As most of you know I have a series of investing goals that I look to achieve over the course of each year.
These I use to assess my performance periodically throughout the year (see, for instance, my Q1 review in April).
These goals are regularly tweaked and changed as appropriate. Sometimes this is because they have been achieved already (great). Other times it is because I want to focus on a new specific goal (keep aiming high). And on other occasions it is because the goals don't quite seem fit for purpose (oh dear).
This current adjustment is due to the last of those reasons. Not being fit for purpose.
How My Yield Goal Stands Now
Currently one of my goals reads:Retain a portfolio dividend yield of more than 4%.Now this is all well and good. But something I forgot about when thinking up that goal (which has been in place since the origins of this blog) is that as the capital value of my portfolio grows. My yield will--necessarily--drop.
However, what I don't want is to be chasing higher yield and higher risk companies just in order to achieve this goal. I want my portfolio to be a healthy mix of high yield and low growth companies (such as my recent purchase in National Grid and Royal Dutch Shell) and low yield and high growth.
As a result, I need a more intelligent and dynamic yield goal for my portfolio.
My New Proposed Yield Goal
So what should I do with this goal? Drop it altogether? Maybe. But for now, here is my new proposal:Retain a portfolio yield of more than 1.25 times the FTSE 100 yield.My particular comparison will be the HSBC FTSE 100 Class C Income ETF and its 12 month trailing gross yield (it can be found in the factsheet from their website). It is the FTSE 100 tracker I currently also have in my portfolio.
Now as it stands the yield is 3.18%. This means my target yield for my portfolio should be 3.975% or more (coincidentally around my current 4% target!).
Being a 12 month trailing yield this means that if suddenly the FTSE 100 price drops (and the immediate yield thus goes up) any sudden increases will be slowly reflected in the FTSE 100 yield figure I am using.
As a result, I should have a reasonable amount of time to adjust my portfolio accordingly to keep roughly in line with this target.
What Do You Think?
Do you think this new goal is a more appropriate replacement for my previous one? Can you think of a better one?
Notes
* That is the UK if you're not familiar with that particular bit of slang. Also, I will take this footnote as an opportunity to apologise to Justin Timberlake for the poor play on words in the title. I couldn't help it. Please don't sue me.
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[Creative Commons image reproduced from Flickr user Metro Centric]
"My particular comparison will be the HSBC FTSE 100 Class C Income ETF..." Why not just compare with the actual FTSE100 divi yield? As of the 01 May 2015 it's at 3.39%.
ReplyDeleteGreat question! I have two reasons at the moment. First, because I struggle to find a reliable source of the FTSE 100 yield (do you have freely available link/source I could use, if so that would be great!).
DeleteSecond, because I hold the HSBC FTSE 100 Class C Income ETF and it would be my "go to" ETF if I was not actively investing so it seems a fair comparison for me to judge how strong my portfolio yield is.
Third, I like the fact that the HSBC ETF figure will not be constantly changing but only doing so once a month. It means I can sit down, work out the target yield for the month and not have to (or, rather, feel the need to) check it each time I review my portfolio!
It is a good point. If I can find a reliable and easy to access source of the FTSE 100 yield I may change that!
Thanks for dropping by and commenting!
Hi DD
DeleteI get my FTSE data from the FT. It's freely available here http://markets.ft.com/research/Markets/Data-Archive
Cheers
RIT
Thanks, RIT! That is exactly what I have been looking for for absolutely ages. Not only the yield for the FTSE 100, 250, etc but also the PE and dividend cover. Excellent. Thanks massively.
DeleteHi DD
ReplyDeleteI understand your reasons for changing your yield goal and it makes sense.
However, does it matter that not all of your holdings are FTSE 100, eg Amlin is in the FTSE250?
Good question, weenie. I see where you're coming from.
DeleteNo, not at all. About 22% of my portfolio is in FTSE 250 companies and 73% in FTSE 100 companies.
My main focus is regarding the yield. The FTSE 100 yield is invariably higher than the FTSE 250 yield. As such, using it as my reference point seems logical. What is more (as noted above), a FTSE 100 ETF would be my standard investing vehicle if I was not actively investing. Again this means using such a figure is a more logical comparison.
In many regards, of course, it is rather arbitrary but it is certainly a better target than the current set inflexible yield target I have!
Thanks for dropping by and commenting!
Hi DD, very sensible to switch from an absolute yield goal to a relative one. I use the FTSE All-Share as my main target, although generally that's pretty much the same as the FTSE 100.
ReplyDeleteYour response to weenie is spot on I think. It's not so much whether a benchmark is somehow "technically" correct, but that it represents the zero-effort alternative that you would use if if you weren't active.
John
Thanks, John. I thought so as well. It lasted so long as a goal because my portfolio has been hovering around cost price pretty much since it has existed so the fixed goal did not seem a problem. Now it is making moves up in price it clearly was not fit for purpose!
DeleteInteresting thought with the FTSE All Share. I will have a look at that as a prospect shortly. I had not, actually, thought of that as a possible option.
It was a good question from weenie as it is something I should have covered directly in the post itself (which I did not really other than pointing out it is the tracker I use myself). This I may correct if I decide to do a proper edit of the article!
Something I have since thought of (since RIT posted that excellent link) is the possibility of using the FTSE 350 as the reference point (as that is where the bulk of my investments lie). It would respond to the points that RIT and weenie raised. However, in that regard, teh All Share may be equally--or more--appropriate.
I will have a ponder. Thanks for taking the time to comment.
Hi D2,
ReplyDeleteI must admit I've never thought about setting a target yield for my portfolio; it's always seemed a secondary metric to me. Letting the goal float as you're proposing is probably a good thing though.
