[Stephen Bland]

Thanks for the suggestion and in fact I considered doing what you say when HYP6 closed and I commenced HYP7. However for the same reasons that I ceased some time ago showing all the old portfolios, I gave it some thought but came to the conclusion that this should apply also to showing the last one.

I point out that all back issues of TDL are available online in the archives so subscribers can access this information if they want.

But be careful if drawing on old portfolios. I stress that the advice given in a back issue must not be taken as my current view of a share because circumstances change. My latest view on whether a share is a Buy or Hold is valid only in the Dividend Schedule of the latest TDL and each new issue supersedes the previous one. A share can easily move several times over a long period between Buy or Hold as its fortunes and the market fluctuate.

Further, not only do circumstances change, actual shares change too because of corporate activity. Thus several of my previous choices over the years have disappeared due to bids to be replaced by new holdings. Others have altered their character, divested new shares, had rights issues, share splits, cash returns and so on. Even the most recent completed HYP6 to which you refer has one share, SKY, that is in a bid situation and is now a Hold. So a reader using all or part of a previous portfolio to construct an immediate HYP, must do this in conjunction with the Dividend Schedule and my latest advice, sticking only to the Buys.

Additionally, in that case it’s up to them to ensure diversification is not compromised. This is very important, diversification being a fundamental rule of the strategy.

[Stephen Bland]

If you hold in an ISA then no. If you hold direct, I believe there is some bureaucratic procedure for recovering this from the German government but I suspect that is far too laborious for the amount of money involved in most cases so few if any will bother with it. Even if you did manage to go through with that, you would still be liable for UK tax on the gross as I outline below, so a successful recovery of German tax would only really benefit a non UK taxpayer, and by a very small, probably nugatory, amount a 20% UK taxpayer.

Under UK tax rules foreign dividends are treated differently for UK tax purposes to UK dividends and do not fall within the tax free allowance, currently £5,000 per year. This is outside an ISA.

How it works is that you are taxed upon the gross value of the foreign dividend but are then given credit for foreign tax deducted up to the level of your marginal UK tax rate. So if your marginal UK tax rate is lower than the German tax deducted you lose the excess but would face no further UK liability. If your marginal UK tax rate is higher than the German tax deducted then you are liable for the balance.

Thus for TUI a 20% taxpayer would lose the small additional amount of German tax above that to the gross, a 40% payer would be liable to pay further UK tax above the German deduction up to 40% of the gross.

[Stephen Bland]

Agreed Nigel, everyone’s circumstances are different of course.

One point on the math, I know that 5% capital withdrawal plus dividends was just an example but I wanted to show that the length of time available before it runs out is not simply 100/x years (where x is the annual percentage capital withdrawal) as you had assumed. It is considerably shorter because increasing amounts of capital have to be taken to compensate for the declining dividend income so as to deliver the same (or worse, a growing) total income. There are some crude assumptions in there but that was the basis upon which we were discussing the point.

My fundamental position on this and hence my general advice to readers as I’ve said is that capital withdrawal is to be avoided if at all possible. When advising TDL readers, I have to offer what I believe is the best course for the great majority, which means that this approach may not suit a few. That applies to almost all the advice I give on running HYPs, not just the question of spending the capital.

So, yes, I quite accept that some individual situations will sometimes force a sale of capital from an HYP but would hope that this applies to only a small minority of HYPers.

Also, readers should not start investing in HYPs with the intention from the outset of selling up at some stage, either wholly or gradually. If they are eventually forced to do so by circumstance then so be it, but it should not form part of the reasoning for investing with HYPs in the first place. I had the impression from your message and others that you were assuming from the start that you would be spending capital. I am definitely against that view of HYPing. As I’ve said, selling should be the last resort, not part of the plan.

I’ve been asked many times over the years whether HYPs were suitable for dividend reinvestors building up capital to be used eventually for some other purpose. The answer is always no, that attitude creates unnecessary risk and it is not how I intended the strategy to be used at all. The idea behind HYPs is to step outside the obsession with capital values that preoccupies most equity investors and concentrate on the income. To liberate people from thinking about how much capital they have made or hope to make in future and instead look just at the income.

Thinking about the capital drags us back to trading shares, the old viewpoint from which I am trying with HYPs to distance readers.

[Stephen Bland]

Personally, I am against capital withdrawal from an HYP and it was definitely never part of the strategy as I intended it. Eternity means forever, as an absolute minimum holding period.

Here’s some reasons:

1 Most obvious is the fact that if you withdraw capital regularly you will experience an increasing decline in the HYP dividend income. Yes you will be topping that up with the capital withdrawals so the cash you take each year may be about the same, though only as long as it lasts, but that’s like eating bits of yourself because you’re a little hungry. It’s increasingly damaging, irreversible and ultimately fatal.

