UK Dividend Aristos

[Arborbridge]

I've posted the latest portfolio here:
https://www.lemonfool.co.uk/viewtopic.php?f=15&t=1159

[OhNoNotimAgain]

I find an IT totally transparent. I can if I like get a hard copy Annual Report, just like any other company and study its assets and liabilities as at year end, together with its philosophy and then judge for myself if I like what I read or not. That always seems to be much more difficult with an ETF, OEIC or unit trust.

Dod

The problem is IT portfolios are at least 6 months out of date by the time they are published.

A half decent OEIC will publish its largest holding a few days after the end of every month.

Rob

[Arborbridge]

And UKDV publishes it complete holdings daily.

Theorising is all well and good, but In the end, the proof must be in the results that one experiences over a period of years.

[GeoffF100]

Theorising is all well and good, but In the end, the proof must be in the results that one experiences over a period of years.

Not really. That just tells you whether you have been lucky or unlucky.

[Arborbridge]

Not really. That just tells you whether you have been lucky or unlucky.

That was partly the point. Furthermore, even if one comes to any conclusion about all the different influences and factors, one always finds out when the game is all but over. Taking a long view doesn't help much either, since the market will quite likely morph into something subtly difference by the time you come to apply whatever you think you've found out.

Arb.

[Arborbridge]

A disappointing dividend payout from UK DV.

The current interim is 32.98p down from 36.88p , making the 12 month payout 47.33p, down from 53.5p. That's two declining dividends in a row.

An 11.5% drop can hardly be accounted for by the drop in real payouts from the "aristocratic" companies included, so I suspect some monkey business must be going on. I know my own HYP has not zoomed up in income payments, but neither has it dropped. The yield does not make up for it either, being 3.75% at the current price.
I will try to find out what the company has by way of excuses, but last time I tried, I received very little in the way of information.

UKDV is not proving itself as a worthy HYP companion at present.

Arb.

[Alaric]

A disappointing dividend payout from UK DV.

Top 10 as of 30 Sep 2017

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1   NEXT   5.11
2   SSE PLC   4.85
3   GLAXOSMITHKLINE   4.75
4   TP ICAP PLC   4.63
5   ASTRAZENECA PLC   4.49
6   IMPERIAL BRANDS PLC   4.44
7   CAPITA PLC   4.35
8   PENNON GROUP   3.94
9   CLOSE BROS GROUP   3.91
10   TATE & LYLE   3.85

As of Nov 30 2016 (from a Lemon Fool posting)

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GlaxoSmithKline plc                  5.09
Aberdeen Asset Management PLC        5.08
SSE plc                              4.97
G4S plc                              4.85
Carillion plc                        4.57
Tate & Lyle PLC                      4.56
AstraZeneca PLC                      4.36
Pearson PLC                          4.32
BAE Systems plc                      3.93
Burberry Group plc                   3.79


I wonder whether the methodology got out of Carillion without a drastic loss.

Capital losses could account for a dividend fall. If it's rebalancing periodically, that's not "buy and hold", so the yield at which it reinvests is a more of a factor, rather than whether individual shares have maintained their dividends.

An IT run with similar stock selection rules would have stabilised the income using revenue reserves.

[hiriskpaul]

I know I have said this before about these ETFs, but I just don't get this process. They screen for stocks which have a 10 year record of increasing dividends. That is more likely than not to mean an expensive (in terms of fundamentals) portfolio as the market will recognise these as better than average companies and price them appropriately. Then when one of the companies stumbles and is forced to cut the dividend, the shares are sold. In such circumstances the share price is likely to have been significantly marked down. In other words they are following a buy high sell low strategy.

There does not seem to be any theoretical justification for the portfolio construction either. There is no "Dividend Aristocrat" factor as far as I am aware, but perhaps it loosely correlates with the quality factor? One look at the P/B will tell anyone this is certainly not a value strategy. Perhaps this strategy Is something made up by a marketing department targeting investors trend-chasing bias?

[hiriskpaul]

I had a quick look at the 2017 accounts and can see that the following shares are no longer in the ETF:

Aberdeen Asset Management
Berendsen
Mitie Group
Pearson
Sky
UBM

The first 2 were likely sold because they were taken over, the others due to dividend cuts. I can see that Carrillion is still in the portfolio, no doubt going at the next rebalance.

