OLTB's HYP - 2nd Anniversary

[OLTB]

Afternoon everyone - the time seems to have flown by and with my payments from Vodafone, United Utilities and British Land being received yesterday, I believe I have no further HYP income for August (my end of year). I have listed below the HYP position and income target to income received. I have slightly amended the figures since last year to show a Direct Debit target income for my fixed direct debits (£770/month) along with an Income Target to cover direct debits and half of required income for other costs (food, fuel etc.). A great aim is to have my State Pension fund annual holidays (a comment I picked up from TJH which sounded very nice to me!). I also slightly adjusted my inflation forecast upwards following a comment from Ozyu who suggested using RPI as opposed to CPI as that would be more realistic. When I ran the amended figures, that pesky extra 1% or so really compounds away doesn't it! It was quite an eye-opener as 1% doesn't sound much, but looking at the bare figures, it makes a huge difference. It also showed why re-investing dividends really helps over the longer term as they in turn compound up.

I have diligently reinvested dividends in those holdings that paid the highest yield that were below the average value of the HYP constituents (once dividends had built up to a worthwhile figure to allow for trading costs (about £1k)).

My plan is to consider slowing down work-wise at about 62 (13 years from now) so my target income is linked to this date, although what I might do is use my auto-enrolment scheme through my employer at 62 to live off and run this down to zero over 5 years to coincide with my State Pension starting and give my HYP a little more time to grow.

Capital wise, the HYP has increased by about 3.45% helped mainly by IG Group, Sky and Tui (just if anyone's interested of course )

Cumulative dividends received to Original Cost is just a figure of interest to me so I know when dividends have exceeded capital invested (it'll be a nice feeling!).



Here is my income table as mentioned above:



So, seems to be going ok and will keep re-investing dividends when I can to try and get to where I need to be.

I am also a sector short after Carillion disappeared so will be adding either Standard Life Aberdeen (SLA), or WPP as I do not have exposure in these sectors currently (fund managers or advertising).

Any comments welcome!

Cheers, OLTB.

[Itsallaguess]

It also showed why re-investing dividends really helps over the longer term as they in turn compound up.

I've been in a similar position to you for a few years now OLTB, and being a bit of a spreadsheet-junkie too, I also track the sorts of backwards-looking and forwards-looking data that you're keeping note of yourself.

It's really surprising how quickly things snowball with regards to the power of compounding, especially for those of us still working and both injecting new capital into our portfolios, at the same time as we're allowing dividend-income to also feed-back in and further compound our returns even more. If those twin-injections are accompanied by small, but regular real-world dividend-increases from the majority of our HYP components, then things can ratchet up considerably swifty over the medium to long term.

It's been interesting seeing your progress, and we can see that the £5534 dividend income from your last 12 months dividends might well deliver a return, all on it's own, of around £250 next year, if it's invested into something with a yield of around the 4.5%, which probably seems at the low-to-middling end of the HYP-yield spectrum at the moment and so shouldn't be too difficult to achieve.

I'm like you, in that I think it's great to have relatively long-term financial goals, and I really do enjoy tracking my progress towards them. I find it immensely motivating, both from an investment point of view and also regarding work too, given that large parts of my newly-injected capital is being delivered from my current job, even if (as you'll know only too well....) some of the data that's required to really nail-down the plotted-progress has relatively long lead-times...

A very interesting post.

Cheers,

Itsallaguess

[idpickering]

What an excellent post OLTB, and duly rec'd. Thanks for the update. You and your HYP seem to be progressing well, and your HYP aims are sound IMHO. That's a nice looking HYP, but I must admit I favour a dew more holdings than you. Remember though, just because Carillion has gone, you're not duty bound to rush to fill the gap. However, to do seems to be your want. I hold both Standard Life Aberdeen and WPP, and think they're worthwhile additions. I'm going to top up my SLA holdings soon I think.

Cheers,

Ian.

[Dod101]

Thanks OLTB. I do not understand the comment 'I am also one sector short'. Why only one? What makes you think you need another sector? Shares are what you are investing in not sectors.

If I were you I would look to Schroders rather than SLA or maybe Chesnara and/or Phoenix Group Holdings.

