Investing in 7% plus HY shares

[moorfield]

Thanks for your reply moorfield. I don't hold Centrica any more, and am not tempted by that extreme yield either.

It's interesting Ian you've described that as an "extreme" yield - it suggests you perhaps have a multiple of FTSE100 in mind that you won't exceed? - as has been discussed earlier up the thread.

Or you just don't like the (gassy) smell of Centrica the company? - in which case you might buy into a 9% yield elsewhere?

[Walrus]

Thanks for your reply moorfield. I don't hold Centrica any more, and am not tempted by that extreme yield either.

It's interesting Ian you've described that as an "extreme" yield - it suggests you perhaps have a multiple of FTSE100 in mind that you won't exceed? - as has been discussed earlier up the thread.

Or you just don't like the (gassy) smell of Centrica the company? - in which case you might buy into a 9% yield

Personally I think there is severe pressure on the sustainability of that Centrica dividend for a multitude of reasons.

[idpickering]

Thanks for your reply moorfield. I don't hold Centrica any more, and am not tempted by that extreme yield either.

It's interesting Ian you've described that as an "extreme" yield - it suggests you perhaps have a multiple of FTSE100 in mind that you won't exceed? - as has been discussed earlier up the thread.

Or you just don't like the (gassy) smell of Centrica the company? - in which case you might buy into a 9% yield elsewhere?

Hi moorfield. I think Walrus put it aptly with. His comment Regarding there being numerous reasons to side step Centrica, not including the excessive yield purportedly on offer. If it looks to good to be true springs to mind. I would ignore any such share.

Ian.

[NeilW]

If you're going for very high yield you need to make sure the debt is under control, the pension is under control and that earnings are growing.

The higher the yield, the harder the filter.

[kempiejon]

If you're going for very high yield you need to make sure the debt is under control, the pension is under control and that earnings are growing.

The higher the yield, the harder the filter.

Or we should always apply the hardest filters, pick only the highest yield in each sector that fulfils safety criteria. Your criteria may include things like pension, debt, cover, earnings, that coupled with portfolio diversity will hopefully protect our growing portfolio income long term.

[Lootman]

If you're going for very high yield you need to make sure the debt is under control, the pension is under control and that earnings are growing. The higher the yield, the harder the filter.

Or we should always apply the hardest filters, pick only the highest yield in each sector that fulfils safety criteria. Your criteria may include things like pension, debt, cover, earnings, that coupled with portfolio diversity will hopefully protect our growing portfolio income long term.

Except that one can reasonably argue that the yield is the price that the market confers upon all those factors like pension, debt, cover etc.

In which case it really doesn't matter whether you pick the lowest yield, the highest yield or the average yield. That yield is a reflection of the share price, which in turn bakes in what everyone knows about those factors.

To think otherwise is to assume that you know what other market participants do not know. Do you truly believe you have that edge?

[idpickering]

If you're going for very high yield you need to make sure the debt is under control, the pension is under control and that earnings are growing.

The higher the yield, the harder the filter.

Or we should always apply the hardest filters, pick only the highest yield in each sector that fulfils safety criteria. Your criteria may include things like pension, debt, cover, earnings, that coupled with portfolio diversity will hopefully protect our growing portfolio income long term.

Quite right kempiejon. As Stephen Bland put it;

Stick to FTSE 100 companies and spread the holdings around sectors. I would do it by ranking the shares in the index by descending yield, then work down the list choosing one from each sector, but doing a bit of research on each potential candidate. You don't want excessive debt, for example. Another useful clue is to pick only those companies that have increased dividends regularly over the last few years.

https://web.archive.org/web/20140219210 ... 01106c.htm

[moorfield]

Stick to FTSE 100 companies and spread the holdings around sectors. I would do it by ranking the shares in the index by descending yield, then work down the list choosing one from each sector, but doing a bit of research on each potential candidate. You don't want excessive debt, for example. Another useful clue is to pick only those companies that have increased dividends regularly over the last few years.

https://web.archive.org/web/20140219210 ... 01106c.htm

I wonder sometimes if that might be the wrong way round. How about starting at the lowest yield above FTSE100, 4.2%ish, and ranking shares by ascending yield, and working up the list?

[idpickering]

Stick to FTSE 100 companies and spread the holdings around sectors. I would do it by ranking the shares in the index by descending yield, then work down the list choosing one from each sector, but doing a bit of research on each potential candidate. You don't want excessive debt, for example. Another useful clue is to pick only those companies that have increased dividends regularly over the last few years.

https://web.archive.org/web/20140219210 ... 01106c.htm

I wonder sometimes if that might be the wrong way round. How about starting at the lowest yield above FTSE100, 4.2%ish, and ranking shares by ascending yield, and working up the list?