It is not true that they pay out all of the income received by the way. In the 2017 accounts, dividend income was £3,696,669 and dividends paid out £3,605,140, a difference of £91,529. However operating expenses were £258,331. So for that year more of the expenses were met from capital than income.

The difference in income from one year to the next will reflect the income received and a deduction for operational costs. Possible reasons for a lower income could be:

- more income used to pay expenses, less capital
- cuts to dividends, e.g. Carillion
- timing issues. e.g. replacement stocks may not have paid a dividend in the period.

[OhNoNotimAgain]

:
However operating expenses were £258,331. So for that year more of the expenses were met from capital than income.

How can anyone claim ETFs are low cost with that level of expenses?

[OZYU]

:
However operating expenses were £258,331. So for that year more of the expenses were met from capital than income.

How can anyone claim ETFs are low cost with that level of expenses?

Well, it is easy, because if you care to divide those expenses by the market cap, you will find that they are indeed low cost, quite a bit lower than a certain so called 'smart fund' which has lost investors capital since inception, in particular taking RPI into account, while paying nothing to write home about divis which are easily matched or bettered, which I am sure can think of!

Suggest the purchase of a mirror and a calculator.

Ozyu

Not interested in ETFs generally ourselves, we only hold one, EQQQ, to cover the Nasdaq. And with that kind of net return so far, we don't care a jot about costs.

[hiriskpaul]

:
However operating expenses were £258,331. So for that year more of the expenses were met from capital than income.

How can anyone claim ETFs are low cost with that level of expenses?

Only some ETFs are low cost. There are a handful of LSE listed ETFs with TERs < 10bps which track cap weighted indices such as the FTSE 100, 250, S&P 500 and EuroSTOXX 50. Another handful are available with TERs< 20 bps which track other cap weighted developed market indices, such as FTSE Japan, Asia/Pacific excluding Japan, developed World, Europe. This SPDR ETF quotes an OCF of 0.30%. Not what I would call low cost, but lower than actively managed ITs/OEICs.

There are very few low cost ETFs that do not track cap weighted indices, although Vanguard do 4 global actively managed ETFs for an OCF of 22bps, much lower than actively managed global OEICs/ITs.

[Lootman]

:
However operating expenses were £258,331. So for that year more of the expenses were met from capital than income.

How can anyone claim ETFs are low cost with that level of expenses?

That's an interesting question coming from the manager of the most expensive UK passive fund that is out there, with expenses of over 1% a year. Looking at the expenses as an absolute number is meaningless without comparing it to the total value of the fund. When that is done it is clear that this ETF is far cheaper then your fund.

More generally I'm not sure it is fair to compare this ETF to a HYP-type strategy. The latter has (supposedly) a focus only on income. Capital doesn't matter. But UKDV has a focus on total return, and uses dividend growth to try and achieve that. So how has UKDV performed in terms of total return?

The idea of dividend aristocrats derives from the US where, for many years, such a strategy out-performed the S&P 500. Now, whether a similar approach works in the UK is a legitimate question and it seemed to me at the time that the methodology had to be tinkered with to an extent that it wouldn't work well. So I was not tempted by UKDV even though I was by USDV.

But I suspect those who buy it are not looking for an annuity that stretches for yield so that people can retire on insufficient sums of capital. It's for those who are looking for total return driven by growing earnings and dividends.

[Hariseldon58]

As a small aside, ETFs have something called “excess reportable income”, this is significant on accumulating ETFs but even those that pay out dividends , also have excess reportable income that should be on your tax return. Vanguard and State Street both publish this on the web site, ( it’s not that obvious on state street SPDR Europe site, look under announcements)

This can explain small discrepancies in income, as well as timing issues as I indicated earlier in this thread.

ETFs are very transparent, Long detailed annual reports, daily reporting of the ‘basket’ contents. It’s pretty dry stuff with little or no commentary but all the info is there if you dig around in their websites, sometimes the “professional “ version of the web sites is more forthcoming.

[Arborbridge]

Coming back to this ETF for a rain check again: I'm definitely losing patience and will probably sell out at some point in the next few months.

The next dividend coming up is a disappointment being 12% down on last year at the same point. I can see no real reason for this in view of the fact that these are supposedly aristocrats of the dividend world!
Here's a table showing the dividend payouts for the past five years since I have held the fund, and one can hardly say there is a "trend" - which there has been in most dividend payers such as various ITs and my HYP.



