Frozen Pension: Monevator demo HYP: Income update

Friday 29 July 2016

Monevator demo HYP: Income update

I promised a quick update on how 2011’s demo high yield portfolio (HYP) was doing from an income perspective – having already cunningly posted the exciting capital value update on the slow news days of June 23rd.

Ahem.

Okay, so June 23rd – aka EU Referendum Day – turned out to not be so dull, after all. And we all got distracted for a few weeks.

But now I’m back to share the income picture, and to muse a bit about what it all means.

Loadsamoney

An ultra-quick recap: You’ll remember I invested £5,000 of my own real money into this demo HYP back in 2011, and that I’m benchmarking it against two alternatives – a FTSE 100 tracker and a trio of investment trusts.

Please refer back to my most recent capital update for more on the whys and wherefores, including links to a mini-FAQ all about HYPs, this demo, and the benchmarks.

Today, as I’m already ludicrously tardy with it, I just want to cut to the chase and get those income details up!

So here’s a snapshot of how the demo HYP and its benchmarks are doing, both in capital terms (updated since 23rd June, because why not?) and in terms of how they’re kicking out income.

I’ve also calculated yields for the portfolios.

	Current value	Income	Yield	Yield on purchase
Demo HYP	£5,896	£231	3.9%	4.6%
FTSE 100 ETF	£5,549	£235	4.2%	4.7%
Trio of trusts	£6,318	£265	4.2%	5.3%

Note: ETF/Trust prices from Yahoo, dividends from iShares and the A.I.C..

A few things to note:

The 12-month period being studied is from 11 May 2015 to 12 May 2016.¹

All income rounded to nearest pound.

For the demo HYP, I’ve simply totted up all the real-money dividends received.

For the FTSE 100 ETF and the trio of investment trusts, I’ve sourced and totaled dividend data from relevant information providers, and then multiplied it by the number of shares in the notional benchmark portfolios.

Capital values are up-to-date as of 28 July 2016. (Remember, these are NOT reinvesting portfolios – all income is presumed to be withdrawn each year).

Yield is the income over the 12-month period expressed as a percentage of the current capital value.

Yield on purchase tells us what we’re getting as a percentage of the initial £5,000 investments.

Here’s how the income has grown for each vehicle in the four years since my one-year update.

	Income: 2011-12	Income: 2015-16	Growth
Demo HYP	£182	£231	27%
FTSE 100 ETF	£155	£235	52%
Trio of trusts	£184	£265	44%

Thoughts (or bonfire of the vanities)

The first thing to say is that all three portfolios have been doing the business, growing the income they pay out compared to the first full year of coverage.

That’s not surprising – we’ve seen several years of generally rising dividends – but it’s still heartening.

If you had invested in any of these options for investment income – whether for financial freedom or to help fund your retirement – I think you’d be pretty happy so far.

Of course, if you’d invested in the demo HYP and your next door neighbor had invested in the trio of investment trusts, then you might be somewhat less happy as you chat over the garden fence about shares, as we all do on those balmy summer evenings…

I’m a long time fan of UK equity income trusts. But I must admit that even I’m knocked back on my heels by just how well they’re doing here.

Both in capital terms and in the income they’re chucking out, our notional trio of trusts are soundly beating the two alternatives.

Now, like everything to do with this little side project we shouldn’t start claiming to be learning anything incredibly definitive here.

For one thing, five years is a short time.

For another, the trio of trusts is influenced by luck and any sliver of skill I brought to their selection.

There are dozens of trusts out there, and picking three different ones would have given you a different result.

For instance, the worst performing component of my basket of three trusts, Merchants Trust, is pretty much flat both in capital and income terms over the past five years, whereas the best, Edinburgh, is up over 50% in capital terms.

But it’s in the selection of 20 shares for the demo HYP that idiosyncratic risk looms largest.

And here I’m desperate to cry about bad luck – rather than blame my blundering incompetence – for the fact that no fewer than a fifth of the portfolio cut or even cancelled their dividends entirely at some point over the period.

BHP Billiton, Balfour Beatty, Centrica, and Tesco: Your names are mud to me now!

A fifth of the portfolio cutting their dividends is a terrible hit rate. You’d expect it to hurt the total income and it has, as the demo HYP doesn’t have any cash reserves to smooth payments like the income trusts do. (Cash buffers I’d suggest you implement for yourself if planning to live off investment income).

In fact, the dividend cuts mean the demo HYP last year paid out only £2 more than at the second anniversary point.

So what do I plan to do about it?

Nothing. This is a no-trading portfolio, remember, as explained in the links below.

Hopefully the income from the dividend dunces will be rebuilt. (Although I don’t doubt something else in the portfolio will be hacking and slashing at their payouts over time, too.)

Finally – and curiously – despite lagging in capital growth terms, the iShares FTSE 100 ETF has delivered the strongest income growth. Its annual payout now matches the demo HYP.

This is a surprising result, and perhaps indicative of the times we live in.

But with dividends no longer covering earnings at the 350 largest UK companies², it will be interesting to see how it and the other vehicles fare over the next few years.

Whatever the academic theory says, it’s hard for me not to imagine the trusts will continue to have the edge in an environment of further dividend cuts.

Demo HYP: Frequently Asked Questions

Here’s that pseudo-FAQ (it’s really a bunch of links to previous demo HYP articles) for those too engrossed to click away earlier, or who I’ve now confused into having more questions: