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Weekend reading: Divided by a common drawdown dilemma

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What caught my eye this week.

I have a soft spot for income investing. I haven’t actually (naughtily, actively) invested with a focus on income since the financial crisis, though.

(Why not? That’s a whole other story.)

I still expect to live off investment income when I’ve had enough of spinning the wheel on my net worth (and of work, of course). But it’s been more than a decade since replacing my salary with the readies from a growing collection of income-producing assets guided my portfolio.

Thinking back, when I began investing I feel it was the aim of most serious private investors I came across to someday live off dividends, bond coupons, interest on cash, and perhaps a buy-to-let or two.

But that’s not the case any longer.

Obviously, the utter squashing of fixed income yield hasn’t done income investing any favours, although those who owned such inflating assets enjoyed a lucrative ride on the way to today’s miserly yields. And interest on cash is a bygone luxury.

More recently dividends have gotten the chop. It all adds up!

But I believe wider cultural influences are at work beyond the numbers.

Imported Americana

When my co-blogger The Accumulator began talking about his planned drawdown strategy – to sell a certain amount of capital every year, with the aim of running it down to near-zero by death – it sounded foreign to me.

And I mean that very specifically.

I was familiar with such strategies – although newer investors would be shocked how rarely you heard terms like ‘safe withdrawal rate’ 20 years ago.

But to me the plan sounded American. I associated it with the American market, which taught different lessons from those I picked up from the curmudgeonly band of 30- and 40-something dotcom bust survivors who frequented the UK investing landscape at the turn of this century.

In contrast The Accumulator was schooled by Bogleheads at the Temple of Vanguard. I sensed he found my income-fantasies atavistic.

I believe he’s made his peace with the concept – writing numerous articles on the intricacies of the safe withdrawal rate will show anyone that all strategies come with their own mental and practical fudges – but he still definitely wouldn’t advise it.

To him, income-investing as a drawdown strategy is at best a retirement hobby for rich people. Like raising alpacas.

You say milllionaire, I say million-a-year

The US market hasn’t yielded much by the way of income for many years. I always assumed that was the main reason for the disinterest in income.

There are big tax disadvantages to dividends in the US, too, although this is also true in the UK nowadays outside of ISAs and SIPPS.

But I was interested to read a post on The Rational Walk blog suggesting there were deeper cultural habits at work, too. Only this author is American, looking in the UK’s direction:

I find the British manner of thinking about wealth much more satisfactory for several reasons that are worth exploring in greater depth.

He believes we still focus on income. The following section from a famous investing book, Where Are The Customer’s Yachts, is fingered for this trans-Atlantic supposition…

Have you ever noticed that when you ask a Britisher about a man’s wealth you get an answer quite different from that an American gives you?

The American says, “I wouldn’t be surprised if he’s worth close to a million dollars.”

The Englishman says, “I fancy he has five thousand pounds a year.”

The Englishman’s habitual way of speaking and thinking about wealth is of course much closer to the nub of the matter.

A man’s true wealth is his income, not his bank balance.

…which does indeed sound familiar, but only to those who’ve read the likes of P.G. Wodehouse, Somerset Maugham and their contemporaries, not to today’s British investing forums.

Because as dedicated investing nerds all know, author Fred Schwed published Where Are The Customer’s Yachts in 1940!

It’s still a timeless read, mind you. Even if I think that this British/American distinction is more dated than many of its other observations. (It’s funny, too, so check it out if you’ve never had the pleasure.)

Also be sure to read that Rational Walk post: What’s Your Magic Number?

Who knows? You might just find some of your native income-seeking spirit rekindled, after all!

Have a great weekend.

From Monevator

Negative interest rates explained (including the potential consequences) – Monevator

Walter Schloss: His rules that beat the market – Monevator

From the archive-ator: Debating passive vs active investing: Episode II – The Couch Potato Strikes Back – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

UK borrowing soars to record high of £55bn in May – Independent via MSN

Bank of England pumps an extra £100bn into the UK economy to help the recovery – BBC

MPs call for ‘triple lock’ on pensions to be temporarily suspended – Guardian

Bounceback loans to survive the pandemic are being spent on supercars, insiders claim – ThisIsMoney

Should you buy a house now? [Free to read if you’ve no paywall cookies]Investor’s Chronicle

Products and services

Nationwide triples deposit for first-time buyers – Guardian

Inflation plummets to 0.5%: discover the best savings accounts as rates decline – Which?

