Total Return based portfolio for income

[Itsallaguess]

But why would someone want to 'call you a coward' Arb?

Cowardly, in the sense that I cannot/could not face up to the dilemma of which shares/ITs to partially sell to realise an "income" equivalent.

Easier to walk away from that and settle for income from dividends.

I'd not use the word 'cowardly' in that situation Arb - I'd simply see it as a case of 'Investor - know thyself'...

Cheers,

Itsallaguess

[Arborbridge]

I think this is the crux of why I posted the original question, because to me it did feel like selling my seed corn, and emotionally it made more sense to just watch the dividends come rolling in without having to consider selling any holdings for income. However I wanted to know if I was being misled by my instinct and whether a Growth / Total Return approach was a viable and indeed better long-term strategy.

Although I prefer to watch the dividends roll in, that does not make it necessarily the better long term strategy for increasing wealth. I have observed for many years that funds in the "income" sector generally have a lower TR growth rate than the "all company" group. I can't say I have done this formally or rigorously, but I have from time to time over the years checked the average performances of these sectors on trustnet, and it does generally seem to be so. Indeed, in my own collection of shares or funds/ITs, it is true also.

So my general feeling is that if I were building a pension pot over decades, I would look for lower yielding or accumulating funds. Once in retirement, that was a different matter, and my choice was to go for higher yielders to give me enough income.

Arb.

[Urbandreamer]

Just my 2p worth.

You can get many IT's that attempt to do the job for you. Ie income and growth. Some have adopted the "total return" policy and pay dividends from realised capital.

Sure some who realise capital to pay dividends are considered income IT's, but I note that Scottish Mortgage recently did this. They remarking upon the importance of the dividend, however small. Few would buy SMT for the yield, but clearly they recognise its importance.

Biotech firms often don't pay dividends. The return is due to capital growth or buy-outs by big pharma. Yet International Biotech trust (IBT) pays a dividend. It does that from realised capital and sets it as 4% of NAV per annum. A chart seems to suggest that increase in NAV covers the policy.

JPMorgan Asia Growth & Income (JAGI) sets it's dividend at 1% of NAV per quater. If it has enough cash coming in then that is used. If not then it realises capital to top up the dividend.

Is it more "cowerdly" to get the IT manager to sell the assets and give you regular income? It's certainly easier and as has been said allows a wider choice of investments.

I have holdings in SMT and IBT

[Itsallaguess]

You can get many IT's that attempt to do the job for you. Ie income and growth. Some have adopted the "total return" policy and pay dividends from realised capital.

Sure some who realise capital to pay dividends are considered income IT's, but I note that Scottish Mortgage recently did this. They remarking upon the importance of the dividend, however small. Few would buy SMT for the yield, but clearly they recognise its importance.

Biotech firms often don't pay dividends. The return is due to capital growth or buy-outs by big pharma. Yet International Biotech trust (IBT) pays a dividend. It does that from realised capital and sets it as 4% of NAV per annum. A chart seems to suggest that increase in NAV covers the policy.

JPMorgan Asia Growth & Income (JAGI) sets it's dividend at 1% of NAV per quarter. If it has enough cash coming in then that is used. If not then it realises capital to top up the dividend.

Is it more "cowardly" to get the IT manager to sell the assets and give you regular income?

It's certainly easier and as has been said allows a wider choice of investments.

Quite right - and all of which is why it's often so very frustrating to see some people still stuck in such an 'anti-HYP' (single-share income-portfolio) 'knee-jerk' position that seems to mean that whenever they see any discussion at all regarding income-investing, they seem to assume that it's still the right approach to be fighting 'yesterdays anti-HYP war' from the get-go....

Things have moved on so, so much in the income-investing sphere since single-share HYP's were proposed and promoted, and it now means that many of the generally accepted negative issues surrounding that particular single-share income-strategy, which I'd tend to largely agree with, by the way (income-volatility, too-high-yields-as-a-symptom-of-struggling-businesses, too-FTSE-and-UK-market-focussed, limited-geographical-and-sector-selections, etc..) have largely been overcome by other income-related investment options that improve on many of those underlying single-share issues...

