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Why do you invest for income (if at all)?
Mixa
Posted: 14 October 2020 06:11:48(UTC)
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Hi All,

My answer to the topics question is a yes. I do some income investing.

I currently have a Fund!heavy portfolio 90% funds 10% shares in my stocks and shares ISA all with a growth focused strategy.

I do this all Via Hargreaves Lansdown which charge an annual fee of 0.45% (last time I checked).

A small percentage of my portfolio pays income and relative to the size of my entire portfolio pays just enough to cover this fees while the investment itself has modest year on year growth. This is just so my portfolio is “hands free” and requires as little input from me to maintain as it’s paying for itself without me having to sell anything.

Hope that makes sense and happy for any pointers.

As always, stay safe and hope your investments go well.
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mdss68 on 14/10/2020(UTC)
bédé
Posted: 14 October 2020 06:38:29(UTC)
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Mixa;133217 wrote:
my entire portfolio pays just enough to cover this fees while the investment itself has modest year on year growth. This is just so my portfolio is “hands free” and requires as little input from me to maintain as it’s paying for itself without me having to sell anything.


Yes it makes perfect sense.

If we were able to count the silent forum readers, I'm sure you lot would be in the majority. But that should be no consolation.

In a word it is LAZY. It's like never maintaining your house and being surprised by a low price when you come to sell.

Glad you posted though. Keep following and you might learn something.
bédé
Posted: 14 October 2020 06:43:07(UTC)
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Jimmy Page;133124 wrote:

If therefore, as you say, all else is equal why choose to sell 3% of a holding each year for the whole of retirement if an option exists to have it give you that 3% as cash. At no cost, effortlessly, automatically, straight to bank?


Have you done the sums? Income plus growth = total return. Do you know how much you are passing by, by being LAZY?
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King Lodos on 14/10/2020(UTC)
bédé
Posted: 14 October 2020 06:45:21(UTC)
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SimonHughes;133128 wrote:
I am in the school of thought that says that investing for income is wrong unless one wishes to invest for income.


It's a free world. If one wants to be lazy, be lazy.
bédé
Posted: 14 October 2020 06:52:03(UTC)
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King Lodos;133200 wrote:
I think it could be an idea for firms to offer distributing versions of their ITs .. You could buy SMT with a 5% dividend, or PNL with a 5% dividend .. Hold both: get solid growth and defence, and a steady 5%.

It wouldn't really be achieving anything – you could hold both right now, with 5% cash, and just rebalance


It might be a good marketing proposition.

It might be a lazy way of taking some of the froth off certain funds, so that you could reinvest more widely.
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King Lodos on 14/10/2020(UTC)
SimonHughes
Posted: 14 October 2020 06:55:49(UTC)
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bédé;133229 wrote:
SimonHughes;133128 wrote:
I am in the school of thought that says that investing for income is wrong unless one wishes to invest for income.


It's a free world. If you want to be lazy, be lazy.


I suggest that you get LAZY and go back to the bed you so clearly got out the wrong side of today.
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mdss68 on 14/10/2020(UTC), Guest on 14/10/2020(UTC)
bédé
Posted: 14 October 2020 07:02:36(UTC)
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Jimmy Page;133172 wrote:
Personally, I'd stick it all into VWRL and let the dividends appear each month via HL into the bank account. Presumably however, the tr brigade would use VWRP instead and periodically log on to sell down the required capital instead.


Nowt wrong with dividends. Large or small. Spent or reinvested.

It's the fixation on Income without attention to the bigger picture that is the issue. You seem to have a good balanced perspective, but many have not.
Mixa
Posted: 14 October 2020 08:01:02(UTC)
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bédé;133225 wrote:
Mixa;133217 wrote:
my entire portfolio pays just enough to cover this fees while the investment itself has modest year on year growth. This is just so my portfolio is “hands free” and requires as little input from me to maintain as it’s paying for itself without me having to sell anything.


Yes it makes perfect sense.

If we were able to count the silent forum readers, I'm sure you lot would be in the majority. But that should be no consolation.