That could be a way to go certainly moorfield. Your own yield comfort limits, higher and lower, would still be the same though I imagine. For me, I have Unilever at the bottom end and the likes of Imperial Brands at the other. I would shy away from a yield higher than 7.5%, and my lower limit is 3.3% ish.

Ian.

[kempiejon]

If you're going for very high yield you need to make sure the debt is under control, the pension is under control and that earnings are growing. The higher the yield, the harder the filter.

Or we should always apply the hardest filters, pick only the highest yield in each sector that fulfils safety criteria. Your criteria may include things like pension, debt, cover, earnings, that coupled with portfolio diversity will hopefully protect our growing portfolio income long term.

Except that one can reasonably argue that the yield is the price that the market confers upon all those factors like pension, debt, cover etc.

In which case it really doesn't matter whether you pick the lowest yield, the highest yield or the average yield. That yield is a reflection of the share price, which in turn bakes in what everyone knows about those factors.

To think otherwise is to assume that you know what other market participants do not know. Do you truly believe you have that edge?

I pick the higher yielders to maximise the income, but I would not reduce my safety factors for lower yield candidates when the market prices them as such, if a lower yielder failed my cover, debt, increasing dividends safety factors it's not a likely to be a pick, of course I'll apply the criteria to shares in highest yield order first in any sector so might not even investigate the lower yielder.

[Arborbridge]

https://web.archive.org/web/20140219210 ... 01106c.htm

I wonder sometimes if that might be the wrong way round. How about starting at the lowest yield above FTSE100, 4.2%ish, and ranking shares by ascending yield, and working up the list?

That could be a way to go certainly moorfield. Your own yield comfort limits, higher and lower, would still be the same though I imagine. For me, I have Unilever at the bottom end and the likes of Imperial Brands at the other. I would shy away from a yield higher than 7.5%, and my lower limit is 3.3% ish.

Ian.

"How about starting at the lowest yield above FTSE100, 4.2%ish, and ranking shares by ascending yield, and working up the list?"

It's up to you, but you would not be following the described method for making HYP picks. To start by looking at the lower yielders first, would tend to reduce one's overall yield, and to a HYPer, that would seem a rather off the wall idea.

If you are worried about yield, just set an upper limit where you are happy and ignore those above. Still work down the list from your highest tolerable yield to the lowest. I don't see the need to reverse the ranking.

Arb.

[idpickering]

I wonder sometimes if that might be the wrong way round. How about starting at the lowest yield above FTSE100, 4.2%ish, and ranking shares by ascending yield, and working up the list?

That could be a way to go certainly moorfield. Your own yield comfort limits, higher and lower, would still be the same though I imagine. For me, I have Unilever at the bottom end and the likes of Imperial Brands at the other. I would shy away from a yield higher than 7.5%, and my lower limit is 3.3% ish.

Ian.

"How about starting at the lowest yield above FTSE100, 4.2%ish, and ranking shares by ascending yield, and working up the list?"

It's up to you, but you would not be following the described method for making HYP picks. To start by looking at the lower yielders first, would tend to reduce one's overall yield, and to a HYPer, that would seem a rather off the wall idea.

If you are worried about yield, just set an upper limit where you are happy and ignore those above. Still work down the list from your highest tolerable yield to the lowest. I don't see the need to reverse the ranking.

Arb.

I agree Arb. I must admit that I think moorfield was commenting, tongue in cheek so to speak.

Ian.

[Walrus]

Ultimately for me personally I'm looking for companies with a high yield where I consider the dividend to be secure. I would much rather a dividend if 5 percent that I consider secure than a dividend of 10 percent with a 50% delta of being paid. I appreciate that over a portfolio the two should average out but I prefer to invest in the former, consider it the 'gut' or 'being able to sleep at night test'

That being said I'm still watching everything like a hawk

[Arborbridge]

Ultimately for me personally I'm looking for companies with a high yield where I consider the dividend to be secure. I would much rather a dividend if 5 percent that I consider secure than a dividend of 10 percent with a 50% delta of being paid. I appreciate that over a portfolio the two should average out but I prefer to invest in the former, consider it the 'gut' or 'being able to sleep at night test'

That being said I'm still watching everything like a hawk

We are all after the bold bit! And that is hopefully what the safe factors in HYP amount to - although there's nothing against adding extra ones if it makes us happy

[moorfield]

It's up to you, but you would not be following the described method for making HYP picks. To start by looking at the lower yielders first, would tend to reduce one's overall yield, and to a HYPer, that would seem a rather off the wall idea.

