A pseudo-HYP option?

[Newroad]

Hi All.

I did an example exercise as to what such a portfolio might look like point in time. The proposed basic methodology (currently ignoring debt considerations) ...

1. Start with the FTSE100
2. Get the highest yielding stock from the industry with 5+ years of dividend growth (even if below the FTSE yield average!)
3. If no such stock exists in the FTSE100, look for the same in the FTSE 250
4. If not such stock exists in the the FTSE250 also, pick the nearest fit (slightly subjective, but based on both dividend growth and yield) from the FTSE 350

Apply the above would give the following (where the first percentage is the sector risk weighted and the second the yield)

Basic Materials 10.0% - RIO 11.51%
Financials 7.5% - PHNX 7.74%
Consumer Staples 13.5% - BATS 7.20%
Telecommunications 8.2% - VOD 6.22%
Industrials 10.0% - RMG 4.64%
Utilities 9.0% - NG. 4.40%
Technology 5.7% - SGE 2.63% (note the underline in Rule 2)
Healthcare 8.6% - HIK 2.04% (note the underline in Rule 2)
Real Estate 8.2% - PHP 4.36% (from Rule 3)
Consumer Discretionary 8.2% - TW. 6.29% (from Rule 4)
Energy 11.1% - SHEL 3.57% (from Rule 4)

which would give a weighted yield of 7.56%. It's possible I've made errors by my own rules as it proved a very manual process (in the end, II was the best source to select, then DividendData to check, but interestingly, II's had "Consumer Cyclical" and "Consumer Defensive" rather than "Consumer Discretionary" and "Consumer Staples" - and the mapping wasn't 1-1).

My proposed Rule (2) is perhaps the most controversial in this forum and it's where I would favour Carver (minimise correlation) over Pyad (maximise yield). However, the overall bias remains very HYP'ish IMO. The above also reflects likely order of purchase (as it would give the most time for the later ones to change and get covered by an earlier rule).

As an aside, on DividendData in the FTSE250, I could find RCH (Reach) only in the Dividend Yield page, but not the Dividend History page - I'm not sure what that's about? If that is an error and it had 5+ years dividend growth, then it would have been preferred to "TW." in the Consumer Discretionary industry.

Next step, to do a notional next 11, to see what they might look like.

Regards, Newroad

[kempiejon]

As an aside, on DividendData in the FTSE250, I could find RCH (Reach) only in the Dividend Yield page, but not the Dividend History page - I'm not sure what that's about? If that is an error and it had 5+ years dividend growth, then it would have been preferred to "TW." in the Consumer Discretionary industry.

I have noticed a couple of errors on that website in the past. If you're prepared to flex for covid Reach is pretty good for 6 years
https://www.reachplc.com/investors/shar ... nd-history

[MDW1954]

Hi All.

I did an example exercise as to what such a portfolio might look like point in time. The proposed basic methodology (currently ignoring debt considerations) ...

Basic Materials 10.0% - RIO 11.51%
Financials 7.5% - PHNX 7.74%
Consumer Staples 13.5% - BATS 7.20%
Telecommunications 8.2% - VOD 6.22%
Industrials 10.0% - RMG 4.64%
Utilities 9.0% - NG. 4.40%
Technology 5.7% - SGE 2.63% (note the underline in Rule 2)
Healthcare 8.6% - HIK 2.04% (note the underline in Rule 2)
Real Estate 8.2% - PHP 4.36% (from Rule 3)
Consumer Discretionary 8.2% - TW. 6.29% (from Rule 4)
Energy 11.1% - SHEL 3.57% (from Rule 4)

Regards, Newroad

This perfectly exemplifies what I don't like about super-sectors.

RMG as "Industrials"? TW. as "Consumer discretionary"? BATS as "Consumer staples"?

Newroad, please be clear: I'm not criticising you in the least. I'm criticising the way that companies get stuffed into these sometime-ludicrous super-sectors.