In a word it is LAZY. It's like never maintaining your house and being surprised by a low price when you come to sell.

Glad you posted though. Keep following and you might learn something.



Appreciate your thoughts and thanks for sharing. One thing I wanted to clarify is that the majority of my portfolio is actually doing well so far with very good growth year on year. It’s only that small part that is income based to cover my fees which has modest growth. And as I’m a long term investor, I do check my portfolio regularly and tweak it every now and then, I just didn’t want to burden myself with keeping an eye on my platform charges and having to pay money in or sell assets to pay it off. It’s only this fees part which I’m admittedly lazy about.

Thanks again and really appreciated your thoughts.
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SimonHughes on 14/10/2020(UTC), Guest on 14/10/2020(UTC)
Jimmy Page
Posted: 14 October 2020 09:06:50(UTC)
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bédé;133227 wrote:
Jimmy Page;133124 wrote:

If therefore, as you say, all else is equal why choose to sell 3% of a holding each year for the whole of retirement if an option exists to have it give you that 3% as cash. At no cost, effortlessly, automatically, straight to bank?


Have you done the sums? Income plus growth = total return. Do you know how much you are passing by, by being LAZY?

Nothing gets passed by.
Income is extracted, capital grows. The growing capital is there as insurance against future market slumps, or for future one-off capital raids, or for inheritence (SIPP). It is an entirely discrete portfolio, run independent of other investments, and beats an annuity. It requires no maintenance. (So far). Generated income has outstripped inflation so the required yield has dropped each year (So far). The income level was set on retirement to bring all taxed income up to the higher rate threshold bar. An annual request is made to change the monthly withdrawal amount accordingly. And that's it.
If such lazy inactivity offends though, one can always buy the Accumulation version of a favourite fund rather than the Income version! Having to periodically log on and pay for a transaction to sell capital for income may be one way to avoid a charge of laziness, but I can't help thinking there are better ways to do it.

Away from the less than sensible extremes of income investing - a portfolio of a few FTSE100 5% yielders and junk bonds for instance - it is utterly possible imho to build a sustainable, diversified income portfolio which beats annuities for income and yet protects, even grows, capital.
Unfortunately every time 'income investing' gets raised, someone feels the need to rush in and start shouting about yield traps and all the rest. It's akin to insisting that total return investing must always mean 100% in the next techy startup to the exclusion of all else, and equally unhelpful.
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SimonHughes on 14/10/2020(UTC), Guest on 14/10/2020(UTC), D Bergman on 14/10/2020(UTC), Mixa on 14/10/2020(UTC), Alexander Johnston on 14/10/2020(UTC), Luca Brasi on 14/10/2020(UTC)
Jimmy Page
Posted: 14 October 2020 09:09:09(UTC)
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bédé;133233 wrote:
Jimmy Page;133172 wrote:
Personally, I'd stick it all into VWRL and let the dividends appear each month via HL into the bank account. Presumably however, the tr brigade would use VWRP instead and periodically log on to sell down the required capital instead.


Nowt wrong with dividends. Large or small. Spent or reinvested.

It's the fixation on Income without attention to the bigger picture that is the issue. You seem to have a good balanced perspective, but many have not.

I wouldn't presume to be patronising. Oh, and income is the whole point of this particular thread, by the way.
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Guest on 14/10/2020(UTC)
Joe 90
Posted: 14 October 2020 09:38:36(UTC)
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By coincidence there's another very interesting piece on the subject published today by Early Retirement Now.

https://earlyretirementn...ries-part-40/#more-61667
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King Lodos on 14/10/2020(UTC)
Alexander Johnston
Posted: 14 October 2020 09:51:22(UTC)
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Joe 90;133149 wrote:
Some interesting thoughts in PNL’s latest quarterly report. Point 10 is particularly germane to this thread.

https://www.patplc.co.uk...t/files/documents/96.pdf


Hardly earth-shattering.
It's saying that total return is the relevant criteria, which is capital appreciation plus dividends. Surely this is as obvious as 1+1 = 2.
Also it says that one should not solely go for high dividends. Surely everyone knows this? I learnt that lesson 50 years ago.
He forgot to include "scrub your teeth after breakfast" and "don't beat your wife".