Dod

[tjh290633]

A comment that I have made in the past is the way that dividend income accelerates. The particular model was a unit-linked endowment policy, started in 1968 and maturing at the end of 1997. Because of LAPR, the amount invested was £5 a month, but I only paid about £4.75, which also covered the fees for the life cover.

I am sitting in a cafe at the moment, so cannot look at my records, but from memory the dividends exceeded the premia within 10 years and after 29 years they were about six times the premia.

Had it not been an endowment, and had it not had tax relief, the odds are that I would have increased the amount that I was subscribing. As it is, it demonstrates the powerful effect of reinvesting dividends.

TJH

[OLTB]

Thanks OLTB. I do not understand the comment 'I am also one sector short'. Why only one? What makes you think you need another sector? Shares are what you are investing in not sectors.

If I were you I would look to Schroders rather than SLA or maybe Chesnara and/or Phoenix Group Holdings.

Dod

Thanks Dod - sorry, what I should have said was I am one sector short of my original HYP as Carillion went under. Yes, I know that Schroders and Chesnara/Phoenix are companies you like (their culture - which I also understand is important) and will be on the radar. I prefer the larger caps but will look at these as they are in similar businesses to SLA.

Thanks again, cheers, OLTB.

[Dod101]

OLTB

Not trying to be clever! Schroders is nearer to SLA than Chesnara or Phoenix which recently have both become more exposed to the active life insurance sector and are no longer pure zombie insurers. Schroders is a very conservative fund manager with almost 50% of the voting shares held by the Schroder family. To me that gives it an edge.

I would not worry about Support Services as a sector.

Dod

[monabri]

I set up a model to estimate future divis based on assumptions such as (1) for the HYP as a whole, what do I hope the overall increase in annual dividends will be (5% - entered as 1.05 in the grey box) and what extra yield can I get be reinvesting the new money (5% - entered as 0.05)?

I also added the "facility" to add a fixed sum of money every year (currently set at zero - see grey box).

Q1: Can I expect to get 5% a year increase in dividends (as an average) from my HYP (difficult to answer as it depends which companies have been chosen....this opens another question - which companies might increase their dividend yearly.?)

Q2: Can I reliably reinvest the dividends at the assumed rate of (in this case, as shown in the model) of 5%?


To Q1, I looked at dividenddata and - whilst no guide to the future - the companies that appeared attractive from their compound annual growth rate in dividends were

GFRD ITV MCRO SDRC LGEN BT STJ IAG DLG
IMB PTEC LLOYD SLA

One might have to preclude the likes of STJ and IAG as their yields are "sub HYPacceptable" !

However, OLTB, based on assumptions of 5% increase in annual dividends for the HYP as a whole and then reinvesting all divis at 5%, I come up with an annual dividend of a tad under £20k by 2031 (based on no new money added)


Here's the Excel model



Here's the result of "5%" annual increase in HYP portfolio dividend as a whole and 5% divis for all reinvested.




I think you would need to add an extra £4k pa to reach the target desired incomes.

[ZipserSir]

If you don't mind doubling up in sectors - like BP and Shell - then you might consider AstraZeneca, BATS and UU before adding more sectors.

If you still want to add more sectors, you could also consider Royal Mail and Direct Line.

I hold all of the above, plus VOD, WPP and SLA among others.

[OLTB]

I set up a model to estimate future divis based on assumptions such as (1) for the HYP as a whole, what do I hope the overall increase in annual dividends will be (5% - entered as 1.05 in the grey box) and what extra yield can I get be reinvesting the new money (5% - entered as 0.05)?

I also added the "facility" to add a fixed sum of money every year (currently set at zero - see grey box).

Q1: Can I expect to get 5% a year increase in dividends (as an average) from my HYP (difficult to answer as it depends which companies have been chosen....this opens another question - which companies might increase their dividend yearly.?)

Q2: Can I reliably reinvest the dividends at the assumed rate of (in this case, as shown in the model) of 5%?


To Q1, I looked at dividenddata and - whilst no guide to the future - the companies that appeared attractive from their compound annual growth rate in dividends were

GFRD ITV MCRO SDRC LGEN BT STJ IAG DLG
IMB PTEC LLOYD SLA

One might have to preclude the likes of STJ and IAG as their yields are "sub HYPacceptable" !