Cheers,

Itsallaguess

[dundas666]

Weirdly (or not) I think I might end up using a hybrid approach, including all three types: Growth, Income and G+I investment trusts.
Income ITs - buy and hold, enjoy the steady dividends as they roll in
G+I ITs - buy and hold for growing yields, so in 10 years they're effectively Income ITs
Growth ITs - for selling to top-up income

If nothing else it gives me a full selection of ITs to choose from!

[Dod101]

Weirdly (or not) I think I might end up using a hybrid approach, including all three types: Growth, Income and G+I investment trusts.
Income ITs - buy and hold, enjoy the steady dividends as they roll in
G+I ITs - buy and hold for growing yields, so in 10 years they're effectively Income ITs
Growth ITs - for selling to top-up income

If nothing else it gives me a full selection of ITs to choose from!

There is nothing weird about that. I do not specifically hold a portfolio of ITs but I hold Scottish Mortgage and RIT for growth, Finsbury for growth and income (as it says on the tin) as well as Caledonia, and Murray Income and Murray International for income. Over the last 18 months, I have taken quite a lot out of Scottish Mortgage and deployed it usually in single shares. I have used none of it for income, but I have usually bought income producing shares to boost my income long term.

For me that just evolved and works well.

Dod

[jonesa1]

Weirdly (or not) I think I might end up using a hybrid approach, including all three types: Growth, Income and G+I investment trusts.
Income ITs - buy and hold, enjoy the steady dividends as they roll in
G+I ITs - buy and hold for growing yields, so in 10 years they're effectively Income ITs
Growth ITs - for selling to top-up income

If nothing else it gives me a full selection of ITs to choose from!

To me that makes a lot of sense, spread your bets and hopefully avoid being all in on a strategy that doesn't work out. The risk with that approach is you end up with something that behaves like a global tracker, but takes more effort to manage

[dundas666]

Do you think it would be fair to assume that the income from a typical Growth + Income IT would grow faster than a purely Income IT?

So for example a typical Income IT might yield 5% and grow the dividend by 3%pa on average, and a typical G+I IT would have a yield of 3% but growing at >5%pa?

I've looked at the historical figures but they seem to be too distorted by changes in policy/events. I was just wondering if this was part of the intent of G+I ITs, that they would attempt to grow income faster than Income ITs, albeit from a lower base.

[dealtn]

I've been around these boards, and the earlier Motley Fool boards, for many years, and the pursuit for total return at the potential expense of 'long term investor enjoyment and comfort' is something that's constantly perplexed me...

interesting because I see it the other way around.

Total Return is just a measure that accepts returns come in more than one form. All shares or ITs have a total return. The "pursuit" of an income return, and seemingly thinking income is only dividend income (not the income of the underlying company, or the change in the price of the asset) is constantly perplexing.

Limiting one's thinking, the universe of assets, and a sole specific definition of income just seems odd.

I know many people that like watching sport, but not very many that limit that enjoyment to a single specific sport, even if they have a preference.

But generally I agree, being comfortable, or enjoying "it", is more important than a pure financial analysis, whatever that "it" is.

[Itsallaguess]

But generally I agree, being comfortable, or enjoying "it", is more important than a pure financial analysis, whatever that "it" is.

Thanks - and that's the general point I'm trying to make here.

In fact you've probably made the point more strongly than I'd actually put it - I wouldn't ever say that it's 'more important' to be comfortable or enjoying 'it' - I'd only ever wish to point out that it's a worthwhile consideration in the round, and one that's probably going to have a relatively large influence over the long investment time-frames that are likely to be useful to some personal investors...

In the end, time itself does a lot of the heavy-lifting with long-term investment returns, no matter which generally-useful strategy we might employ as individual investors, so surely it's a worthwhile consideration to perhaps think about aligning any given long-term investment strategy with the individual investment-personality that's going to be carrying any given strategy out...