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Jimmy Page on 14/10/2020(UTC), Guest on 14/10/2020(UTC)
Alexander Johnston
Posted: 14 October 2020 09:55:23(UTC)
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King Lodos;133016 wrote:
brian jackson;132992 wrote:
An interesting subject.

The Barclays annual study has shown over an extended period that the big returns from the stockmarket arises from reinvested dividends. Those living off the income will not benefit from this approach.

More recent commentary is that only a miniscule number of stocks actually provide real positive returns.

Those with an income shortfall are probably better to achieve a target income and hopefully have spare funds left over to target more growth orientated companies, as this will save selling down during a downturn.

It is fair to say that over the last 10 years growth/momentum has been by far the better option than income orientation but this has not always been the case. There has been a long term tendency to overprice growth and returns in practice have frequently disappointed.

In short fads will come and go, what is disappointing with managed funds is that the managers find it difficult/impossible to adjust their approach to meet what appear to be the better shorter term rewards


From what I recall, there was a famous piece of research from the 70s or 80s – reprinted everywhere – that made the case most market returns had come from dividends .. and that created a generation of equity income investors.

But 20-odd years later, it was found there was a simple error in the maths (I'm looking for this article, but can't recall a keyword to identify it), and the role of dividends had been overstated .. Now we generally find about 2-5%(?) of stocks are responsible for most of the market's return; what defines those stocks is profitability; and the median stock underperforms cash (dividend or not).

The current situation is historically fairly normal .. There are usually only a handful of stocks pushing the market higher, even long-term – it used to be more banks and oil (which is why 'value' used to appear to do better) .. The key is that dividends don't create any value; they're just a taxable transfer of value .. Chasing them is probably one of the least logical things investors do



Perhaps in 20 years later a further flaw will be discovered in the maths.
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Jimmy Page on 14/10/2020(UTC)
Alexander Johnston
Posted: 14 October 2020 10:27:35(UTC)
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King Lodos;133212 wrote:
Alexander Johnston;133169 wrote:
Joe 90;133118 wrote:
I agree with KL. if a company pays cash to shareholders in the form of a dividend then this will be reflected in a reduced share price. Seems obvious to me.

Only reason to prefer income over capital gain (or vice versa) is the shareholder’s tax planning objectives.


It's not obvious to me.
Share prices are determined by the interaction of supply and demand. If a business is distributing a REASONABLE dividend and is increasing that dividend and is ploughing back enough investment to grow and take advantage of other opportunities, then I see no reason why the share price and dividend can't both increase.
If the business can't make use of it and it attracts 1% in their bank account why not distribute some of it?
I suppose one could argue that if all the profits are ploughed back and no dividends are distributed, then the business should grow faster, gain market share and be even more profitable.
But that assumes that the ploughed back monies are invested productively and sensibly. In a business it is possible to spend retained profits and make things worse, such as mounting a disastrous acquisition.
I'm talking about reasonable dividends here not exceptionally high dividends which are often associated with low share prices because of concerns about the future prospects of the business.



The share price is an estimate of the value of a business .. Market cap is obviously: share price x the number of shares outstanding.

If analysts deem a business to be worth £1,000, then it distributes £50 as a dividend, it's extremely easy to say the business is now worth £950 on the ex-div date .. People buying and selling deem the business to be worth £50 less than it was, and that reduces demand for trades at £1,000.

A Terry Smith answer to "it is possible to spend retained profits and make things worse" would probably be: 'Well, avoid those businesses.' .. Yes, a lot of businesses can't reinvest capital profitably, and there's a good chance they represent the 80-90% of the market that isn't a particularly good investment .. Berkshire Hathaway doesn't pay a dividend, because from Buffett's perspective, if they couldn't reinvest capital profitably, they might as well give up


IMO if a businesses can't reinvest capital profitably at a point in time it should not give up IMO. It could consider for example consider qualitative improvements such as improving management and skill training which would involve modest expenditure if any.