MDW1954

[Newroad]

No problems, Malcolm.

Understood - no offence taken

For the avoidance of doubt, the list refers to Industries, not Super-Sectors (these being the next level down). I can understand all your views, but I don't think the categorisation is that far from the mark. Indeed, it perhaps get's slightly clearer once you go that level down - where RMG for example becomes "Industrial Transportation".

Thanks KempieJon.

RCH wouldn't qualify ahead with that dividend history (like "TW." it's also imperfect) but who knows on the next pass.

Regards, Newroad

[Itsallaguess]

This perfectly exemplifies what I don't like about super-sectors.

RMG as "Industrials"? TW. as "Consumer discretionary"? BATS as "Consumer staples"?

Newroad, please be clear: I'm not criticising you in the least. I'm criticising the way that companies get stuffed into these sometime-ludicrous super-sectors.

I'd agree with that, and would go further and say that there's definitely a sweet-spot in sector-categorisation, where things don't get too granular on the right hand side as to make such a process useless (think - Iceland (Consumer Goods - Frozen) - Tesco (Consumer Goods), etc..), and things don't get too lumpy at super-sector level on the left hand side, such as the good examples you've given above.

So I can totally agree that there are ways of using sector categorisation that might end up being unhelpful at best, or downright dangerous at worst, but I'd also urge to consider that just because that might be true, it would hopefully not stop us agreeing that there are also ways of using sector categorisation for diversification purposes that are also very helpful....

What I'd be concerned about here is that people might be put off taking advantage of good investment diversification practices, just because some here might be able to come up with extreme examples of poor application.

Of course, it's possible to apply beneficial processes in poor ways that result in them not being as beneficial as they can be, but that shouldn't stop us being able to accept that there's also ways to apply those beneficial diversification processes in ways that maintain those original intentions...

Cheers,

Itsallaguess

[idpickering]

This perfectly exemplifies what I don't like about super-sectors.

RMG as "Industrials"? TW. as "Consumer discretionary"? BATS as "Consumer staples"?

Newroad, please be clear: I'm not criticising you in the least. I'm criticising the way that companies get stuffed into these sometime-ludicrous super-sectors.

MDW1954

I agree with you Malcolm. For me, it's all a matter of investors using their common sense as to what share fits into whichever sector. Then use that to manage their HYPs with regards to how they're happy to place their bets, but maintaining diversification, without being to exposed to any given sector.

It seems to me that some here are over thinking things, whereas using common sense and keeping it simple are, imho, the ways to go. HYPing isn't difficult, so why tie oneself up in knots making it so? But each to their own of course.

Ian.

[Newroad]

Hi IAAG et al.

I assume the reference version of the HYP investment strategy is generally considered to be the original Pyad one (I went back and read the relevant posts)?

If so, whilst it is conceptually fairly simple, I suspect it is deceptively complex to implement consistently in practise (e.g. what is adequate diversification, what is not too much debt etc). There appears to be a considerable portion of art to the science - indeed, the only purely measurable bit seems to be a yield higher than that of your reference universe (FTSE 100 or FSTE 350 or whatever). Does anyone on the forum believe they run purely in accordance with the original Pyad version?

Hence, the proliferation of interpretations (some of which were created independently and in some cases, pre-date Pyad's version) and the resultant discussions/disagreements.

As for me, I'm still not at all convinced, but I'm prepared to keep an open mind and perhaps tweak it my own way, as suggested. Where I'm heading might arguably better viewed as a low correlation high'ish yield strategy. In effect, I'm postulating that all other things being equal, I might as well choose within an Industry on the basis of dividend yield and its relative safety.

Regards, Newroad

[idpickering]

Hi IAAG et al.

I assume the reference version of the HYP investment strategy is generally considered to be the original Pyad one (I went back and read the relevant posts)?