Go 'force' that jogger to always have to run instead of jogging, and then see how long he keeps it up for....

Cheers,

Itsallaguess

[dealtn]

Do you think it would be fair to assume that the income from a typical Growth + Income IT would grow faster than a purely Income IT?

So for example a typical Income IT might yield 5% and grow the dividend by 3%pa on average, and a typical G+I IT would have a yield of 3% but growing at >5%pa?

I've looked at the historical figures but they seem to be too distorted by changes in policy/events. I was just wondering if this was part of the intent of G+I ITs, that they would attempt to grow income faster than Income ITs, albeit from a lower base.

There are 2 things going on here that will be driving this.

Imagine 2 companies, or ITs if easier, that hold exactly the same assets with exactly the same cash flows. Someone, the Board of the company, or the Investment managers at the IT "decide" what underlying income is paid out to the investors. If less is paid out, and more reinvested, it will grow more than if all is paid out. This is just a simple mathematical fact. (Consider it as a 2 bank savings account earning a fixed rate of interest, one pays all the interest to a parallel current account, the other pays half out and rolls over the other half.)

The second factor is what those underlying assets are. A typical Income IT will have a (still relatively large) niche of available assets to invest in, and as a consequence is heavily influenced by anything that might affect that niche. Exactly the same with an IT that only invests is China, or Japan, or Romania, or wherever, or those that only invest in Gold, Mining, Tech etc. So an Income IT which might have a disproportionate exposure to Banks, or Telecoms etc. is at the mercy of the markets views on those sub-sectors (and Growth ITs might be similarly affected by the markets view on Tech, Pharm. etc,). Even things such as changes in tax policy, on earnings, on Dividends, on R&D credits will affect different sectors, and therefore types of IT in different ways.

So generally, yes lower "payout" investments will tend to have higher growth in those payouts over time. Generally the more "niche" and less market diversified the (collective) investments are, the more likely their volatility will be higher (which could be good or bad, of course as a return measure).

The wider point though is that regardless it is possible to tailor that income stream to what suits you. If the dividend is more than is needed it can be reinvested back into underlying, if less you can sell some of the underlying. It is certainly easier to take whatever the company, or IT, decides to pay out, and there are costs in "adjusting" that, and possibly tax implications too. ITs will often have different classes of investor to address this too so that "income" seekers can have one, and "growth" seekers have another (and those who want both can but both!). As such you can focus on what the underlying investments are, not on the potential payouts.

[77ss]

Weirdly (or not) I think I might end up using a hybrid approach, including all three types: Growth, Income and G+I investment trusts.
Income ITs - buy and hold, enjoy the steady dividends as they roll in
G+I ITs - buy and hold for growing yields, so in 10 years they're effectively Income ITs
Growth ITs - for selling to top-up income

If nothing else it gives me a full selection of ITs to choose from!

That is pretty well where I am now, having gradually migrated away from an HYP approach over the past 10 years. Works for me.

I retain about 50% of individual equities - high yielding, growth (and basket cases - hey ho) but 50% is now in ITs - growth and G+I (0-3.5% yields) I avoid Income ITs.

You hypothesized an income IT giving a 5% yield and 2% annual capital appreciation. OK and fairly safe, but modest. Looking at the frequently mentioned CTY - it does give the yield, but has only managed a 4% capital growth over the past 5 years.

[jackdaww]

.

my somewhat biased and subjective view is that there has been a substantial trend here away from "HYP" towards a more "total returns" method , making some use of IT's .

[Itsallaguess]

Do you think it would be fair to assume that the income from a typical Growth + Income IT would grow faster than a purely Income IT?

So for example a typical Income IT might yield 5% and grow the dividend by 3%pa on average, and a typical G+I IT would have a yield of 3% but growing at >5%pa?

I've looked at the historical figures but they seem to be too distorted by changes in policy/events. I was just wondering if this was part of the intent of G+I ITs, that they would attempt to grow income faster than Income ITs, albeit from a lower base.

