Investing in 7% plus HY shares

[Walrus]

Initially on embarking on setting up a HYP I had told myself to keep away from yields that were greater than 7% on the basis these companies must be under some kind of serious stress and of a higher risk than I would be willing to take with my pension fund.

Now I'm looking at a portfolio with a bunch of 7 percent yields that look ripe for top ups. With interest rates rising I'm wondering perhaps whether I should relax that criteria somewhat. At the same time though I fear I'm inadvertently 'value' gambling/averaging down in bad companies.

Is it sensible to not invest purely because the yield is too high? I think watching last week's fundsmith AGM and it's focus on investing in quality companies rather than 'high yield junk' has spooked me somewhat.

[moorfield]

Initially on embarking on setting up a HYP I had told myself to keep away from yields that were greater than 7% on the basis these companies must be under some kind of serious stress and of a higher risk than I would be willing to take with my pension fund.

Is it sensible to not invest purely because the yield is too high?

Absolutely, and plenty of us here have the scars to prove it. The HYP guidelines are clear on a minimum yield to beat (the FTSE100, approx. 4.2% ish today), but have been less so on how high to go. Since my own disaster chasing Carillion's yield over the last few years, I now won't buy or top up anything yielding > 2*FTSE100, about 8.4%ish today, which rules out Centrica (CNA) currently (ie. until it's price comes off current lows and assuming dividend is maintained). Not perfect, but for me it's a start and more importantly a control criterion I was not using this time last year.

[tjh290633]

It all depends on the company. I have eleven shares with yields over 6%.

EPIC   Yield
TW.    8.09%
SSE    7.54%
IMB    7.33%
MARS   7.32%
BT.A   6.94%
MKS    6.93%
VOD    6.70%
BP.    6.34%
RDSB   6.30%
GSK    6.17%
ADM    6.02%

I'd be prepared to top up any of those which meet my criteria for topping up. At the moment, IMB and BT.A are top of the top up rankings. SSE might be avoided because of its possible split if and when it merges with Innogy.

TJH

[Arborbridge]

Initially on embarking on setting up a HYP I had told myself to keep away from yields that were greater than 7% on the basis these companies must be under some kind of serious stress and of a higher risk than I would be willing to take with my pension fund.

Now I'm looking at a portfolio with a bunch of 7 percent yields that look ripe for top ups. With interest rates rising I'm wondering perhaps whether I should relax that criteria somewhat. At the same time though I fear I'm inadvertently 'value' gambling/averaging down in bad companies.

Is it sensible to not invest purely because the yield is too high? I think watching last week's fundsmith AGM and it's focus on investing in quality companies rather than 'high yield junk' has spooked me somewhat.

If a share is diving relatively to it's peers, one might be suspicious, but when the general market yield has increased too and the company fundamentals haven't been seriously eroded, that's a less worrying time.
If you find a yield of 4-5% will do the trick for you, there's no harm in being cautious - but many will want to take the chance of gradually investing in these large companies while their prices are depressed along with the market.
As regards the excellent Terry Smith, one must remember that his aim is not necessarily the same as ours. I'm seeking income, whereas he is seeking total return. Not at all the same thing.

Arb.

[monabri]

It will be interesting to see how the TR on Fundsmith pans out over the next 5 years compared to HYP...I'm betting on HYP. Looking at some of the main holdings I'd say they were over priced (momentum) and when they don't deliver then we might see reversals....just my view - "you pays your money and takes your choice"!

[idpickering]

I agree with Terry (TJH), it depends on the company. Not that I'd blindly just buy shares yielding over say 7.4%, but I may do with other checks. Hence my caution regarding topping up IMB.

Ian.

[Arborbridge]

It will be interesting to see how the TR on Fundsmith pans out over the next 5 years compared to HYP...I'm betting on HYP. Looking at some of the main holdings I'd say they were over priced (momentum) and when they don't deliver then we might see reversals....just my view - "you pays your money and takes your choice"!

I wouldn't bet on that personally. If you are after TR, I would back a Fundsmith type fund (or Nick Train as an alternative) against HYP anyday. The sorts of companies that provide good long term TR often do look expensive, and there's a good reason for that.

HYP is principally for income, and in my view should be used for just that. TR is quite another thing.

Arb.

[TUK020]

It all depends on the company. I have eleven shares with yields over 6%.

EPIC   Yield
TW.    8.09%
SSE    7.54%
IMB    7.33%
MARS   7.32%
BT.A   6.94%
MKS    6.93%
VOD    6.70%
BP.    6.34%
RDSB   6.30%
GSK    6.17%
ADM    6.02%

I'd be prepared to top up any of those which meet my criteria for topping up. At the moment, IMB and BT.A are top of the top up rankings. SSE might be avoided because of its possible split if and when it merges with Innogy.

TJH

Apart from the duplication in Oilies, this would seem like a model starter portfolio for HYP......

[idpickering]

It all depends on the company. I have eleven shares with yields over 6%.