What will you do if it runs out? We’re talking of a situation where the investor felt the income to be insufficient in the first place, which is why it was augmented with capital withdrawals. Well, if it was insufficient to start with, it’s going to be enormously more insufficient when you have reduced it to nil.

2 You are reducing, possibly to nil if it goes on long enough, the capital that you may wish to leave in your will.

3 For me, though perhaps not everyone, there is an emotional objection to spending capital. My ideal is never to spend it and just live on income from various sources, including my HYP. It just feels right somehow. I know that, technically, this can be seen as illogical because money is “fungible”, (horrible word that sounds like some kind of mushroom) meaning that’s it all just money and that distinctions between capital and income can be seen as artificial. But that’s really academic, in the real world most of us do see a distinction and so does the law and accountancy rules.

So I view capital withdrawal as a last resort for an investor desperate for additional cash though I do appreciate that some HYPers may unfortunately be forced into this situation by circumstance. But I assume we’re not discussing those for whom compulsion exists because there is not much argument in such cases. It’s where you have discretion that there is room for discussion.

Finally Nigel said above

…If you are 70 and think you have 20 years left to live why not draw down up to 5% of the value of the fund each year plus dividends?…

This calculation is incorrect. If you withdraw 5% capital each year, plus dividends, then assuming the HYP yield is 4.5% this will last only about 14-15 years, not 20. The reason is that you have to withdraw increasing amounts of capital each year to make up the increasing shortfall in dividend income so as to deliver the same cash income. Like a repayment mortgage in reverse.

For example on a £100,000 portfolio, the dividends will be £4,500 and you take out £5,000 capital because the example assumes you need £9,500 income. In year two though, the dividends will be 4.5% of £95,000 being £4,275 so you need £5,225 of capital to make your required £9,500 and so on each year with increasing capital and reducing dividends. There are several assumptions here, such as the fixed dividend yield and capital value over the years, but on this basis the math says that 5% a year will not last 20 years, because it’s not just a simple interest calculation of 5% capital withdrawn each year gives you 20 years.

For it to work like that over 20 years, you would have to accept a declining income because year one would be £9,500 but year two would be £9,275 and so on. And that method can’t be appealing because presumably this poor HYPer is in dire need of all the £9,500 in the first place, so the last thing they want is that it declines inevitably each year.

And there are complications. In practice the capital and dividends will fluctuate year on year. No guarantees but even though they are both likely to increase long term, this does not happen in a smooth annual progression. Your initial demand of £9,500 income may have to increase with inflation and your circumstances. It really is quite a gamble on it all working out as hoped. Yet another reason to avoid this situation if at all possible.

[Stephen Bland]

Julie, I can tell you for certain that a lot of pensioners use their HYPs for income because that in fact that is the whole ultimate purpose for which I designed the strategy. Nothing that has occurred in the 16 years or so since I first launched the HYP approach publicly has changed my view on this and my own experience and that of a lot of HYPers of whom I’m aware support it.

No guarantees of course, equity investment attracts unavoidable risk and the question is exactly as you posed, can you live with that risk as it exists in the HYP strategy? If you can’t then don’t do it. But in that case make sure that anything else in which you invest isn’t just as risky or even more so. But it is highly likely in my opinion that a HYPer who has had a good experience with an HYP for some years pre-retirement, especially if that covers some inevitable and testing poor years, will be happy to continue with it post-retirement when the income needs to be drawn.

I stress that it was never my intention for HYPs to be used as some form of temporary investment with a definite view to eventually selling and reinvesting elsewhere. That in my view would be a really risky way to approach it! You may have noticed that I refer often to eternity holding, never selling. That was always part of the strategy from the outset. Hold forever, reinvest dividends until you need them and when you do, draw all or just partially as required. That’s the HYP way.

[Stephen Bland]

I am not permitted to advise on your specific pension situation because that would constitute personal financial advice which I am prohibited for legal reasons from offering to readers.

On the more general aspects of your query, when you wish to take an income from your HYP, as you suggest you simply withdraw the dividends instead of reinvesting them. The idea is that you don’t spend the capital but retain it to continue delivering the dividend income.

Also for the above legal reason, I cannot comment on whether investing in an HYP is “very risky” because that is a judgement personal to each investor. One person’s “very risky” is another’s attractive investment so you need to decide for yourself if you can live with the degree of risk that comes with HYPs.

I agree with you though that vested interests who will receive no fee or commission if you stick with an HYP, are likely for that reason to lack impartiality and to encourage you in the direction of products from which they derive a cut in some way.

From my personal point of view, HYPs are certainly not “very risky”, though of course they do carry risk, both to income and capital. I practise what I preach so am very heavily invested in my own HYP and add to it if additional cash becomes available. I’m no spring chicken myself but definitely do not see that age changes my view, remaining quite happy to embrace equities within the structured approach of an HYP and accept the risks that go with this because for me it’s not “very risky”, quite the contrary. The level of risk that HYPs unavoidably attract is perfectly acceptable to me. But that’s just me, I can’t decide that for anyone else.