The well documented Basket of 7 and Basket of 8 here on TLF go some way towards answering that question.

An excellent suggestion for someone interested in these types of approaches...

To help with that, here's a couple of links to Luni's most recent yearly reviews of each IT Basket -

Basket of Seven (2021 Review) - https://www.lemonfool.co.uk/viewtopic.php?f=54&t=28791

Basket of Eight (2020 Review) - https://www.lemonfool.co.uk/viewtopic.php?f=54&t=25362

Cheers,

Itsallaguess

[dundas666]

Do you think it would be fair to assume that the income from a typical Growth + Income IT would grow faster than a purely Income IT?

So for example a typical Income IT might yield 5% and grow the dividend by 3%pa on average, and a typical G+I IT would have a yield of 3% but growing at >5%pa?

I've looked at the historical figures but they seem to be too distorted by changes in policy/events. I was just wondering if this was part of the intent of G+I ITs, that they would attempt to grow income faster than Income ITs, albeit from a lower base.

The well documented Basket of 7 and Basket of 8 here on TLF go some way towards answering that question.

An excellent suggestion for someone interested in these types of approaches...

To help with that, here's a couple of links to Luni's most recent yearly reviews of each IT Basket -

Basket of Seven (2021 Review) - https://www.lemonfool.co.uk/viewtopic.php?f=54&t=28791

Basket of Eight (2020 Review) - https://www.lemonfool.co.uk/viewtopic.php?f=54&t=25362

Cheers,

Itsallaguess

Many thanks, I'll take a look at those.

[tramrider]

Weirdly (or not) I think I might end up using a hybrid approach, including all three types: Growth, Income and G+I investment trusts.
Income ITs - buy and hold, enjoy the steady dividends as they roll in
G+I ITs - buy and hold for growing yields, so in 10 years they're effectively Income ITs
Growth ITs - for selling to top-up income

If nothing else it gives me a full selection of ITs to choose from!

Like you, I hold a range of ITs from pure income through to pure growth and I do not think it is weird. However, I think it is worth considering the results of doing this, as to how to divide up your available capital. Here is a spectrum of 4 widely divergent ITs that I hold.

The figures are based on the excellent AIC site today. The first column shows the 5 year total return, including both capital gain and dividends reinvested. In the second column, this is converted to what would happen in an average single year. The third column is the trailing yield for the past year. Subtracting this from the total return gives the approximate capital gain for a year (ignoring dates of dividend reinvestment in the total return calculation).

To illustrate what this means in practice, I have applied the percentages to a £1000 investment. This gives the dividend column, the capital gain column and the total gain column.

TIDM	Name				5yr Tot	1yr Tot	Yield	1yr Cap		Divis	Cap 	Total 	
					Ret %	Ret %	 %	 Ret %		£	Gain £	Gain £

NCYF	CQS New City High Yield Fund	 38.3	 6.7	8.3	-1.6		83.0	-16.0	 67.0
HFEL	Henderson Far East Income	 55.9	 9.3	7.2	 2.1		72.0	 20.9	 92.9
JGGI	JP Morgan Global Grow & Inc 	145.7	19.7	3.2	16.5		32.0	165.0	197.0
SMT	Scottish Mortgage		343.6	34.7	0.3	34.4	 	 3.0	344.1	347.1

I quite like NCYF because it behaves nearly like a fixed income investment, giving a lot of dividend that I can either spend or use it to reinvest and rebalance my holdings. However, there is a slight capital loss at present but my XIRR is still 8.1%, which is better than most savings accounts.

HFEL provides diversity to the Far East and a slightly smaller yield, but with a capital gain that should push up the yield a little, year by year.

I feel that JGGI is the sweet spot for me. Although the past year yield is given as 3.2%, this is because the capital rise has overtaken the 4.0% intended yield which is the 'average' over the year, but in hindsight looks less as the IT price has risen strongly. So there is both an acceptable 4.0% dividend and a very acceptable capital gain, which can be accessed if necessary.