If so, whilst it is conceptually fairly simple, I suspect it is deceptively complex to implement consistently in practise (e.g. what is adequate diversification, what is not too much debt etc). There appears to be a considerable portion of art to the science - indeed, the only purely measurable bit seems to be a yield higher than that of your reference universe (FTSE 100 or FSTE 350 or whatever). Does anyone on the forum believe they run purely in accordance with the original Pyad version?

Hence, the proliferation of interpretations (some of which were created independently and in some cases, pre-date Pyad's version) and the resultant discussions/disagreements.

As for me, I'm still not at all convinced, but I'm prepared to keep an open mind and perhaps tweak it my own way, as suggested. Where I'm heading might arguably better viewed as a low correlation high'ish yield strategy. In effect, I'm postulating that all other things being equal, I might as well choose within an Industry on the basis of dividend yield and its relative safety.

Regards, Newroad

Your thoughts on this sound spot on to me, so thanks for sharing them with us.

Ian.

[Itsallaguess]

As for me, I'm still not at all convinced, but I'm prepared to keep an open mind and perhaps tweak it my own way, as suggested.

Where I'm heading might arguably better viewed as a low correlation high'ish yield strategy.

I think the single most important thing with investing is to find a system and approach that suits us as individuals, and you're right to look and tweak where you think that might be helpful.

Having been around the HYP block for many years, and having decided to step back, for the large part, from single-company investing and look at broadening out into more diversified collectives for my income-strategy, I can say that most of the issues I see is where people don't have a defined strategy or approach, and if income-investors tend to have a 'dithering' approach to investment, then I think a single-company income-strategy such as HYP will tend to amplify that dithering, and offer up all-too-regular 'noise based opportunities' for such dithering to occur...

That's certainly been my experience over many years of watching the HYP landscape on here and back on the Motley Fool, and so I think your much more sensible 'defined strategic tweaks' approach is likely to lead to improved results just because it's less likely to take such a 'scattergun' approach where thinking like this isn't carried out.

Cheers,

Itsallaguess

[MDW1954]

So I can totally agree that there are ways of using sector categorisation that might end up being unhelpful at best, or downright dangerous at worst, but I'd also urge to consider that just because that might be true, it would hopefully not stop us agreeing that there are also ways of using sector categorisation for diversification purposes that are also very helpful....

What I'd be concerned about here is that people might be put off taking advantage of good investment diversification practices, just because some here might be able to come up with extreme examples of poor application.

I couldn't agree more. In 'real life' investment discussions, I always stress the virtues of diversification -- and have, over the years, sometimes been thanked for it, later.

Another example of stupid super-sectors is how REITs are often stuffed into "Financials" at the super-sector level. I'm a huge fan of REITs, especially now that more alternatives exist to the lumbering giants of BLND and Landsec. REITs are about as far removed from banking and insurance etc as it is possible to be (ie, *real* physical assets, not paper ones), yet I've seen sectoral constraints dissuade investors from owning them.

In my view, one always has to look at the actual business, and reach one's own conclusion -- as TJH has repeatedly done, for example.

Mind you, doing so is not always safe. I recall Pyad saying that Northern Rock (or somesuch) was different from RBS (or somesuch) because one was a mortgage bank, and one wasn't. It was a seductive idea, but failed to see that both were linked by the same fatal flaw: over-leverage, and a reliance on short-term finance. (Apologies to Pyad if I've mis-remembered the actual companies, by the way. 2008 was a long time ago!)

So yes: diversify, diversify, diversify.

And one more thing on the subject of diversification: Some here with long memories will perhaps recall Gengulphus performing some analysis with standard deviations of something or other to determine that 15 companies was a "safe" HYP number, and that one shouldn't holder fewer than that, if one wanted to be properly diversified.

What tends to be overlooked was that 15 was a minimum. I have many, many more than that -- and sleep better as a result.

MDW1954

[Newroad]

Afternoon, Malcolm.