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Jimmy Page on 15/10/2020(UTC)
Jimmy Page
Posted: 14 October 2020 10:30:02(UTC)
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Joe 90;133286 wrote:
By coincidence there's another very interesting piece on the subject published today by Early Retirement Now.

https://earlyretirementn...ries-part-40/#more-61667

I note the author specifically accepts that natural yield harvesting alleviates Sequence of Return Risk, a point of view at variance to some others.
He then follows that with-

'But by solving the “running out of money” problem we create a bunch of new questions, such as:
Will the principal keep up with inflation over a typical retirement horizon?
Will your dividend payments keep up with inflation over time?
How much volatility in the dividend payments would you have to expect?'

To which I would say that's trying rather too hard to find problems-
1 and 2. The first two points are really one. Inflation matching applies to any drawdown discipline, whether capital or income.
3. Volatility. Some may be content with variable income - good years and bad years. For those to whom it matters however, volatility is contained by way of a cash reserve - exactly as a recommended for tr harvesting for those bad years. Hands off harvesting would also suggest pitching withdrawals at slightly lower than average expected yields. Good years will then replenish the cash pot.
To suggest this is a 'problem' unique to income investing is to assume the tr investor will never suffer a capital loss.

The most substantial point is the old chestnut that stretching for too high a yield can lead to problems. Indisputably true, but then the same charge can apply to tr investing- whether by chasing too much growth with risky assets, or by withdrawing too much each year and running out of capital. Drawdown requires moderation whichever mechanism is used.
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Dexi on 15/10/2020(UTC)
Big boy
Posted: 14 October 2020 10:39:50(UTC)
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Up until the last year or two investors flooded into high yield and
we’re willing to pay a premium for Trusts and Property ICs based
on the believe that the yield would support the value.
As usual the sector got ramped up until the bubble burst with Woodford etc.
This lead to the usual stampeded of PIs and hence the sectors got oversold and
the Trusts/Property Trusts move on to discounts as less buyers than sellers.
Having looked at the 1,2,3,4 and 5 year performance of Lowland/Temple Bar
maybe discounts of 10% offer good value. I know no one is interested as lost money but
I never worry about the past I just let the markets decide what I buy and sell.
In answer to the question what I am driven by is it under or overvalued. Income and capital
in my current a/c are all capital to me.
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King Lodos on 14/10/2020(UTC)
King Lodos
Posted: 14 October 2020 23:50:15(UTC)
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Jimmy Page;133275 wrote:

Away from the less than sensible extremes of income investing - a portfolio of a few FTSE100 5% yielders and junk bonds for instance - it is utterly possible imho to build a sustainable, diversified income portfolio which beats annuities for income and yet protects, even grows, capital.


No, it's utterly stupid .. We know the average stock underperforms cash, and dividends offer no protection against that.

Plenty here started down the path of buying stocks like Vodafone, and topping up useless bank and miners, because they think the dividend is a guarantee that, if they hold long enough, they'll get their investment back.

It's the strategy of someone who doesn't care to know how things work .. It's been a huge failure so far this century, and this year it's been a disaster .. It's not your argument – you're just lazy and slightly poorer than you could be.


Jimmy Page
Posted: 15 October 2020 00:44:00(UTC)
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King Lodos;133413 wrote:
Jimmy Page;133275 wrote:

Away from the less than sensible extremes of income investing - a portfolio of a few FTSE100 5% yielders and junk bonds for instance - it is utterly possible imho to build a sustainable, diversified income portfolio which beats annuities for income and yet protects, even grows, capital.


No, it's utterly stupid .. We know the average stock underperforms cash, and dividends offer no protection against that.

Plenty here started down the path of buying stocks like Vodafone, and topping up useless bank and miners, because they think the dividend is a guarantee that, if they hold long enough, they'll get their investment back.

It's the strategy of someone who doesn't care to know how things work .. It's been a huge failure so far this century, and this year it's been a disaster .. It's not your argument – you're just lazy and slightly poorer than you could be.