EPIC   Yield
TW.    8.09%
SSE    7.54%
IMB    7.33%
MARS   7.32%
BT.A   6.94%
MKS    6.93%
VOD    6.70%
BP.    6.34%
RDSB   6.30%
GSK    6.17%
ADM    6.02%

I'd be prepared to top up any of those which meet my criteria for topping up. At the moment, IMB and BT.A are top of the top up rankings. SSE might be avoided because of its possible split if and when it merges with Innogy.

TJH

Apart from the duplication in Oilies, this would seem like a model starter portfolio for HYP......

Very true TUK020. I hold all of the above apart from Marks & Spencer. I am intending topping up IMB, SSE (maybe), MARS, BT.A (maybe), VOD, and ADM over the coming months.

Ian.

[Raptor]

Initially on embarking on setting up a HYP I had told myself to keep away from yields that were greater than 7% on the basis these companies must be under some kind of serious stress and of a higher risk than I would be willing to take with my pension fund.

Is it sensible to not invest purely because the yield is too high?

Absolutely, and plenty of us here have the scars to prove it. The HYP guidelines are clear on a minimum yield to beat (the FTSE100, approx. 4.2% ish today), but have been less so on how high to go. Since my own disaster chasing Carillion's yield over the last few years, I now won't buy or top up anything yielding > 2*FTSE100, about 8.4%ish today, which rules out Centrica (CNA) currently (ie. until it's price comes off current lows and assuming dividend is maintained). Not perfect, but for me it's a start and more importantly a control criterion I was not using this time last year.

Maybe setting an arbitary 7% is your problem. The FTSE yields go up (and down) as is the markets whim. Why not set a figure you currently feel happy with, My current higher rate is FTSE All Shares * 1.8, which was 6.89% last week. Would I rule out a share above my limit, not necessarily, but I would give it a thorough review to see if there is anything behind it.

Raptor.

[Walrus]

It all depends on the company. I have eleven shares with yields over 6%.

EPIC   Yield
TW.    8.09%
SSE    7.54%
IMB    7.33%
MARS   7.32%
BT.A   6.94%
MKS    6.93%
VOD    6.70%
BP.    6.34%
RDSB   6.30%
GSK    6.17%
ADM    6.02%

I'd be prepared to top up any of those which meet my criteria for topping up. At the moment, IMB and BT.A are top of the top up rankings. SSE might be avoided because of its possible split if and when it merges with Innogy.

TJH

Apart from the duplication in Oilies, this would seem like a model starter portfolio for HYP......

Very true TUK020. I hold all of the above apart from Marks & Spencer. I am intending topping up IMB, SSE (maybe), MARS, BT.A (maybe), VOD, and ADM over the coming months.

Ian.

As a relative newcomer just looking at that list it really does feel like income is potentially on sale here, certainly cheaper than when I started 18 months back. I think come April 6 I'll be topping up

[idpickering]

Apart from the duplication in Oilies, this would seem like a model starter portfolio for HYP......

Very true TUK020. I hold all of the above apart from Marks & Spencer. I am intending topping up IMB, SSE (maybe), MARS, BT.A (maybe), VOD, and ADM over the coming months.

Ian.

As a relative newcomer just looking at that list it really does feel like income is potentially on sale here, certainly cheaper than when I started 18 months back. I think come April 6 I'll be topping up

I don't think you'll go far wrong in doing so Walrus. In the current climate there are a lot of high yielding shares out there. It was Arb who said, "We're spoilt for choice" I think.

Ian.

[kempiejon]

Back in the day when I was first buying HYP type shares I'm pretty sure I didn't baulk at twice the FTSE average. I might be misremembering but I recall the FTSE100 yielding 2.x% and buying up to 6%. I was looking at brewers, banks, utilities, retailers, insurers, usual sort of stuff.
Perhaps it's this unusually high FTSE yield that scares?

[Arborbridge]

It was Arb who said, "We're spoilt for choice" I think.

Ian.

It certainly was!
For a long time, yields have been somewhat depressed because everyone started seeking income. Now we are either in, or on the edge of, a bonanza time. Regrettably, only by hindsight will we know which it is: therefore buy in tranches now and again while the sweet shop is open. If this should turn out to be the end of our bull run, the downturn could last several years, so pace yourselves! (And, get used to the possibility of a 40% downturn in capital whilst it works its way through). Cool heads and steady nerves prevail.

Arb.

[Lootman]

Now we are either in, or on the edge of, a bonanza time.

Maybe I am in a minority here but I can't help but feel worried about some of those headline yields. And even more so because they include some of the very largest shares like BP, Royal Dutch, Glaxo, BT, MKS, VOD, IMB etc. For so many large household name companies to be sporting "junk bond" type yields disturbs me.

One thing to look at is the dividend cover and, at least in some of these cases the dividend is either barely covered or not covered and boosted by borrowings or reserves.

And given things like a subdued oil price and governments with a focus on drug prices, it's not clear where the scope is for these dividends to grow. But the real killer is going to be dividend cuts which, at a stroke, will end the "bonanza".