At some level above, you are fighting the last war - as you can see from the example cases "Real Estate" is now an Industry of its own.

On diversification, few with significant knowledge would argue with you/me/IAAG/etc on that. There remains an open question though on how much diversification can be afforded (or how best to achieve it) for a given size of portfolio. This is one of the areas where Carver's book is very useful for anyone interested - I won't repeat the key take-aways ad nausuem here - but suffice to say it suggests that selecting just FTSE100 or FTSE350 stocks is unlikely to be the "correct" way to achieve it for many.

Regards, Newroad

[MDW1954]

Afternoon, Malcolm.

At some level above, you are fighting the last war - as you can see from the example cases "Real Estate" is now an Industry of its own.

Regards, Newroad

Sorry, I could have phrased that better -- adding "pre-2019" or something. Yes, I accept that the new FTSE Russell ICB classification is better, and yes, Real Estate as a super-sector of its own makes a lot more sense.

(Incidentally, posters might find the background interesting: https://classification.codes/classifications/industry/icb/.)

Re: diversification, I also accept that investments outside the FTSE 350 make sense. There are non-350 stocks in my own HYP. I tend not to mention them here, as they are "off topic" for this board, but some of my smaller REITs don't make the cut.

MDW1954

[Itsallaguess]

This is one of the areas where Carver's book is very useful for anyone interested - I won't repeat the key take-aways ad nausuem here - but suffice to say it suggests that selecting just FTSE100 or FTSE350 stocks is unlikely to be the "correct" way to achieve it for many.

It's probably a discussion for another board, but I agree - it's often funny to hear people saying HYP'ers 'don't have to have a finger in every pie', when 95% of the actual available-investment pie is situated in a room that you've deliberately locked yourself out of...

Cheers,

Itsallaguess

[idpickering]

It's probably a discussion for another board, but I agree - it's often funny to hear people saying HYP'ers 'don't have to have a finger in every pie', when 95% of the actual available-investment pie is situated in a room that you've deliberately locked yourself out of...

Cheers,

Itsallaguess

For whatever it's worth, I have said those words a few times here myself. I was talking about shares that on the face of it, with a high yield etc that look like good picks, but it doesn't necessarily make them one. I was trying to caution people to avoid the danger of diworsification, and the like. But I accept we're all different.

Ian.

[tjh290633]

Re: diversification, I also accept that investments outside the FTSE 350 make sense. There are non-350 stocks in my own HYP. I tend not to mention them here, as they are "off topic" for this board, but some of my smaller REITs don't make the cut.

MDW1954

Perhaps one should also mention shares which are not in the FTSE tables because of domicile, even though they have a London quote. Examples are BHP and its offspring South32, both registered in Australia. Some of the REITs are based in the Channel Islands, I believe. Buying them does not suffer stamp duty.

TJH

[MDW1954]

Perhaps one should also mention shares which are not in the FTSE tables because of domicile, even though they have a London quote. Examples are BHP and its offspring South32, both registered in Australia. Some of the REITs are based in the Channel Islands, I believe. Buying them does not suffer stamp duty.

TJH

Indeed.

MDW1954

[Newroad]

Hi All.

I've actually redone the exercise, with a key difference or two

1. Taking a more (but not wholly) relaxed view on Covid-19 related cuts - as long as they've been restored and if in a second year, flat or rising
2. Catering for the potential of a second 11 choices (i.e. choices 12-22)
3. Assuming a purchase order of (a) the lowest one in excess of the FTSE100 yield up to (b) the highest one in excess of FTSE100 yields, then (c) the highest one below the FTSE100 yield down to (d) the lowest one below the FTSE100 yield. My theory on this is that it would give 6-9 months (assuming one purchase per month) for the very high yielders to get a dividend cut and therefore be reconsidered

I've also put a few third 11 choices in, either in case they're ever needed or they might be used as substitutes. As before, one choice per "Industry" per group of 11.