SMT is very popular as it keeps on 'giving' capital gain, but the £3.00 annual dividend would not be enough to live on. We would have to do as DOD has and sell some during the volatile peaks.

I hope this gives you something to think about and compare for the range of IT strategies. The AIC site is excellent at showing both the 5 year total return and the historic dividend yield by clicking on the arrowheads at the top of the table to sort according to preference for particular IT strategies, such as Global in this case.

https://www.theaic.co.uk/aic/find-compa ... desc=false

Tramrider

[AshleyW]

It's not necessarily the case that going for a dividend income portfolio means you will sacrifice Total Return. On RetirementAce there is a comparison of an Income Trust Income Portfolio that on a total return basis outperforms the Vanguard Life Strategy 60% equity fund. However, an income strategy requires active management of the underlying funds and management of the portfolio. Obtaining an income through drawdown can be achieved through the use of passive funds and with exposure to a more diversified range of assets including government bonds to reduce portfolio volatility.

There are however investors who favour dividend income because they are prepared to accept high portfolio volatility in return for a consistent real income. There is an underlying rationale that companies that have a history of paying increasing dividends out-perform growth companies in the long term. However, it's virtually impossible to undertake a historic analysis of the two approaches as the income route doesn´t work on a passive investment basis.

[TopOfDaMornin]

I just wanted to confirm my understanding of a number of posts where I've seen posters mention that Total Return is a more valuable portfolio selection criteria for drawing income than High Yield.

Using a simplified example, is the general idea that instead of a high yield IT portfolio that returns, say, a 5% income plus 2% capital growth, you would invest in a portfolio of growth-based ITs with 0% yield but grew at 9% so you could sell 5% each year and have 4% 'profit' instead of 2%?

Thanks in advance for your comments!

I cannot help but think that a portfolio of “many” ITs, would be better replaced with a global tracker. I understand the temptation of the income ITs towards retirement, particularly the dividend heroes.


My concern with a mixed basket of income and growth is that a falling market affects all equities. This towards the start of retirement could be devastating.


As time goes on, I am more and more tempted by a Vanguard Targeted Retirement fund. This moves progressively into bonds, thus preserving capital. At retirement, you can ask Vanguard to sell a certain amount each year e.g. 4% and thus get income this way.




TDM

[1nvest]

...

But that's completely irrelevant to the discussion at hand - the OP isn't talking about a single-share HYP being one of his two options, he's talking about a collection of income-related Investment Trusts, which have generally been shown to provide much lower volatility in terms of delivered income, as can be seen by this chart from someone who's been running long-term comparisons for some years.

The income-IT line is the pink one -

<snip>

Cheers,

Itsallaguess

I hold the FT250 which holds getting on for 50 IT's that presumably also include those 'exceptionals'. The reality is however that FT250 excluding IT's was more rewarding that FT250 including IT's. That selective set you're promoting isn't reflective of the general case. I suspect yet again you're looking to 'report' one of my posts that have no ulterior motive in order to promote your own ulterior motive.

[1nvest]

It's not necessarily the case that going for a dividend income portfolio means you will sacrifice Total Return.

Did you mean sacrifice price appreciation rather than total return? More usually higher dividend broadly equates to lower/slower price appreciation. Total returns broadly are comparable, all else being equal. There's no reason I know of why higher dividend might lead to lower expected total return. As a extreme for instance, from 1972 to 1980 if you'd invested just in cash deposits, and then in 1980 upon seeing high interest rates/inflation and a low Dow/Gold ratio rotated into Long Dated Treasury bonds and held since, then the rewards were close to that of all stock total 1972 to 2020 inclusive annualised returns. More so if you'd held some gold along with cash in the 1970's in reflection of the $ ending the pegging to gold (at 67/33 cash/gold perhaps in reflection of a mindset that if 67 $ cash value halved and 33 gold doubled you'd still be at break-even).