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

More insult added to injury for Woodford investors – The Evidence-based Investor

What are ‘buffered ETFs’? A comprehensive guide [US but relevant]ETF Trends

The most reliable hybrid and electric cars you can buy – ThisIsMoney

Comment and opinion

How sustainable is your investing? – Fire V London

Millions on furlough in fear of redundancy [Search result]FT

Why many in the 50s fear the Covid crash will force them to work up to ten years longer – ThisIsMoney

When should you sell your stocks? – A Wealth of Common Sense

Same as it ever was – Morgan Housel

Google Skynet hedge – Finumus

pwned – Indeedably

Think like a winning investor – Humble Dollar

Small value stocks: Opportunity and peril – Morningstar

Why a recession can be a good time to start a business – BBC

The lystrosaurus – Epsilon Theory

Portnoy complaints

Barstool’s Dave Portnoy leads army of new traders into the stock market – Fox Business

Trading sportsbooks for brokerages, bored bettors wager on stocks – New York Times

Why so many people are getting into the stock market – Of Dollars and Data

20-year-old Robinhood customer dies by suicide after seeing a $730,000 negative balance – Forbes

Beware the ‘Portnoy top’: A former Wall Street chief strategist breaks down how the day-trading exploits of Barstool Sports’ founder highlight an ‘unholy speculative mix’ infecting stocks – Business Insider

Naughty corner: Active antics

Has the US coronavirus recession ended? – The Capital Spectator

The math of value and growth [PDF]Morgan Stanley

Coranavirus and general contention corner

Nearly 1,500 deaths in a day: UK ministers accused of downplaying Covid-19 peak – Guardian

UK virus-tracing app switched to Google-Apple model – BBC

Covid-19 antibodies may start fade within 2-3 months in many cases – CNBC / Nature

Fear of public transport got ahead of the evidence – The Atlantic

When will life return to normal? [Infographic]Visual Capitalist

“Totally predictable”: State reopenings have backfired [says article]Vox

Why are Covid-19 cases increasing in Florida? – Slate

Fear of infection hurts the economy more than lockdowns – Bloomberg via MSN Money

Kindle book bargains

Why We Work by Barry Schwartz – £0.99 on Kindle

The Anti-Procrastination Mindset by Harry Heijligers – £0.99 on Kindle

How To Day Trade For A Living by Andrew Aziz [Wealth warning!] – £0.99 on Kindle

The Spider Network: The Wild Story of a Maths Genius and One of the Greatest Scams in Financial History by David Enrich – £1.99 on Kindle

Off our beat

Cut-and-run: The underground hairdressers of lockdown – Guardian

Bizarre allegations against eBay security team who didn’t like a particular blog – US DOJ

How Elon Musk aims to revolutionise battery technology – BBC

The global implications of ‘re-education’ technologies in China – Center for Global Policy

Hardcore History: Supernova in the East IV [Podcast]Hardcore History

Invisible insulation – Seth’s blog

And finally…

“For all of the most important things, the timing always sucks. Waiting for a good time to quit your job? The stars will never align and the traffic lights of life will never all be green at the same time. The universe doesn’t conspire against you, but it doesn’t go out of its way to line up the pins either. Conditions are never perfect. “Someday” is a disease that will take your dreams to the grave with you. Pro and con lists are just as bad. If it’s important to you and you want to do it “eventually,” just do it and correct course along the way.”
– Tim Ferris, The Four-Hour Work Week

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{ 51 comments… add one }
  • 1 Ruby June 19, 2020, 9:55 pm

    @ The Investor – I have just moved both my elderly parents from investment trust income type portfolios to a) deposit account b) VWRL and c) Vanguard Global Bond and what a relief it is – for them and me. Spend a fixed amount each month from (a) accept what dividends and interest come from (b) & (c) during the year and then top up (a) annually by selling some of (b) or (c) or both. One ‘got it’ straight away, one took a little longer, and it seems total return remains a bit of a mystery to those who don’t read Monevator. Prior to doing this I found myself getting worried they had enough income, the pattern of the distributions, the inevitable duplication of holding similar UK investment trusts and the yield chasing. A bit of palaver so I guess I’m with The Accumulator. My own investments have a similar structure, save that I don’t draw any income, but when I do I’ll follow something similar. I suppose the amount taken from the deposit account is obviously the effective drawing rate. My interest in the detail of this has waned also and find myself being drawn to two options being 1) the @ Naeclue portfolio of 10/90 bonds equities and taking what the market gives or, from the USA, 2) the Retirement Cafe ‘fixed % of opening portfolio’ withdrawn at the beginning of each year. Both seem to offer the possibility of significant fluctuations in income but that’s ok for me as my fixed costs are low. So this reader’s income chasing does are gone and, like many with suspect habits, it feels good to have made the break!

    Thanks for some interesting links.

  • 2 Xailter June 19, 2020, 9:59 pm

    I’d never really considered the UK/US split before, but people in the UK do compare each other’s salaries (yearly income) rather than their total wealth in my opinion. Then again in the US most people are just ‘temporarily embarrassed millionaires’ 🙂

    The battery technology article from the BBC is certainly where I see the world moving to in terms of energy generation and storage. They’ll always be power stations to provide base loads, but get enough batteries (even small ones) talking to each other (the smart grid) and you have a revolutionary way of controlling power. And the best part is everyone can be a supplier and consumer – truly levelling the playing field for the energy market. If every home doesn’t have some kind of battery in the next 10 years, purely on a financial benefit basis I will be surprised. We just need the prices to drop a bit more. But I’ve been told I’m hopelessly optimistic!

  • 3 MoneyByChoice June 19, 2020, 10:34 pm

    Thanks for the links, long time reader.