If you are worried about yield, just set an upper limit where you are happy and ignore those above. Still work down the list from your highest tolerable yield to the lowest. I don't see the need to reverse the ranking.

Arb.

I agree Arb. I must admit that I think moorfield was commenting, tongue in cheek so to speak.

Ian.

No it was a serious point! - you should both be familiar enough with my ramblings now to know that I like to test the boundaries of the orthodox thinking here, and if that helps people like the thread OP (Walrus) improve management of the various risks placed on their hard-earned in some small way, then so much the better.


So which way do you think I selected this XV - up or down ?


Source: https://moneyweek.com/prices-news-chart ... ce-tables/
Overall yield, 5.8%


The point here is that I simply didn't even get as far as or need to picker about Centrica (CNA) or any other extreme high yielders at all. Starting the other way they would have been first on my pickering list! Or put another way, the first opportunity for (potentially) misallocating capital ...

[idpickering]

It's up to you, but you would not be following the described method for making HYP picks. To start by looking at the lower yielders first, would tend to reduce one's overall yield, and to a HYPer, that would seem a rather off the wall idea.

If you are worried about yield, just set an upper limit where you are happy and ignore those above. Still work down the list from your highest tolerable yield to the lowest. I don't see the need to reverse the ranking.

Arb.

I agree Arb. I must admit that I think moorfield was commenting, tongue in cheek so to speak.

Ian.

No it was a serious point! - you should both be familiar enough with my ramblings now to know that I like to test the boundaries of the orthodox thinking here, and if that helps people like the thread OP (Walrus) improve management of the various risks placed on their hard-earned in some small way, then so much the better.


So which way do you think I selected this XV - up or down ?


Source: https://moneyweek.com/prices-news-chart ... ce-tables/
Overall yield, 5.8%


The point here is that I simply didn't even get as far as or need to picker about Centrica (CNA) or any other extreme high yielders at all. Starting the other way they would have been first on my pickering list! Or put another way, the first opportunity for misallocating capital ...

Ok moorfield, my apologise. I see where you're coming from with looking at it from the other direction. There is no need to reach the highest (danger zone (thanks Luni) at all to achieve a decent overall yield. In fact that is not a bad selection at all. Furthermore, I'd have no issue with selecting them all.

Ian.

[kempiejon]

moorfield,

An interesting contrarian to the HYP principal that looks like at portfolio level it gives a good income return. Could you expand why you'd prefer lower yielding BATS over IMB for example or why the pick was BP the higher yielder rather than Shell the lower?
If one assumes the very highest yieled is bad without checking other metrics we could miss out. I added to my oilies at 10% forecast just a year and a bit back and have collected other shares when they were very high yielders and I have managed to collect some historically mid/lower yielders at a maximum and I'm pleased to have done so. Provided the safety factors stack up why exclude on yield alone?

[westmoreland]

you just have to look at the levered free cash flow and compare it to the current dividend to see if it is sustainable.

also look at clear trends such as declining margins, rising debt, pension deficits, revenues, cyclicality.

capital intensity is also something to consider - inflation hurts firms with higher capital intensity much more.

i'd much rather have a 3-4% rising yield than a stagnant 6-7%.

[moorfield]

moorfield,
Could you expand why you'd prefer lower yielding BATS over IMB for example or why the pick was BP the higher yielder rather than Shell the lower?
If one assumes the very highest yieled is bad without checking other metrics we could miss out.

Of course, kempiejon. I cribbed that selection from another recent post/thread viewtopic.php?p=125585#p125585 where I commented that the other metric being checked was simply:

Trying out a different approach, I've selected a FTSE100 XV starting from the lowest yield above 4.2% (my current benchmark of "high yield"), and working up the list, replacing a share from the same sector if the higher yielder also has a higher market cap.

So working from low(FTSE100)->high yield, BATS is selected first but is not replaced by the higher yield/smaller market cap IMB from the Tobacco sector, whereas RDSB is selected first but is replaced by the higher yield/higher market cap BP. from the Oil & Gas sector (nb. according to the Moneyweek source I use but I do appreciate YMMV there and it probably doesn't handle the RDSA/RDSB split very well).


Source: https://moneyweek.com/prices-news-chart ... ce-tables/

[kempiejon]

Trying out a different approach, I've selected a FTSE100 XV starting from the lowest yield above 4.2% (my current benchmark of "high yield"), and working up the list, replacing a share from the same sector if the higher yielder also has a higher market cap.

Gotcha thank you. And so if there were 2 shares of the same market cap provided the yield is above that of the benchmark, a 4.3% yield is better than 4.4% yield and of course much better than a 5% etc. I'm not sure that higher is necessarily less sustainable or indicates a company in trouble more it's the weight of the market that pushes such yields around as a function of price.