5 Years a HYPer!
Posted: February 9th, 2019, 6:06 pm
This is an update of my HYP, on the 5th anniversary of the 1st purchase on 7th Feb 2014.
I thought after 5 years, I ought to share my views on HYP, the lessons I have learnt, as well as report on progress to date. It has been an interesting journey so far, and before I start, I would like to pay tribute to pyad, and those (too many to mention) on TMF and TLF for educating me in this method of investment. Also to IAAG and kiloran for their HYPTUSS spreadsheet.
HYP Context
I retired in December 2013 at age 58, and I am very fortunate in that my DB pension meets all my basic living needs, so any income from my HYP can be spent on luxuries, or re-invested back into the HYP.
At the start, I had a number of old cash ISA’s languishing in low interest accounts, a lump sum from my pension scheme, and an inherited holding in GlaxoSmithKline, so from this, I decided to start a HYP. I am not a long-term HYP builder, and purchased the first 15 shares in the first month (Feb/Mar 2014), and this initial investment constitutes 66% of the HYP income units held today, the other 34% being from re-invested dividends and a small amount of additional capital added over the subsequent 5 years.
I have found my spending needs have been lower than expected, so most dividends have been re-invested, but some have been withdrawn for holidays and house renovation. I don’t expect to invest any significant new capital from now on, and I also expect to withdraw a higher proportion of dividends, at least until my state pension kicks in at 66 (4 years to go).
Not all my initial purchases could be ISA wrapped, so I have utilised the ‘Bed and ISA’ approach to gradually transfer all my HYP into an ISA, utilising each year’s allowance. I finally achieved 100% ISA cover last year. This was an important goal, as the new dividend tax has come in, and my tax situation may also change when the state pension kicks in.
HYP is by no means my only investment – I also have a high income-generating IT portfolio, and index trackers. The HYP forms about 20% of my investments, the IT’s another 20% and the rest is trackers. I will be comparing HYP v IT’s on another day, on another board!
HYP Current Status
My HYP currently looks like this:
Yield, is current, not forecast (i.e. based on last 12 months dividends received, including specials, and today's share price). Current yield for the HYP is 5.8% overall. 20 shares in total, in 16 sectors – more or less a classic pyadic HYP. Capita is my most recent, and only real problem!
HYP Performance
As I withdraw some dividends, I track performance by unitisation of the HYP, using income units. Thus, income per unit, and unit price give an indication of income and capital performance.
For income, the 5-year performance is as follows:
It all looks OK. The 8.5% increase in Year 2 is a bit flattering, as there is a lot of dividend drag in Year 1, but since then income per unit has matched CPI inflation. (I use CPI rather than RPI as it seems to better model my actual spending). I have included specials, as I seem to get one each year on average – long may they continue!
I have had 8 dividend cutters along the way – Centrica, Sainsbury’s, BHP, Amec, Pearson, Galliford Try, StageCoach and Capita (100%!). Not sure if I am unlucky, a serial yield chaser or something else, but I am re-assured the income per unit continues to flow and grow.
For capital, the 5-year performance is as follows:
Overall, over 5 years, HYP unit price has fallen nearly 10% (mostly in Year 4), whereas the FTSE AS has risen 7%. Not great, but given this is an income strategy, capital should be secondary. I try not to worry about this too much!
HYP Activity
I am not a tinkerer by nature (i.e. confident purchaser, timid seller), so activity has been mainly top-ups, but I have also sold shares during Bed and ISA transactions, where I see a better alternative. Activity is summarised as follows:
There have been several corporate actions over the 5 years, affecting Amlin, Amec, National Grid, BHP and ICAP, rights issues from Galliford Try and Capita, and of course Carillion went bust! They are a fact of life in running a HYP.
Lessons Learned
So over 5 years of investing in a HYP, what have I learnt? Here are a few lessons:
• Don’t invest in the Support sector! I have had my fingers badly burnt in Capita and Carillion.
• Stick to High market cap companies (Eg >£5000m). Most of my failures have been in FTSE 250 companies.
• Add additional checks before purchasing – especially free cash flow, and excessive shorting to reduce the risk of dividend cutters.
• Monitor the HYP, but don’t obsess over it. Check capital value, but not too often. Log dividends received. Update unitisation regularly (I do it monthly, and at the point of a sale or purchase)
Overall, I intend to stick with HYP, at least until I draw my state pension in 4 years’ time. At that point, I may switch entirely to IT’s - but the jury is still out.
On the other hand, HYP is fun! I do enjoy reading the blogs and researching my next top-up, so I may continue just for this!