Been on the Red bull again tonight I see! At least you've kept your language out of the gutter this time though.
As to being poorer than I could be, then I would politely disagree. There's more to life than counting the dollars every night you know, and I've been blessed in many other ways over the years.
Having a reliable, annuity beating, adequate, hands-free income portfolio is nice, very nice actually, but in the grand scheme of things it's pretty small beer really.
Lots of other things are more important than 'more money' - and I certainly don't waste a moments thought on for instance, whether a payment from an IT should technically be called a dividend or not. Life's too short. And, say it quietly, but I quite like lazy.
But that's just my perspective; you may disagree.
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King Lodos
Posted: 15 October 2020 01:39:26(UTC)
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An annuity's a lot safer.

In investing, there are stocks to own – what we might call the Fundsmith, Nifty 50, or Quality Growth stocks .. High earnings stability; low debt; simple, effective business models.

And there are stocks to rent – which would be the cyclicals, economically sensitive, recovery stocks .. Which people trade in and out of tactically, to bet on things like growth, rates and inflation.

Terry Smith's got retail investors calling cyclicals 'rubbish' .. It's not that they're rubbish – it's that they're stocks you might want to hold sometimes, and not others .. They're not necessarily good investments.

The issue with dividend investing is it creates a culture of buying risky, cyclical trades, and treating them like safe, steady buy-and-holds .. Even if you make more than an annuity, you're taking high market risk .. I'd say it's a big problem we put so much time and energy into earning money, then so little into understanding what we're doing with it

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Jimmy Page
Posted: 15 October 2020 11:44:01(UTC)
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King Lodos;133418 wrote:


The issue with dividend investing is it creates a culture of buying risky, cyclical trades, and treating them like safe, steady buy-and-holds .. Even if you make more than an annuity, you're taking high market risk .. I'd say it's a big problem we put so much time and energy into earning money, then so little into understanding what we're doing with it


I agree the temptation is there. But exactly the same temptation exists within a 'go for growth and sell capital when required' strategy.
It would be deceitful to assert that every total return investor will inevitably pile into high risk small start ups in a cultural 'reach for growth', and gamble the family capital away - and then use the caricature as 'proof' that all total return decumulation is ludicrous, foolish, and all the rest.
It is equally deceitful to always characterise income investors as inevitably and exclusively gambling on zombie, high yield, bombed out stocks.

With an annuity, risk has been largely eliminated but at immense cost. Immediate and irretrievable loss of all capital, no inflation linking, and pitiful returns - especially joint life. (c.1.4%, if escalating at 3% per year)
Going up the 'income' risk scale however, is not limited to a single giant leap to the extreme of 5% zombies and junk bonds. A portfolio of mainstream, generalist investments can be constructed to provide a more moderate, yet still annuity beating, income from distributions.
If I were in Mrs Buffet's position my 90% would be invested in VWRL and I would simply let the 2% distributions arrive automatically into the bank account each month via HL. (Using 10% cash reserve to smooth).
I'll leave the semantics to you, but I call that income investing. (No selling of capital for drawdown).
As it is, I prefer to position for a yield whereby our total taxed income (ie combined with state pension etc) is butting up against the higher tax threshold. I have the capital to achieve that without 'Vodafone! Junk!', and the portfolio reflects that.

Trying to fund a decent retirement in current low return climate will be difficult for many. The realisation of just how much capital is needed, how much risk is required, and how little the returns, will become increasingly apparent as more people slip into 'decumulation'.
Therefore there is great value to be had in discussing options, pros and cons. But that isn't going to happen if every conversation gets drowned out by shrieks of 'Vodafone!', 'yield traps!' and all the rest.

I suspect, by the way, that more pensioners will actually run out of cash by mis-managing a 'sell capital when required' retirement fund than ever will through living off natural yield. There is at least some kind of in- built discipline with the latter, no matter how flawed.
It would be helpful to discuss such matters without misrepresenting just what 'income investing' can mean.

Edit. The c.1.4% annuity rate refers to the second life, the surviving spouse. An income portfolio however, would be entirely unconcerned by my death.
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