    I love the idea of income investing because it turns your investment account number into something more tangible, as most expenses relevant to FIRE are thought of as components of income rather than capital expenditure. I’m guilty of reading many, many dividend growth investing blogs, even if I don’t do it myself.

    As a compromise, I pretend I receive my Accumulation fund dividends averaged monthly, and use that as my motivation to keep investing more in them! Also as a bonus it keeps me grounded with a ~2% assumed withdrawal rate.

  • 4 xxd09 June 20, 2020, 12:16 am

    Read PG Wodehouse and Somerset Maugham all the time but always practiced Total Return as opposed to Dividend Income
    Obviously lived too long!
    xxd09

  • 5 Naeclue June 20, 2020, 1:31 am

    I would like to believe in the optimism of the BBC article on battery technology as this is one crucial area that has been disappointingly slow to develop. Having become fed up with the lifetime of lead acid batteries on my boat I did some extensive research into replacing them with lithium based batteries about 7 years ago. The battery used to start the engine had to remain lead acid due to the very heavy, but short, current draw, but the ones used to power the lights, fridge, etc. could be replaced by lithium batteries. Eventually I bought a single 12V LIFEPO4 battery pack directly from a manufacturer in china (via ebay). I had to build my own charger for the boat, with some help from an electronic engineer, to handle charging the thing from the engines alternator as you have to be very careful with charging lithium batteries compared to lead acid. Anyway, it has worked remarkably well. Capacity well down, but I would have got through about 4 lead acids in that time.

    Thing is, the battery I bought 7 years ago costs about the same now as it did then and the technology has not really moved on a great deal, despite all the claims I have read about. Part of the cost problem is down to the depreciation of the pound, but despite that progress has still been really slow. I have read a lot of claims about advances in battery technology down the years, but they seem incredibly slow in appearing on the market in tangible products. I cannot see EVs really taking off unless some of the claimed advances in battery technology start driving down prices.

  • 6 Vanguardfan June 20, 2020, 8:14 am

    Why the sudden rush of articles saying people in their 50s and 60s will need to delay retiring?
    So far, a well diversified index tracking portfolio has not lost significantly (certainly not unusually). And someone aiming for retirement in next 5 years is surely pumping money in to investments, and will have benefitted from the March/April dip.
    I can certainly understand fears of job loss or loss of assumed future income from work.
    I can also understand why people who have already retired, and decided on drawdown rather than annuity, might be having their first taste of what it means to live off an investment portfolio and the meaning of risk. Those are the people who might suddenly be wondering if they’ve got their risk tolerance correct!

  • 7 Brod June 20, 2020, 8:16 am

    Spurred by a couple of articles last year about people charging their EV for free, I looked into a solar power, batteries, EV, electric underfloor heating rig and selling some surplus back to the grid, but the figures didn’t add up. Components would reach the end of their expected life before they started to make a profit, although there’d be a nice green feeling

    Shame, because with the interest rates it would have been an interesting diversifier. Mind you, now we’ve gone for the electric underfloor heating as part of the new downstairs (laminate) flooring, I could convince myself that bit’s free….

  • 8 IanT June 20, 2020, 9:05 am

    Just a data point regarding RateSetter, as I know a few readers from this site will have deposited funds in conjunction with the bonuses that were available on Monevator some time ago.

    I requested a release of some funds in ‘Access’ on March 23rd, and am still waiting some 3 months later. According to their latest update they’re currently releasing Access funds that were requested on March 12th, although that’s been the case for at least 4 weeks now!

    They’ve also cut interest rates payable by 50%.

    It gives a whole new meaning to the word ‘Access’!

  • 9 A Betta Investor June 20, 2020, 9:42 am

    A lot of people used to ridicule the data from the various long term studies such as the Barclays Equity Gilt Review that the bulk of equity returns come from dividends, reinvested dividends and growth of dividends.
    Despite the massive dividend cuts currently being imposed on investors the capital losses are also severe and anyone selling now to raise cash will be selling a much larger percentage of their portfolio to raise the required amount.
    Pound cost averaging works well in rising markets when you are adding capital.
    But the maths works brutally against you when selling in a falling market as you need to sell more and more to raise the same amount of cash.

  • 10 xxd09 June 20, 2020, 9:52 am

    Presumably if you have planned properly you should have 2 years of living expenses in cash or equivalents
    You then should be drawing from your Bond portfolio if required
    Both of which actions should buy you enough time to go on living and allow equities to recover without having to sell any equity
    This lesson should be learned well before retirement-in retirement it’s too late and your portfolio may never recover
    xxd09

  • 11 Xailter June 20, 2020, 10:24 am

    @7 Brod – I’ve actually done the maths for the ‘average’ household already on just that (not doubting your maths skills ;)) – https://igniting-fire.com/2020/05/05/just-20000-to-save-the-world/

    Conclusion – solar will always pay for itself (mine have a 25 year guarantee and will pay for themselves in Year 12) , a second hand electric car for the 90% of journeys where range isn’t a problem will pay for itself in ~6/7 years in fuel savings. Batteries aren’t cheap enough yet – but I think we’ll get there soon. A return on investment of 6/7% is certainly possible going by my numbers.