I never buy stocks with the intent of adjusting my overall portfolio yield, so it's not something I set as a target. Plus as the portfolio grows in size, I suspect it'll be progressively harder to change the overall portfolio yield without significant rebalancing. I set only a minimum yield for stock purchases and a target amount of income that I want over the year.
That said, it's an interesting viewpoint and I've encountered it indirectly when considering the question "should I sell a stock if it increases drastically in price and drops the yield below my minimum level"?
Best wishes,
-DL
I did consider dropping it altogether when I was reviewing it. However, the reason that I included it was in order to--whilst still building up my investments--try and target higher yield equities in order to "turbocharge" my portfolio growth at this early stage.
DeleteIn reality, as you note, the dividend income target largely does the same job and does so in a more appropriate way for my aims (hence why I thought of dropping the portfolio yield target!).
As noted already with my recent purchases I am now looking to include more high growth equities for the long term. However, with these higher yield companies already tucked away I can already see my portfolio growing organically at quite a lick thanks to reinvested dividends.
As you say, once the portfolio reaches a larger size I will find moving the yield in any substantive way much harder to enact (in fact, I am sort of starting to experience that now!). But that is a (pleasant) issue for future me to contend with!
I had not thought about the dropping yield of a rising stock aspect. Indeed, maybe having a "floating" yield target for that yourself would be quite appropriate.
Indeed, now you mention it this may be what I shift to once a "portfolio" yield target becomes less appropriate and harder to manage. After all, if the FTSE 100/All Share increases so it yields only 2.5% rather than 3.3% is it really practical to sell a stock when its yield drops below, for example, 3%?
Thanks again for the interesting comments. Plenty of food for thought!
I was wondering what really prompted you to change this in the first place? I mean, what is really wrong with aiming for a 4% yield overall? That is what I lean towards when looking at new stocks to buy, although I often go for ones with a lower yield. Just that in the back of my head, I am thinking 'the default inflation rate I go by is 2%, and I would like to beat that, how about going for 4%?'
ReplyDeletePart of my reasoning is also that given the recent portfolio changes I wrote about, we are putting more money into dividend paying stocks as a kind of cheeky way to get a bit of extra money throughout the year, so the higher the yield the better for us, as long as it's safe of course.
Cheers
Good question!
DeleteFrom a picking perspective I want to ensure that when buying I do not end up taking on a huge amount more risk during a bull market. If the FTSE 100 rockets up and leaves a yield of under 3% then presumably the number of 4% plus stocks (which would positively contribute to my portfolio target) will dwindle leaving a larger number of higher risk companies in that group.
Also, I want a portfolio yield target so that I get a nice combination of high yield and high growth stocks. In reality, what I am after is something around that target rather than noticeably higher.
I plan to try this new dynamic goal to see how it works in real life. It is, of course, far from perfect as all of the commenter's have highlighted. As I say, I seriously considered dropping it altogether. However, I thought: "Let's try something new first". Let's see how it works!
Thanks for commenting. I have yet to comment on your recent watchlist. Been swatting up on local election manifesto details as well (completely forgot about those!).
(PS: Diageo is in my target price range again. But so are so many others! Argh!)
cool. I am glad you're trying something new, rather than just eradicating that goal altogether.
ReplyDeletein re Diageo, yes it's almost in my range too, I just want it to slightly cheaper so the PE hits 20 or below, think it's about 23 right now. I am cheap! And stubborn!
Cheers
Yes, we will see how it goes! It seems more useful to me at present. But we will see!
DeleteIt is looking very tantalising. Though it strengthened a little towards the end of the day. This morning so many companies nearly made me pull the trigger. I will be patient for now!
I went to pull it on GSK but then realised the market was closed, DOH! So I've set a limit order for tomorrow. Hopefully we'll see a bit more volatility in the morning as a hung parliament scares the crap out of the markets for a few hours. I have zero in pharmaceuticals right now, other than my trackers.
ReplyDeleteMaybe you could put on your limit orders too? Choose your prices!
Sorry, missed this yesterday! Haha, I have done that before!
DeleteI was tempted by GSK again yesterday. I am, however, very overweight with it. Maybe a small push in that direction if it continues to shift down.
I was trying to work out why their share price dropped so sharply yesterday other than simply the announcement of board changes. Very odd. Did you read anything? It seemed very disproportionate to the whole market.
Dividend Drive,
ReplyDeleteI believe that maintaining a 4% as an absolute goal like you have in the past is too difficult, mainly because it's outside of your control. The solution to aim for a portfolio yield worth 1.25 times the FTSE's yield seems better.
However, I wonder why you aim to keep your portfolio's yield at 4%? Does it really matter what your current yield is as long as your initial yield was OK and your dividends are growing faster than inflation? Of course, I mean the overall yield of your entire portfolio and not just one particular stock.
Looking forward to your reply!
Cheers,
NMW
My thoughts exactly, NMW!
DeleteOne of the next things I would like to start to look at is further goals which achieve my aims. A target predicted dividend growth figure is just one of those!
As noted earlier, chiefly this goal is just looking to create a comparatively high-yielding portfolio (relative to the market as a whole) on which I can build long term. My logic here is that it is early on that I can take bigger risks on higher yield equities as I have longer for things to be rectified.
Also, whilst my portfolio is small. It is very easy for a single new addition to notably affect my portfolio yield. As a result, being acutely aware of the yield and seeking to keep it above the FTSE 100 or FTSE All Share yield is something that needs to be slightly more consciously considered.
As I suggested above, once the yield is clearly not significantly affected by a single normal purchase I will likely retire this as a goal (or maybe maintain it as a sort of guideline). At that stage it would perhaps be harder to have it as a goal anyway!
Thanks for your contributions. Very interesting. I may well update this post to reflect the suggestions/thoughts raised in the comments.