However, OLTB, based on assumptions of 5% increase in annual dividends for the HYP as a whole and then reinvesting all divis at 5%, I come up with an annual dividend of a tad under £20k by 2031 (based on no new money added)


Here's the Excel model



Here's the result of "5%" annual increase in HYP portfolio dividend as a whole and 5% divis for all reinvested.




I think you would need to add an extra £4k pa to reach the target desired incomes.

Wow monabri - that’s fantastic, thank you so much! I am fortunate in that I have a little additional capital to invest and will be a full extra HYP holding (the SLA/WPP comment in my OP). This will be a little under two years worth of the £4K figure you mention so we’re off to a flyer!

Thanks again, it really is appreciated. Cheers, OLTB.

[Itsallaguess]

It also showed why re-investing dividends really helps over the longer term as they in turn compound up.

I remember looking a while back, to see what a HYP might look like that self-generated an income-increase of £1000 internally, from one year to the next....

That is to say, what might a portfolio need to be doing without needing any new capital at all, but where re-invested dividends, and perhaps a small increase in existing dividend pay-outs each year, might self-generate a year-on-year increase of £1000 of income.

Some figures -

Example HYP value = £280,000

Assumed HYP overall yield = 4.5%

Dividends in Year 1 = £280,000 * 4.5% = £12,600 (re-invested at the end of Year 1)

Assumed internal HYP 'blended' dividend-payout increase for Year 2 of 3.44%

Year 1 re-invested dividends generate £12,600 * 4.5% = £567 of extra income in Year 2

Year 2 dividends increase by £12,600 * 3.44% over the Year 1 payouts = £433.44

Total internally generated income increase for Year 2 = £567 + £433.44 = £1000.44

Cheers,

Itsallaguess

[Dod101]

Hi Monabri

I do not pretend to understand your Excel spreadsheet but it is very impressive (what it can do that is) I am also interested in your list of the companies that have generated a 5% increase in the dividend (or more!) I will need to check these because I do not quite understand all the EPIC codes but I will be interested to take a look and see. I hold some but not very many I think.

So thanks for all of that, you clever people.

Dod

[Gengulphus]

I am also a sector short after Carillion disappeared so will be adding either Standard Life Aberdeen (SLA), or WPP as I do not have exposure in these sectors currently (fund managers or advertising).

With 5.7% of your portfolio in HSBC (Banks), 6.4% in Legal & General (Life Insurance) and 8.2% in IG Group (Financial Services), you're a bit over 20% in financials. I personally wouldn't add another financial at the moment - I've made the mistake of going significantly overweight in them in the past (a bit over 30% in early 2008...) and 20% is now my limit! (Not one that I let force me to sell, just one that stops me from buying more.)

Can't say that I fancy WPP all that much either. I'd have to dig into Sky's accounts to make certain (and don't have time right now - I'm on a short cooling-off break from the Cambridge Folk Festival at present...), but I suspect selling advertising may well be a large fraction of its revenues... If so, I'd prefer a bigger distinction from it.

Halfords (HFD) might be worth a look - it's got the basic qualifications of a high yield (5.6% historical) and FTSE 350 membership, and is in a sector you don't have anything in or close to. Haven't done any further checking, though - I'm only saying it might be worth a look!

Gengulphus

[monabri]

Hi Dod,
I've updated the list, I should have put more than the ticker for the companies not so often discussed.

GFRD - Galliford Try
ITV .....
MCRO..Micro Focus International ( software,)
SDRC....Schroders non-voting
LGEN ....
BT .....
STJ... St. James's Place (current yield might be a little low.)
IAG ... International Airlines Group....I think you are not a fan
DLG..Direct Line Group ( "Winston Wolfe".)
IMB ....
PTEC...Playtech ..software
LLOYD
SLA..Aberdeen Asset Management ( ok, Standard Life Aberdeen!)

And I should also add in WPP which I forgot!

To assess the compound annual growth rate in dividends, I used the figures presented in "Dividend Data"....links below.

Generally

https://www.dividenddata.co.uk/dividend ... et=ftse100

Then I sort based on Yield (the first press of the sort button will order from low to high so a second press will be required).