I’ve always intended the HYP strategy to offer lifetime potential from age zero up. The dividends are reinvested if not required, thereby boosting the future income when it is required. There is no cost or problem in switching from reinvesting to withdrawing.

[Stephen Bland]

I don’t intend to change the dividend schedule for a number of reasons, related to my decision last year to cease showing the old portfolios in every issue and the reasons for which were discussed extensively on the old forum – no longer accessible unfortunately. I don’t wish to reopen all those arguments and point out that only an extremely small number and percentage of readers expressed concerns about the change despite my publicising it widely in advance and seeking opinion, both in TDL itself and on the forum.

As mentioned elsewhere on the forum, forecast dividends and yields are available from online sites such as DigitalLook.

Remember that databases like this sometimes have errors and that forecasts in most cases are just estimates by external analysts and will often vary depending on the source used. They can, and often are, shown to be wrong when the actual figures become known so consequently people should not give them too much credence or regard forecasts with an accuracy they just cannot possess.

[Stephen Bland]

I don’t normally show past portfolios but do publish an annual review each January of all of them to reveal their performance. However all shares selected in the past, where still existing in any portfolio, are shown in the dividend schedule published with every issue of TDL together with my latest Buy/Hold advice.

[Stephen Bland]

I use the database service Stockopedia which gives the average of a range of broker dividend forecasts. This service requires a subscription.

[Stephen Bland]

Yes. I believe though that the S32 dividend qualifies as a UK payment for this purpose. TUI does not and its dividends suffer German withholding tax in consequence.

[Stephen Bland]

One popular and free online source of dividend forecasts is DigitalLook though it’s not the one I use.

http://www.digitallook.com/

And as an example, looking up BP there shows the following

http://www.digitallook.com/equity/BP

I point out that all external forecasts of dividends and eps etc. carry a fair degree of unreliability and not only that, they often vary between the sources used. I have no reason to believe that my source is superior to any other.

[Stephen Bland]

Following your message I have had further discussions with Southbank to clarify this matter. The old publication routine until the recent change was to aim for readers to receive the print edition of TDL on the third Saturday.

When the new schedule was introduced recently, it was decided that for most months the issue date of the print edition will be the fourth Friday so that readers should receive it, post permitting, the next day. Occasionally though this may need to be varied due to public holidays or production bottlenecks. Additionally, an email PDF version of it is released late Friday and readers will receive that before the print edition.

When you raised your query, the website must still have been showing the old schedule and I have asked them to update it.

Hope this is now clear and apologies for the confusion.

[Stephen Bland]

The revised publication schedule from February, which was mentioned in TDL, is that the monthly print edition will be released on the last Friday of the month (previously the third Friday). All other weeks will have the email update. Thus there is no email weekly update this week because the March monthly print edition is due out on Friday.

This schedule may be disrupted by public holidays.

In line with the new schedule, the April print edition is due out on the last Friday which is the 28th.

As for the forum names, this concerns the tech side of it with which I do not deal but have passed your comment immediately to the relevant person at my publisher, Southbank. I can’t promise though that they will be willing or able to change it.

[Stephen Bland]

Yes, I’m not in favour of either scrip or drip for HYPers who are reinvesting dividends. The reason is that these compel reinvestment into the originating share and that may not be the optimum choice. Better in my view, despite the costs, to accumulate the dividend cash which then delivers flexibility and choice of where to reinvest it in the portfolio once it has become economically viable to do so.

I’d possibly make an exception though for very small portfolios, especially where no new money is likely to be added, with modest income. In this case, waiting for dividends to accumulate to an economic sum for reinvestment might take far too long and in that situation scrip or drip might be preferable.

For example assuming a yield of 4.5% and a minimum economic reinvestment sum of £1,000, then the HYP would have to be worth at least £22,000 in order that the dividends could build up to that £1,000 in a reasonable reinvestment time of say one year. Any HYPer with a portfolio worth much less than that, where no new money will be going in, may prefer scrip or drip dividends.

But portfolios that small which are complete, ie. where no new money is being invested, will I guess be only a small minority of HYPers if they even exist at all.

[Stephen Bland]

The original sector purchase values are of no relevance when topping up, so you have the right idea.

What matters are the current values so that the aim should be to bring any currently undervalued sectors up to the new average value, but not over it, calculated to include the new money. If the cash being added is insufficient to bring any sector up to the new average value, then just add what you can to the most undervalued sector. You also might wish to consider the available yields of those undervalued sectors because if you have to choose between them, you might as well go for the higher yielders first.

Just as the purpose of equal investment at original cost is to avoid under or over weighting any sector, the same applies when topping up or adding new holdings.

Note that only those shares shown as Buys in the latest TDL should be purchased when topping up or adding new holdings.

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