    I’m currently researching Octopus’ Energy’s Agile import and export tariffs and data and I think there is a genuine case to made with cost arbitrage between cheap import at night (or solar if you have it) and export during the peak period of 4pm-7pm. I’ll probably make a post out of it 🙂

  • 12 c-strong June 20, 2020, 10:33 am

    @Vanguardfan I entirely agree. That Thisismoney article is representative of these stories but is very silly IMO. It is based on surveys, which tells us something about investor sentiment, I suppose, but the individual examples are things like “my portfolio was down 20% though now it has recovered to -5%” or “Most of my portfolio was in oil stocks [!] and it’s down 50%”.

    Anyone thinking of retiring in five years should obviously have a big slug of their portfolio in risk-free assets, the rest in diversified equities (preferably index trackers). And they should be mentally and financially prepared for an occasional 10-20% drop in equities markets. As xxdo9 says, this makes market risks very manageable.

  • 13 TheIFA June 20, 2020, 10:36 am

    Naeclue – re EVs taking off. For me, at a certain price point (premium?) I think they are already competitive with the conventionally powered competition. For example, the Model 3 P is arguably as good as anything in its class.

    Vanguardfan – I can only assume it’s because a global, low cost portfolio is not yet mainstream.

  • 14 weenie June 20, 2020, 10:43 am

    I’m still following a mixed approach as I accumulate – part income providing investment trusts, part ETFs which I will need to sell for income.

    It all seems to work fine in my mind and on the spreadsheets, but the crux will be when I’m having to solely live off this income in the future – will I be able to cope with the faff/stress of dividend cuts?

  • 15 IanT June 20, 2020, 10:58 am

    @Xailter

    It sounds like I’m in a very similar position to you. I had my PV panels installed in 2014, just in time to snag the higher Fee in Tariff rates available. Owing to a nifty bit of data recording I calculate that I’ve used 78% of the units I’ve generated, and cut my bills by 49%.. all without battery storage thus far.

    I can’t quite get the sums to work on a battery installation, as I’m already very close to the limit of what I think we can achieve. I have however just ordered a hybrid car (I tow a caravan, and I lease) that should be able to make more use of the daytime generation to give me cost free commuting.

    Another 20% drop in the price of batteries would see me go down that path too.

  • 16 Gentleman's Family Finances June 20, 2020, 11:45 am

    I think that the instinct to live off dividends or interest is hard to beat.
    You see that with cash savers moaning about their pittiful interest rates when they always seem to ignore inflation.
    But to eschew dividends and sell down your (growing) investments to cover spending will eventually leave you owning nothing.
    That’s the mathematical certainty but going after high dividends has been a much worse strategy for some time now.
    Living off faang dividends might nkt be realistic but it’s a better way to prosperity than cash rich stocks thst might not be here in 20 years

  • 17 ZXSpectrum48k June 20, 2020, 11:54 am

    In terms of the US vs. UK, I do think the UK investor base tends toward having an unhealthy obsession with income whether it’s high dividend stocks (HYP equity types on the Lemon Fool or the Woodford debacle), high coupons (mini-bonds, P2P on speculative property development loans) or high rental yields (another student apartment). It seems there is a strong element of the UK retail investment base that are just carry monkeys.

    One difference might be that the UK and US have different forms of capitalism. The US still has entrepreneurial capitalism. It’s all about growth. By comparison, the UK only really excels these days at what might be termed “rentier capitalism”. It’s about monopolization of access to any kind of property (physical, financial, intellectual, etc.). Extracting as high a rent as possible from those assets without necessarily creating anything. We’re a society of rent seekers. Now we used to extract our rents from the colonies, but now we’re forced to extract rents from each other. I should know: I’ve made a career of it.

  • 18 TheIFA June 20, 2020, 1:01 pm

    Gentleman’s Family Finances

    “Living off faang dividends might nkt be realistic but it’s a better way to prosperity than cash rich stocks thst might not be here in 20 years”

    What do you think would be the worst case outcome for the FAANG stocks if large cap growth investing went out of style?

  • 19 ermine June 20, 2020, 1:12 pm

    @ A Betta Investor #9

    Despite the massive dividend cuts currently being imposed on investors the capital losses are also severe and anyone selling now to raise cash will be selling a much larger percentage of their portfolio to raise the required amount.

    Really? Without a doubt I agree they should show severe capital losses, but it’s just not happening. I am not a typical passivista but even that part of my portfolio is more or less back to where it was in January, in £ nominal terms this year has been very good for me.

    Now as to whether it will last or it is real, or it is the wave of Trump’s money trying to buy the Nov election or Portnoy’s millions, that’s a different question. And if someone need a few years of accumulation and have lost their job/business then that is a genuine strategic problem. If they feel the world is a less safe place and want to built up a larger buffer/shorten the gap they have to bridge, fair enough

    But if it’s the markets that have changed retirement plans as a result of a snapshot of their valuation right now then those putative retirees did something wrong in the markets this year. With a large passive portfolio just sitting tight or selling off bits of a large portfolio monthly over six months shouldn’t result in any great problems at current valuations.