I think I have been patient enough. If the latest dividend had shown a reasonable increase, I would have given them longer to prove the point, but a reduction is not justifiable in my view. It seems that there is either some strange thing going on, or the Aristo concept just doesn't work very well. The "strange thing" is that they may be flattering the total return chart by dampening down the payout. However, I cannot use this as a rationalisation for holding on to them because my TR by XIRR is a sickly 3.6% for five years which almost matches the current payout of 3.9%.

So, unless anyone sees a big hole in my thoughts, it'll be good-bye Aristos when I need cash to redeploy.

Arb.

[colin]

this ETF is matter of believing the "theory" behind it - as we do with HYP.

Is it not more a case of buying into an assumption? That companies with a past record of increasing dividend payouts are more likely continue to increase those payouts? Is SPDR simply harvesting naive assumptions or is there hard evidence that this strategy produces meaningful results?

[Lootman]

unless anyone sees a big hole in my thoughts, it'll be good-bye Aristos when I need cash to redeploy.

The Aristocrat methodology had a fairly long track record of success in the US before it was ever introduced into the UK. As I recall a number of the rules had to be "tweaked" for the UK version because, under the US rules, very few UK shares qualified for inclusion. As a result the criteria were weakened and that may well be the source of the problem.

There were about four of these RTFs introduced at the sane time and I bought into the USDV one, which appears to have done quite well. But I didn't like the compromises made for the UK version and so did not invest. It follows that I know of no reason why you should keep it.

If I had to speculate about why something that works in the US does not work in the UK, I might think that it is due to the fact that in the UK there is a custom of high payouts and lower dividend cover. That restricts the ability to grow dividends in many cases, and may make cuts more llkely. Whereas US dividends tend to have more cover, safety and opportunity for growth. Their dividend policy is more conservative.

I'd describe my style of dividend investing as focused more on dividend growth than a high yield per se, and I continue to believe that works, just maybe not given prevailing attitudes towards payouts in the UK. Trying to combine a high running yield with prospects for growth may not go well together.

[Hariseldon58]

It’s interesting that all the U.K. Equity Income Trackers i dallied with , this one, Vanguards and the iShares U.K. Dividend Plus have disappointed and I disposed of all these some time ago.

I have returned recently to U.K. Equity Income via Investment Trusts , the human input does allow some discernment and some useful discounts at present.

[Arborbridge]

unless anyone sees a big hole in my thoughts, it'll be good-bye Aristos when I need cash to redeploy.

The Aristocrat methodology had a fairly long track record of success in the US before it was ever introduced into the UK. As I recall a number of the rules had to be "tweaked" for the UK version because, under the US rules, very few UK shares qualified for inclusion. As a result the criteria were weakened and that may well be the source of the problem.

There were about four of these RTFs introduced at the sane time and I bought into the USDV one, which appears to have done quite well. But I didn't like the compromises made for the UK version and so did not invest. It follows that I know of no reason why you should keep it.

If I had to speculate about why something that works in the US does not work in the UK, I might think that it is due to the fact that in the UK there is a custom of high payouts and lower dividend cover. That restricts the ability to grow dividends in many cases, and may make cuts more llkely. Whereas US dividends tend to have more cover, safety and opportunity for growth. Their dividend policy is more conservative.

I'd describe my style of dividend investing as focused more on dividend growth than a high yield per se, and I continue to believe that works, just maybe not given prevailing attitudes towards payouts in the UK. Trying to combine a high running yield with prospects for growth may not go well together.

One would need to carry out some analysis on the UKDV portfolio and the change therein to come to a conclusion, and I'm not sure I can be bothered! If it isn't "cutting the mustard" I may as well try something different.
Having seen their list of companies, I really would be surprised if the portfolio income had not grown this year, so either their costs have increased or they are not sharing all the increase for other reasons - or my quick glance down the company list is giving the wrong impression of how robust it is.
The failure is not just down to picking higher yields - my own amateur fumblings have produced an increase in dividends per unit of around RPI so far this year compared with the same point in 2017.

[gryffron]

Top 10 as of 30 Sep 2017...
As of Nov 30 2016 (from a Lemon Fool posting)...

It must be trading very aggressively to manage such dramatic shifts of capital in just 10 months. Hardly LTBH. Is there any evidence a dividend strategy is beneficial for such a short term trader?

Gryff