been a smooth increase since the crash either.

Year DPS (p)
2006 48.58
2007 53.62
2008 57.21
2009 28.33
2010 34.93
2011 37.31
2012 37.57
2013 37.34
2014 41.41
2015 49.60
2016 43.67
2017 47.26
2018 50.57

Now, of course there's no way of knowing it'll behave similarly going forward, but the history doesn't give confidence that it'll provide a reliable annuity, let alone give you your capital back or close to.

IUKD tracks the FTSE UK Dividend+ Index, and you can find how that is constructed and calculated at https://research.ftserussell.com/products/downloads/FTSE_UK_Dividend_Plus_Index.pdf. Note it works on forecast dividends, not historic ones, and the index is yield weighted.

I note they're up to "V2.7" of the methodology. I do remember they changed it after the 2008/9 crash but I don't remember how....

Originally the portfolio was to be rebalanced annually. It was very heavy in financial shares before the crash. Then the methodology changed to trimonthly, no more than 5 shares could be moved out or in, and the changes were made over a period of time.

There may have been other changes, but I was only keeping half an eye on it, as a possible substitute for an HYP. Once I had realised that it was not, I lost interest. The change of ownership of iShares came about before the first change.

TJH

[mc2fool]

IUKD tracks the FTSE UK Dividend+ Index, and you can find how that is constructed and calculated at https://research.ftserussell.com/products/downloads/FTSE_UK_Dividend_Plus_Index.pdf. Note it works on forecast dividends, not historic ones, and the index is yield weighted.

I note they're up to "V2.7" of the methodology. I do remember they changed it after the 2008/9 crash but I don't remember how....

Originally the portfolio was to be rebalanced annually. It was very heavy in financial shares before the crash. Then the methodology changed to trimonthly, no more than 5 shares could be moved out or in, and the changes were made over a period of time.

There may have been other changes...

It seems so, as the current methodology is now for a semi-annual review, and the constituent change "dampening" method is now that non-constituents have to rank 25th or above to be added and existing constituents 101st or below to be kicked out. As that's to a set of 50 it means shares have to massively leap-frog in or out.

[widowandorphan3]

Fascinating discussion. Thanks to all for their analysis, which makes this one of the most interesting forums there is, like TMF in its pomp...

I had IUKD in the run up to the financial crisis. It went from 1380p in May 2007 to 500p in March 2009 - a 63% drop that was greater than the -50% seen in most major indices. I was younger and poorer in the first place then, which was probably a good thing...

I had IUKD as it seemed a no brainer; a HYP without the hassle of doing a HYP DIY. What's not to like? Well, quite a bit as it turned out.

In common with flavour-of-the-month-today trackers, it had good stuff, but a whole load of rubbish too. For the same reason I had Lloyds TSB, which seemed a low-risk, high yield bank that did non-flashy stuff, wasn't apparently involved in America, CDOs etc., until it *was persuaded* to bail out HBOS and inherited that bank's distinctly flashy stuff and everything that came with it.

Lloyds could have been the JP Morgan of the crisis. JPM was remarkably unaffected by the crisis, for a major bank - its SP briefly halved for sure, but recovered by September 09 and has barely looked back ever since, returning c10%pa to date (excl divis). JPM SP in March 2009 = $23 - now, $121.

But no - Lloyds SP in March 2009? - a wonderful entry point for virtually any major equity - 51p. Until a couple of weeks ago, 51p. (now 60p) (appreciate there have been some divis between 1%pa earlier and latterly 6%pa over the period).

I assume IUKD had plenty of Lloyds, along with much else, which was good until it wasn't.

IUKD did - interestingly - have a brief heyday. Between July 2012 (Mario Draghi's "Whatever it takes" speech - possibly the most wealth-creating 3 words in history, as it turned out) IUKD went from 697p to 1016p, in May 2015, its peak to date incidentally; 31% or let's call it 10% pa. Not bad at all - except that even that famed stockpicker Neil Woodford cracked out c22% from June 2014 to June 2015; ie. in just a year or so.

It's all been downhill for IUKD from there - indeed it's down 24% from that peak over four years ago. Which let's face it, isn't great. The FTSE100 is more or less where it was then (and a fair bit more with divis reinvested - let's call that impact +15% or so), while the DJIA and Naz is +60% or so (ditto re divis, maybe +10% or so).

As mentioned by others, my suspicion is that IUKD gets you involved with all sorts of high-risk shares prior to divi-cuts, which in the majority come off to the bad. I'm not retired, I don't *need* the putative income of HY shares, and as such prefer the capital growth of share price increases over income, tax on which I largely don't have to pay (because SIPPs, ISAs) on the former which I would on the latter, incidentally but not irrelevantly). I fully appreciate others have different situations.

This may change, but as the aforementioned Mr Woodford has recently shown, the market can stay irrational far longer than you can stay liquid (and I say that as the "I love UK value stocks" Woodford rather than the "I love random non-listed stuff" Woodford, which seems to have been his slightly dual-personality approach).

I suspect that IUKD will one day have again its day in the sun - hey, the value bandwagon may have just got started - but I'm not impatient to climb aboard on this basis.

WaO

[richfool]

A fascinating discussion, but shouldn't it be on the "Passives Board", or failing that on the "Investment Strategies board". It doesn't really seem to be about Investment Trusts or Unit Trusts.

[scotia]

A fascinating discussion, but shouldn't it be on the "Passives Board", or failing that on the "Investment Strategies board". It doesn't really seem to be about Investment Trusts or Unit Trusts.

ITs and Unit Trusts have been suggested as alternatives to this ETF - and I don't suppose they could be mentioned on the passives board.

[tjh290633]

It's a collective fund, so this is the logical place to discuss it, in my view.

TJH

[colin]

I note they're up to "V2.7" of the methodology. I do remember they changed it after the 2008/9 crash but I don't remember how....

It changed from rebalancing twice a year to four times per year, as far as I remember.

[Armorduck]

I held from 2010/2011 till 2018. They were ok. I think overall about I ended 60% up over that period (my records aren't great). Nearly all the gain was due to dividends (which is after all what they are designed to generate). I think I sold because I just got bored and they were not generating good enough profits to keep my interest. I held IDVY over the same period and sold for similar reasons. I still hold some HSPX which has done much better, very nearly as well as fundsmith for me.

[TahiPanasDua]

I held from 2010/2011 till 2018. They were ok. I think overall about I ended 60% up over that period (my records aren't great). Nearly all the gain was due to dividends (which is after all what they are designed to generate). I think I sold because I just got bored and they were not generating good enough profits to keep my interest. I held IDVY over the same period and sold for similar reasons. I still hold some HSPX which has done much better, very nearly as well as fundsmith for me.

Its interesting that IUKD and IDVY have ended up in, more or less, the same no capital gain place after 10 years. EUE, while not an income ETF, is in the same boat. I know an old duffer who has owned all 3 for the same 10 years. Unlike yourself, and despite full knowledge of the situation, he has done nothing about it. Dumb or what? You can take a horse to water...........

HSPX is an S&P 500 ETF. It has therefore been a successful growth prospect and really can't be compared. Needless to say, in a show of admirable consistency, the old duffer has managed to avoid that one.

TP2.