  • 20 C June 20, 2020, 1:23 pm

    Re: Solar. Fully charged a video on a Chinese EV that is £7K new:
    https://www.youtube.com/watch?v=QkIarb-8Ot8
    I have had solar PV since 2012. A cool gadget diverts any excess power to the immersion heater giving us free hot water about 2/3 of the year. Like others, batteries don’t yet pay for themselves as our electric bill is now very low.

  • 21 Naeclue June 20, 2020, 2:03 pm

    There does seem to be an unhealthy obsession with income in the UK. You can see it in the retail funds market. In the US retail investments are predominantly classified as being for growth, value or both. In the UK we mostly have growth, income or growth & income.

    What matters most for long term returns are earnings, not the portion of earnings that happen to be paid out as dividends. Taking dividends from a portfolio when share prices are down is just as detrimental to long term returns as selling shares when prices are down and I am constantly mystified as to why many investors fail to understand this. It is as though money from dividends has some mystical properties that distinguish them from other forms of money.

    Unless you have a very reliable income stream, such as from a DB pension, annuity, or gilt ladder, thinking in terms of how much income you have based on company distributions per year is meaningless head in the sand stuff. Dividend income from shares is unreliable, even if those shares are wrapped up in a way that disguises the fact, such as with ITs. It also lends itself to woolly thinking, such as concluding that it is safe to take a higher income from your equity investments if you invest in high yielding shares or bonds.

    Our new drawdown strategy mostly involves skimming dividends into a cash buffer and drawing down from the cash buffer, with occasional top ups from share sales triggered by growth in the share portfolio. One aspect of this I am a little concerned about is skimming off the dividends when stock markets are low and am pondering whether I should have some rules to force reinvestment of some or all of the dividends when that happens. OTOH It might be unnecessary as many companies will still be retaining some of their earnings and stock buy backs (involuntary dividend reinvestment) will likely continue.

  • 22 cttw June 20, 2020, 2:38 pm

    TI – firstly thanks for all the blogs.

    Where are all the customers yachts – what a great little book that is.

    I remember when I first started investing back in 1990 I read a feature in the FT recommending the top investing books of all time. In my lunch hour I went to Charing X road and got; – Where are the customers yachts, Confusion de confusions, The madness of crowds, Common stocks uncommon profits and The intelligent investor.
    How times have changed and how lucky was I. What a fantastic way to start an investing journey. I can’t remember buying a single investment book since that day.

  • 23 Al Cam June 20, 2020, 2:44 pm

    @Naeclue:
    “It is as though money from dividends has some mystical properties that distinguish them from other forms of money.”

    This has been called the “free dividend fallacy”, see for example:
    http://www.theretirementcafe.com/2019/04/a-good-many-retirees-seem-to-be.html

  • 24 ian June 20, 2020, 4:28 pm

    with the solar pv rather than a battery we heat water using a ox which directs excess generation which we are not using to our immersion element in our water tank. Works really well- lovely hot water all summer and free. Cost us about £300 years back.

  • 25 xeny June 20, 2020, 6:09 pm

    @ ermine #19

    > Without a doubt I agree they should show severe capital losses, but it’s just not happening.

    High yield stocks that have deferred or reduced dividends tend to be showing very significant capital losses. The unhappiness on the Lemon Fool HYP forum is significant.

    I agree that a portfolio biased away from them can be up significantly at this point.

  • 26 steveark June 20, 2020, 10:27 pm

    Are you saying my retirement plan of raising alpacas is NOT a good idea? Yikes! I guess it will have to be the emu ranch then. Very interesting post, I’m not an income investor. I’m kind of agnostic on the growth versus income debate and have some of everything but I enjoy reading about it and learning. The concept of UK vs US views was a new learning for me, fascinating.

  • 27 Tim June 21, 2020, 12:42 am

    Please be aware that your link to “Where are the Customers’ Yachts?” is actually to one of those irritating bait-and-switch jobs: several reviews along the lines of “Bought this expecting the full original text with some added commentary. Instead this is a hotch potch of new short chapters each headed by a few sentences from the actual book”. For the real deal, try https://www.amazon.co.uk/dp/0471770892/

  • 28 Gentleman's Family Finances June 21, 2020, 8:58 am

    Faang dividends don’t cover my spending so I’d need to sell shares to live!
    That’s the risk of any yield shield.

  • 29 The Investor June 21, 2020, 9:00 am

    @Tim — Yikes, I’m didn’t know such things existed! Thanks, have switched to the new link (where Amazon is confirming a bought a copy for a friend a couple of years ago, so it’d definitely the real deal as you say.)

    Sorry for any confusion anyone else!

  • 30 Owen June 21, 2020, 10:26 am

    @IanT yes, I also noticed they have been able to release their fixed rate products (1 year and 5 year) ahead of their access, I would have assumed they’d prioritise access. The good thing is their Capital coverage ratio is still 169%, meaning they should be able to return the cash in full when they can sell.