Thanks for reading if you got this far, and I would be interested in any comments.
I thought after 5 years, I ought to share my views on HYP, the lessons I have learnt, as well as report on progress to date. It has been an interesting journey so far, and before I start, I would like to pay tribute to pyad, and those (too many to mention) on TMF and TLF for educating me in this method of investment. Also to IAAG and kiloran for their HYPTUSS spreadsheet.
HYP Context
I retired in December 2013 at age 58, and I am very fortunate in that my DB pension meets all my basic living needs, so any income from my HYP can be spent on luxuries, or re-invested back into the HYP.
At the start, I had a number of old cash ISA’s languishing in low interest accounts, a lump sum from my pension scheme, and an inherited holding in GlaxoSmithKline, so from this, I decided to start a HYP. I am not a long-term HYP builder, and purchased the first 15 shares in the first month (Feb/Mar 2014), and this initial investment constitutes 66% of the HYP income units held today, the other 34% being from re-invested dividends and a small amount of additional capital added over the subsequent 5 years.
I have found my spending needs have been lower than expected, so most dividends have been re-invested, but some have been withdrawn for holidays and house renovation. I don’t expect to invest any significant new capital from now on, and I also expect to withdraw a higher proportion of dividends, at least until my state pension kicks in at 66 (4 years to go).
Not all my initial purchases could be ISA wrapped, so I have utilised the ‘Bed and ISA’ approach to gradually transfer all my HYP into an ISA, utilising each year’s allowance. I finally achieved 100% ISA cover last year. This was an important goal, as the new dividend tax has come in, and my tax situation may also change when the state pension kicks in.
HYP is by no means my only investment – I also have a high income-generating IT portfolio, and index trackers. The HYP forms about 20% of my investments, the IT’s another 20% and the rest is trackers. I will be comparing HYP v IT’s on another day, on another board!
HYP Current Status
My HYP currently looks like this:
Yield, is current, not forecast (i.e. based on last 12 months dividends received, including specials, and today's share price). Current yield for the HYP is 5.8% overall. 20 shares in total, in 16 sectors – more or less a classic pyadic HYP. Capita is my most recent, and only real problem!
HYP Performance
As I withdraw some dividends, I track performance by unitisation of the HYP, using income units. Thus, income per unit, and unit price give an indication of income and capital performance.
For income, the 5-year performance is as follows:
It all looks OK. The 8.5% increase in Year 2 is a bit flattering, as there is a lot of dividend drag in Year 1, but since then income per unit has matched CPI inflation. (I use CPI rather than RPI as it seems to better model my actual spending). I have included specials, as I seem to get one each year on average – long may they continue!
I have had 8 dividend cutters along the way – Centrica, Sainsbury’s, BHP, Amec, Pearson, Galliford Try, StageCoach and Capita (100%!). Not sure if I am unlucky, a serial yield chaser or something else, but I am re-assured the income per unit continues to flow and grow.
For capital, the 5-year performance is as follows:
Overall, over 5 years, HYP unit price has fallen nearly 10% (mostly in Year 4), whereas the FTSE AS has risen 7%. Not great, but given this is an income strategy, capital should be secondary. I try not to worry about this too much!
HYP Activity
I am not a tinkerer by nature (i.e. confident purchaser, timid seller), so activity has been mainly top-ups, but I have also sold shares during Bed and ISA transactions, where I see a better alternative. Activity is summarised as follows:
There have been several corporate actions over the 5 years, affecting Amlin, Amec, National Grid, BHP and ICAP, rights issues from Galliford Try and Capita, and of course Carillion went bust! They are a fact of life in running a HYP.
Lessons Learned
So over 5 years of investing in a HYP, what have I learnt? Here are a few lessons:
• Don’t invest in the Support sector! I have had my fingers badly burnt in Capita and Carillion.
• Stick to High market cap companies (Eg >£5000m). Most of my failures have been in FTSE 250 companies.
• Add additional checks before purchasing – especially free cash flow, and excessive shorting to reduce the risk of dividend cutters.
• Monitor the HYP, but don’t obsess over it. Check capital value, but not too often. Log dividends received. Update unitisation regularly (I do it monthly, and at the point of a sale or purchase)
Overall, I intend to stick with HYP, at least until I draw my state pension in 4 years’ time. At that point, I may switch entirely to IT’s - but the jury is still out.
On the other hand, HYP is fun! I do enjoy reading the blogs and researching my next top-up, so I may continue just for this!
Thanks for reading if you got this far, and I would be interested in any comments.