I am actually more sanguine about markets as a whole, and I still like US growth names, industrials and emerging markets. But I think the high yield sector is scary right now, even without the political risks associated with Brexit and Corbyn.

[idpickering]

It was Arb who said, "We're spoilt for choice" I think.

Ian.

It certainly was!
For a long time, yields have been somewhat depressed because everyone started seeking income. Now we are either in, or on the edge of, a bonanza time. Regrettably, only by hindsight will we know which it is: therefore buy in tranches now and again while the sweet shop is open. If this should turn out to be the end of our bull run, the downturn could last several years, so pace yourselves! (And, get used to the possibility of a 40% downturn in capital whilst it works its way through). Cool heads and steady nerves prevail.

Arb.

Great post Arb, and duly rec'd. I can imagine some of our greenhorn HYPers are feeling a bit spooked right now, whereas those of us who've been playing this game longer know to take this market uncertainty in our strides. As Arb wisely says, "Cool heads and steady nerves prevail."

Ian.

[moorfield]

Now we are either in, or on the edge of, a bonanza time.

Maybe I am in a minority here but I can't help but feel worried about some of those headline yields. And even more so because they include some of the very largest shares like BP, Royal Dutch, Glaxo, BT, MKS, VOD, IMB etc. For so many large household name companies to be sporting "junk bond" type yields disturbs me.

It's an interesting thought/conundrum Lootman.

So what to buy?

The lower yielders that are now slightly higher (the Unilevers, BATs, Mattheys, Sages and the like), but still under the FTSE100.

Or the high yielders that are now even higher (the Shells, Vodafones, Imperial Brands and the like).

In my case, I'll be looking at overall portfolio income vs. target. If I have the opportunity to spread some capital into the lower end and remain on overall income target, I might veer that way.

[idpickering]

Now we are either in, or on the edge of, a bonanza time.

Maybe I am in a minority here but I can't help but feel worried about some of those headline yields. And even more so because they include some of the very largest shares like BP, Royal Dutch, Glaxo, BT, MKS, VOD, IMB etc. For so many large household name companies to be sporting "junk bond" type yields disturbs me.

It's an interesting thought/conundrum Lootman.

So what to buy?

The lower yielders that are now slightly higher (the Unilevers, BATs, Mattheys, Sages and the like), but still under the FTSE100.

Or the high yielders that are now even higher (the Shells, Vodafones, Imperial Brands and the like).

If I may interject moorfield, for me, I'm going to remain focused on buying those great yields on offer right now, concentrating on topping up my HYP faves such as Admiral Group, Imperial Brands, ITV, MARS, BT Group, and Vodafone and the like. I'm trying to not be distracted by 'recent event syndrome', and am concentrating on the long term, much like we all should. What's going to happen tomorrow, next week, next year? I've no idea, so I'm not going to fret about it.

Ian.

[moorfield]

If I may interject moorfield, for me, I'm going to remain focused on buying those great yields on offer right now, concentrating on topping up my HYP faves such as Admiral Group, Imperial Brands, ITV, MARS, BT Group, and Vodafone and the like. I'm trying to not be distracted by 'recent event syndrome', and am concentrating on the long term, much like we all should. What's going to happen tomorrow, next week, next year? I've no idea, so I'm not going to fret about it.

Ian.

Very wise Ian, although still not tempted by Centrica's >9% I see?

I think I'll be sticking to FTSE100 from here on. Imperial Brands was a (small) recent new addition for me and will be drip fed for the rest of the year I think. I have enough RDSB, VOD already and am avoiding SSE, CNA for the rest of the year. I would like to get hold of more JMAT, SGE though they've been great dividend payers for me over the years. Decisions, decisions.

[idpickering]

If I may interject moorfield, for me, I'm going to remain focused on buying those great yields on offer right now, concentrating on topping up my HYP faves such as Admiral Group, Imperial Brands, ITV, MARS, BT Group, and Vodafone and the like. I'm trying to not be distracted by 'recent event syndrome', and am concentrating on the long term, much like we all should. What's going to happen tomorrow, next week, next year? I've no idea, so I'm not going to fret about it.

Ian.

Very wise Ian, although still not tempted by Centrica's >9% I see?

I think I'll be sticking to FTSE100 from here on. Imperial Brands was a (small) recent new addition for me and will be drip fed for the rest of the year I think. I have enough RDSB, VOD already and am avoiding SSE, CNA for the rest of the year.

Thanks for your reply moorfield. I don't hold Centrica any more, and am not tempted by that extreme yield either. I have enough of GSK, AZN, BATS, NG., RIO, and BLT. IMB are very interesting and I can't put my finger on exactly why they're on a downward spiral right now. I am 'fully invested' in them, as in monies spent, but I can see me buying more to be honest. I only have MARS from the lower index now, and that's how my HYP is going to stay. At the minute my account is set up for top ups of ITV and Admiral Group for next month, but in this fickle market I will decide nearer the time.

Ian.