    I remember we got an email on the 16th March saying withdrawals were taking longer than normal, but some people were deciding to still invest. I thought this comment was strange and decided to “Nope” out of it within minutes of recieving that email, still I was too late. I held off withdrawing before then because I wanted to try and get my bonus, needed to have it invested until June. Its June now but I assume I have waivered my bonus by requesting early withdrawal, even though thats not what I got and I wonder whether they are still even paying out bonuses now given the interest cut.

  • 31 Jeff Beranek June 21, 2020, 11:49 am

    There is a little-talked-about tax advantage in the US of building a portfolio of individual companies paying “qualified” dividends (i.e. most stocks listed on most major international stock exchanges). A married couple filing jointly can earn up to £62,500 a year and pay no tax on such dividends, even if all the income is from those dividends. You just need to hold the shares for more than 60 days for them to be qualified, so day traders need not apply. It also doesn’t work for collective investments, just individual companies. The same tax rate applies for realising capital gains if you’ve held the shares for more than a year. So while they don’t have ISAs, (they have Roth IRAs, but you can’t contribute much per year), there is still a major incentive to build DIY investment portfolios – even if you run out of tax-advantages accounts. A couple can also earn up to £385,000 (£345,000 if single) and still only pay 15% tax on qualified dividends.

  • 32 WhiteSheep June 21, 2020, 11:58 am

    @Naeclue
    “It is as though money from dividends has some mystical properties that distinguish them from other forms of money.”

    This has always greatly puzzled me too. It is actually the psychological component of the “dividend fallacy” that I personally find most perplexing. With almost any behavioural bias in investing I can easily catch myself being prone to it. Loss aversion? Of course. Anchoring? I do it all the time. Dividend preference? I just don’t get the emotional aspect.

    There are some good rational reasons why some might prefer dividends (most importantly from my perspective, a withdrawal strategy that is straightforward to execute even in old age). But I don’t find it psychologically comforting at all. Why would anyone prefer dividends when money is clearly fungible whether it is paid out or retained in the company, and it is obvious that earnings are the important quantity long-term? But it seems this is somewhat personal.

  • 33 A Betta Investor June 21, 2020, 12:22 pm

    Dividends do have a mystical property for one reason only.
    They are real, you get a cheque or a bank payment that verifies that they really exist. No other number in a company’s report and accounts is capable of similar independent verification.

  • 34 c-strong June 21, 2020, 12:35 pm

    @Naeclue @WhiteSheep
    I basically agree with you both, but I think there is a genuine difference in volatility of returns that makes the HYP-type approach not necessarily irrational when compared with an approach that simply invests in the broad market and sells a percentage of the total portfolio every year.

    Typically dividend hero-type companies will be mature and moderately profitable, with little earnings growth, but (by definition) reliable income streams that are paid out in the form of dividends. Contrast growth companies where current earnings may be low (or negative) compared to their share price, but which have an expectation of substantial future earnings growth. The total return from the latter over, say, a 5-10 year time period may be higher than the former but annual returns are likely to be significantly more volatile.

    This seems to me like a rational difference rather than a purely psychological one. (Though I think it’s better to manage volatility by increasing the minimal risk allocation rather than selecting only part of the equities market.)

  • 35 TahiPanas2 June 21, 2020, 12:36 pm

    Whitesheep,

    You hit the nail squarely on the head for me when you said that dividends are a withdrawal strategy that is straightforward to execute even in old age.

    Most of us probably have to think of others. My wife and I are in our 70s.

    I could just about manage other withdrawal methods but my wife, after I’m gone, would be lost. I have coached her every January for a couple of years to do self assessment for dividends from our joint account using easy to follow Consolidated Tax Certificates. However, dealing with reported capital gains tax would be a step too far. Choosing shares to sell would be beyond her.

    So as not to paint an image of her as a dumb cluck, I should say she is well educated with a masters degree but she has zero interest in this topic. I am sure there are others in this position and wonder how they will deal with their rebalancing asset allocation strategies, etc at the end.

    TP2.

  • 36 Al Cam June 21, 2020, 1:12 pm

    @TP2:
    I recognise the situation and empathise with your concerns, e.g. “… wonder how they will deal with their rebalancing asset allocation strategies, at at the end.”
    Sounds like a very good subject for some further debate/discussion.

  • 37 xxd09 June 21, 2020, 1:16 pm

    You certainly highlight a problem I think about all the time
    My wife does not handle our ISAs and SIPPs and couldn’t
    She would have the State Pension and a Teacher’s Pension -a third of our current income-to survive on -till the executors took over(my children-one is a Banker)
    Executors kept up to date with our position yearly
    Short of converting all to Annuities not much else I can do
    xxd09

  • 38 Al Cam June 21, 2020, 1:19 pm

    Point 7 at the following link may be a good starter for ten – albeit it is written from a US perspective:
    https://www.theretirementmanifesto.com/avoid-these-7-financial-mistakes-retirees-make/

  • 39 TheIFA June 21, 2020, 1:34 pm

    @c-strong
    “but I think there is a genuine difference in volatility of returns that makes the HYP-type approach not necessarily irrational when compared with an approach that simply invests in the broad market and sells a percentage of the total portfolio every year.”

