On the other board's HYP1 review I posted some evidence to suggest that, ignoring capital values, preference shares can outperform pyad's original HYP strategy over a long period of time:
viewtopic.php?f=15&t=432&start=40#p4565
Doris could have purchased AV.A (Aviva 8.75%) preference shares at 131.50p in February 2001 (on the same day as I did). Her £75000 would now be worth only £85059 but the shares would have returned an annual dividend of £4990, a total of £79840 against HYP1's £68758 over the same 16 year period.
In my mind this raises an interesting actuarial question:
How long does it take for a high and rising dividend income to overtake a higher and fixed dividend income?
It's impossible to answer precisely of course, but I think one can investigate a little further with some reasonable starting assumptions.
My own attempt below shows: the cumulative income on £1 invested in a preference share yielding 6.0% (currently the lowest yield of my own preference shares), versus the cumulative income on £1 invested in an ordinary share yielding 4.4% (currently the yield of my own portfolio excluding preference shares and VCTs) and growing the initial dividend at 2.5% per annum (the Bank of England's original inflation target), both without any dividend cuts. All income is spent and not reinvested.
Code: Select all
YEAR PREF ORD
1 0.060 0.044
2 0.120 0.089
3 0.180 0.135
4 0.240 0.183
5 0.300 0.231
6 0.360 0.281
7 0.420 0.332
8 0.480 0.384
9 0.540 0.438
10 0.600 0.493
11 0.660 0.549
12 0.720 0.607
13 0.780 0.666
14 0.840 0.727
15 0.900 0.789
16 0.960 0.853
17 1.020 0.918
18 1.080 0.985
19 1.140 1.054
20 1.200 1.124
After 20 years the preference share has paid a total of £1.20 on the initial £1 investment. The ordinary share has paid a total of £1.12 and still not caught up.
In comparison, men and women retiring at 65 can expect to live a further 14 (to 79) and 17 (to 82) years respectively (according to my quick search of Office for National Statistics figures).
M