Specifically ( Imperial Brands...."Imps") as an example

https://www.dividenddata.co.uk/dividend ... y?epic=IMB

Of course, past performance no guide etc.....


I should also mention that the spreadsheet doesn't allow for dividend reinvestment timing ( you don't get the full annual Divi immediately) so it is a little optimistic. Hopefully though it gives a reasonable idea of the level of dividend ...and bearing in mind the assumptions of annual increases and whether one can achieve a certain yield when reinvesting the dividends.

[monabri]

Comment on Halfords.
Current yield is 5.6%. The share has just gone XD for the Final Divi on 26th July. The share price has fallen quite a bit over the last few years...(560p in August 15 to 322p current). My concern would be that a lot of their " stuff" can be bought online and delivered to the doorstep. They do offer basic car and bike servicing but will this be a big enough contribution to profits going forward ? However, the increase in dividends has been quite low in recent years.

https://www.dividenddata.co.uk/dividend ... y?epic=HFD

The Divi is reasonably well covered ....but it's "high street"..can we expect/ hope for growth?

[OLTB]

Thanks all - Gengulphus is quite right about the Financials sector and owing to his own experience In having too much exposure in one sector, I should look elsewhere. As Dod also pointed out, I don’t have to choose another sector - I may just stay with what I have. Then there’s the added issue of what to do when the Sky buy-out completes!... I feel some Pickering is needed...

Cheers, OLTB.

[monabri]

Terry Smith points out that a good company has a high ROCE. Long term returns are in proportion to ROCE less cost of capital.
Morning star has Halfords ROCE at 12%, which is not bad, but not really compelling. I suspect as a retailer it has a slightly elevated cost of capital, though I don't have the accounts to hand.

I went a looking for the ROCE at Morning Star but couldn't see it reported directly.

It made me 'go a looking' elsewhere (The Telegraph) which adds a second source of info (and it too reports just over 12%). Is Mr Smith looking for over 15%? (it would be nice to have a database/reference to historical ROCE figures so trends could be assessed rather than one off figures which might be skewed in any particular year)

https://shares.telegraph.co.uk/fundamentals/?epic=HFD

(I suspect few HYP candidates will show a high ROCE, possible exception being BATS and Rio (at the moment) + housebuilders but are on the top of the cycle ? )

[monabri]

He is obviously looking at more than ROCE otherwise he'd just bung money into CTY ( ROCE 28%) or Henderson Far East (ROCE 85%).

Rapidly veering OT now though!

[idpickering]

Comment on Halfords.
Current yield is 5.6%. The share has just gone XD for the Final Divi on 26th July. The share price has fallen quite a bit over the last few years...(560p in August 15 to 322p current). My concern would be that a lot of their " stuff" can be bought online and delivered to the doorstep. They do offer basic car and bike servicing but will this be a big enough contribution to profits going forward ? However, the increase in dividends has been quite low in recent years.

https://www.dividenddata.co.uk/dividend ... y?epic=HFD

The Divi is reasonably well covered ....but it's "high street"..can we expect/ hope for growth?

I'm shy of 'niche' type retail shares, having held Dixons in the past, so would tread carefully (if at all) re Halfords. My only retail holding is Sainsbury.

Ian.

[Breelander]

Comment on Halfords.... The share price has fallen quite a bit over the last few years...(560p in August 15 to 322p current). My concern would be that a lot of their " stuff" can be bought online and delivered to the doorstep....

....but it's "high street"..can we expect/ hope for growth?

I'm shy of 'niche' type retail shares, having held Dixons in the past, so would tread carefully (if at all) re Halfords...

I've held HFD since 2011. The share price has risen quite a bit over the years too, 197p in July 2012 when I last topped up.

HFD are 'online' too - 'a lot of their " stuff" can be bought online and delivered to the doorstep' from Halford themselves.

As for their 'niche' it seems to me to be a well balanced one - in times of plenty they sell a lot of automotive 'bling', when times are bad they sell more of the basics to service your car and keep it running on a tight budget.

Being in the FT250 their market cap is too low for some tastes at around £670m (but just inside my £500m lower limit). I'm happy to continue holding, though I can understand those who would not want to.