    I’m not sure if by returns you mean income or total returns, but I struggle to see how this would be the case when compared to something like a global equity/bond portfolio.

    I used to be a high yield investor when starting out, but when you consider the concentration/lack of diversification – typically (from what I remember)

    Number of shares: Typically 20
    Asset class: Equities only
    Geography: UK only
    Sector: Subset that pay decent dividends
    Style: High yield/value

    I think you are taking on risks that you aren’t necessarily compensated for….

    For example, Figure 14 showing almost 50% drawdown during GFC

    https://www.vanguard.co.uk/documents/adv/literature/total-return-investing.pdf

  • 40 ZXSpectrum48k June 21, 2020, 1:40 pm

    The whole debate about living off income vs. drawing down capital a bit weird. This is finance: we transform income streams into capital and we take capital and transform it into income streams. One is just a mathematical representation of the other. End of. Anything you think beyond that is just a psychological problem you have to deal with!

    The problem with HYP is that the criterion for selection i.e. “FTSE high dividend stocks” is bogus. Would you buy high-yield bonds just because the have a high coupon? It’s leads to terrible asset allocation. Look at the FTSE ASX sector breakdown. Financials 15%, Consumer 23%, Energy 9% …. Tech 2%. It’s great investing … for the 20th century. Shame it’s the 21st.

    This year’s returns just underline the problem: FTSE YTD -16.91% vs. EuroStoxx -12.71%, Nikkei -4.98%, S&P -4.12%, Nasdaq +10.85%. Are high dividends worth that sort of underperformance? Wrong country to invest in, wrong sectors, wrong century. It’s just yuck.

  • 41 Gizzard June 21, 2020, 1:44 pm

    @Xailter Solar does pay for itself. But if it takes 12 years to recoup the outlay, after 25 years you double your investment. That’s a compound annual return of 2.8%, which isn’t great. In addition, if you move house within that 25 year period, you’ll probably find that the buyer won’t want to pay much/any extra for the solar panels.

  • 42 TahiPanas2 June 21, 2020, 1:48 pm

    Our method of dealing with passing on our ill-gotten gains to the survivor is to have absolutely everything in joint and several names, most importantly for us our house, bank and share dealing accounts. Comes the Reaper, there is virtually nothing to do as the survivor automatically owns everything. Individual ISAs are apparently easy to transfer to the other and remain tax free. I believe this is particularly easy when your ISAs and bank accounts are with the same bank.

    My wife will continue to receive all the dividends which are paid into a holding bank account which pays a set monthly sum into a spending account. Easy!

    What happens after she goes is, of course, a separate issue.

    TP2.

  • 43 The Investor June 21, 2020, 2:03 pm

    It’s true that a dividend/income focused strategy would lead you holding an unattractive-looking portfolio of shares right now.

    However this isn’t always the case, nor does it necessarily make for poor investment returns.

    A criticism of dividend-focused investing that comes from another angle is that it is just a weak/inferior value signal, and that you’d be better off buying ‘true’ value.

    Fair enough but it’s still a value signal.

    Over the long-term (albeit the relatively short sample periods we have of surviving capital markets) value has outperformed growth. It’s easy to forget this now after many years of growth (/tech) outperformance. It’s even easier to forget it in a year when dividends look like being cut as we’ve never seen before.

    However to my mind that’s like looking at growth/tech in 2001/2/3 and asking who in their right mind would be buying expensive-looking technology shares? (Which is exactly what people did say at that time, and which set up the stage for growth outperformance in the years to come).

    I’ve long argued income investing is primarily an individual, behaviourial, and psychological preference. Many years ago I thought it probably conferred a slight investment edge (because of that value signal, and because *at that time* that’s what some interpretation of *some* of the data suggested). But I don’t think that any more.

    Today I think someone investing in a widely diversified and coherently selected basket of income vehicles (such as equity income trusts, currently trading a big discounts) should expect to see slightly worse performance versus the market, even after fees, on account of some of the factors mentioned by @ZX and others (primarily that you are selecting for a cashflow payout a rational investor doesn’t care about) but crucially that this is the price they may rationally be willing to pay for the benefit (as they see it, and others don’t) of receiving a regular income without much thought, rebalancing, excessive fear at drawdowns etc.

    With that said, starting from here, at today’s relative valuations, I wouldn’t be surprised to see dividend (/value) outperform over say the next 10 years, though that shouldn’t be construed as an expectation or prediction. I just think it’s entirely possible.

    But these are unprecedentedly weird times, with the Covid-recession, minuscule rates etc. Perhaps this time it’s different and value isn’t coming back in our lifetimes. Who knows?

    I no longer think there’s any point even in income-focused UK individuals holding their own baskets of individual stocks (versus trusts or funds) and discontinued my own HYP demo portfolio here partly for this reason several years ago (and partly because it went into my house deposit! 😉 )

  • 44 xeny June 21, 2020, 4:39 pm

    A slightly devil’s advocate possibility for those looking for simple to manage withdrawal methods as they or their partner age.
    Fundsmith held directly offer a quarterly % withdrawal facility. I believe in one of their ASMs they suggested that 4%/year might be an appropriate figure.
    Certainly past performance of this approach has been broadly acceptable, and I suspect has offered better income growth than most HYP type options, created by reasonable capital growth.