Anyway, this gives the following lists, yields and notional purchase order

1-11: SHEL, LAND, RMG, SSE, TW., VOD, BATS, MNG, RIO, SGE, HIK (Yield 6.00%)
12-22: PHNX, AAL, BDEV, NG., ULVR, SMDS, AVST, DEC, TEP, AGR, CTEC (Yield 1-22 5.64%)
23+/reserves: SYNT (9.78%), GLO (6.97%), MONY (5.8%), NWG (4.74%), PHP (4.27%), ITV (3.85%), CCH (3.54%)

I don't regard this as final (you may recall, it needs to be good to go for the new financial year) just a development of the thinking.

Regards, Newroad

[Newroad]

Hi All.

I'm interested in some advice re the above. I've repeated the first 11 for convenience, but switched out M&G for PHNX due to low dividend cover in the former and then ordered in current yield

RIO, BATS, SHEL, PHNX, VOD, TW., SSE, RMG, LAND, SGE, HIK

Two questions

1. Do any of these seem obviously bad choices (and if so why)?
2. If you were buying them once a month from April, what order would you buy them in* (or what methodology would you use each month to determine)?

I know that the list itself is not everyone's choice (and that SGE and HIK yield below the overall FTSE100) and that my proposed "low correlation, high'ish yield" methodology is a little different, but just trying to avoid egregious mistakes.

Regards, Newroad

* I understand that the HYPTUSS somehow supports suggestions as to the order of topping up - is that something that can be applied to initial purchases

[TUK020]

On a tangentially related note, re the debt angle, has anyone running a HYP had a "disaster" or "near disaster" (e.g. Carillion comes to mind - not sure if it was a potential HYP stock) and would having implemented a debt rule for stock selection, a la Pyad, have avoided it?

Personally I don't use a particular debt rule specifically for selection or non-selection. You could look instead at Free Cashflow (FCF), which is essentially disposable cash after interest and taxes have been paid. If a company is spending increasing amounts of its operating cashflow servicing its debt payments, that should become obvious in a reducing or even negative FCF trend.

Since you have mentioned Carillion - I held this until its bitter end and was seduced a little too much into chasing its yield prior to its implosion. Lesson learned, after which I started using a yield filter. I figured there is some correlation between high yield and dividend sustainability (that much should be evident from the likes of Polymetal and Evraz today...) so decided simply not to buy or top up anything which I felt was "too high" yield. I set that ceiling at double the City of London IT yield (CTY being the closest alternative buyable proxy I could think of for a basket of FTSE350 shares). A few regulars here disagree with that but I would stress that it's a coarse method and one has to start somewhere, however it has been useful to me and has over the last few years avoided topping up in particular VOD, IMB and SHEL shortly before their dividend cuts came. Currently it stops me from buying more RIO whose high yield is perhaps an indication that the market does not think its bumper dividends are sustainable otherwise, presumably, its share price would be much higher than it is today.

I got burnt by Carillion.
In retrospect I cast about for early warning indicators that could have helped me, and would help me sleep at night by reducing risk of default.
FCF trends is a very good one, but I didn't rate my accounting ability to analyse this correctly without spending a lot of time on this for my portfolio.

A simpler one is keeping an eye on the Short Tracker. If lots of folks are betting serious money on shorting a stock (a short position has to cover the dividend payment, so this is expensive for high yielders) then something may be adrift. Not a guarantee that there is a problem, but I don't need to live on the edge.
I arbitrarily exit any stock where the stock shorted exceeds 5%. Crude, alarmist, and avoids the best recovery stocks. Also reduces stress levels.
https://shorttracker.co.uk/companies/?sort=2&d=desc

[monabri]

Morningstar is useful for FCF trends.

http://financials.morningstar.com/ratio ... region=GBR

The link above is for British American Tobacco. If you edit the "tckr" to that of another company and hit return, one can speedily obtain info for that company.