  • 45 Al Cam June 21, 2020, 6:09 pm

    AFAIK, this feature is not unique to Fundsmith – I believe most income drawdown products offer some form of regular income option.

  • 46 Getting Minted June 21, 2020, 10:18 pm

    FWIW I’m sticking with a natural yield approach for now but I’m expecting the next two years to be interesting. It is my assumption that I will not face significant dividend cuts because of the revenue reserves held by my dividend hero investment trusts. There have been no dividend cuts announced yet but my commercial property trust is looking vulnerable. I am going to look to put less emphasis on income and more on growth in future.

  • 47 britinkiwi June 22, 2020, 7:43 am

    @Steveark – I cannot recommend alpaca’s as a retirement option – and I say this with “Alpaca Wrangling” on my LinkedIn profile. Not sure about emu’s although that has been tried not very successfully as a farming option and there is one in our next door neighbours section – with the goats…… NZ does have some interesting experiences for the emigrant!

    Livestock on a small holding aside it’s total return and draw-down from the total rather than an income base – and with the % on bonds and cash nearly at zero and likely to stay that way (IMHO) for a while de-cumulation means selling assets…..

  • 48 cat793 June 23, 2020, 10:41 am

    @ IanT #8
    Yes I have the same problem with Ratesetter. Requested withdrawal on 22 March and still waiting to get it from the “Access” account. I have still been able to withdraw money that has reached the end of the loan term or been repaid early as it drips into my holding account. Fortunately I withdrew a large chunk of money last year out of caution and bailed out of Funding Circle ages ago as I saw bad loans rising. I hope the whole thing does not go down the plughole taking my remaining investment with it. P2P has proved to be too illiquid without the compensating returns – the Access tier of investment has proved to be a joke.

  • 49 Seeking Fire June 23, 2020, 11:38 am

    So Ananias went to the house, and when he arrived, he placed his hands on Saul. “Brother Saul,” he said, “the Lord Jesus, who appeared to you on the road as you were coming here, has sent me so that you may see again and be filled with the Holy Spirit.” At that instant, something like scales fell from Saul’s eyes, and his sight was restored. He got up and was baptized, and after taking some food, he regained his strength. And he spent several days with the disciples in Damascus.…

    I was a bit like this with income investing for a while earlier on in my career, thinking that as long as the dividend was being paid that was the main objectives. And then the ‘scales fell from my eyes’, which is where the saying comes from above – am definitely not going off topic :). Even now I see many posters, some with blogs, hoping that as long as the dividend keeps being paid everything is ok. Even if the investment trust or the company is paying the dividend by increasing leverage or running down cash reserves that’s ok. Well arithmetically it’s of no difference. Of course the psychological aspect is highly powerful, which is why so many asset gatherers in the UK have income in their marketing material. And having a dividend policy of sorts is inherently a good thing as it does help keep directors focussed on capital. It can also be a major problem as directors become obsessed about paying the dividend to the long term detriment of the company.

    The one area, I am intrigued on is value, some very helpful posters above showed how value has underperformed and so given the very high prevalence of mean reversion in many walks of life, I am hesitant to suggest ‘this time it’s different’. It’s super boring to say but a global index tracker seems to cover all bases.

  • 50 The Investor June 23, 2020, 3:11 pm

    @cat793 @IanT — I have a small amount of money locked in Ratesetter since March also. To be honest I’m now resigned to thinking it could be stuck in there indefinitely. The platform will need new ‘Access’ savings to be coming to offset withdrawals I believe, and I suspect such an influx will have slowed to a trickle in the current environment.

    To be fair to Ratesetter, it was always possible and it stated that withdrawals from the ‘Access’ account might need to be slowed or restricted in exceptional circumstances where potential credit losses mounted, and these are clearly such circumstances. I referenced such a possibility in my own article on Ratesetter. I’ve also noted that the newness and specifics of these P2P platforms meant even the ones I liked/used (only really Zopa and Ratesetter) were for me a 1-3% total net worth allocation destination. There was always a risk of some sort of systemic issue, although obviously I didn’t foresee a pandemic! I’m sure there’ll be articles in the mainstream press about people putting their life savings into P2P in time; this was never a great idea IMHO.

    Personally I’m glad to see Ratesetter seemingly took speedy action to shore up its provision fund, even at the cost of lack of access and reduced interest. Avoiding capital losses if at all possible would be a good outcome here, I believe.

    I’m hoping to get time to write a standalone article on the state of P2P. Watch this space!

  • 51 Al Cam June 23, 2020, 3:16 pm

    @Seeking Fire:
    It is a puzzle.
    For some further thoughts / info, the paper referred to by Dirk Cotton (link provided at #23 above) which coined the phrase the “free dividend fallacy” is available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2876373

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