OLTB's HYP - Topped up ITV and WPP

[OLTB]

Morning all

Yesterday I topped up ITV and WPP after having initially bought them using the proceeds from the SKY buyout by Comcast.The capital value of these holdings are now in-line with my other holdings in my HYP. The holdings that are now ripe for top-up are either VOD or IMB and fortunately these are uncontroversial holdings without much need for comment...

Cheers, OLTB.

[idpickering]

Morning all

Yesterday I topped up ITV and WPP after having initially bought them using the proceeds from the SKY buyout by Comcast.The capital value of these holdings are now in-line with my other holdings in my HYP. The holdings that are now ripe for top-up are either VOD or IMB and fortunately these are uncontroversial holdings without much need for comment...

Cheers, OLTB.

Thanks for sharing this OLTB. I hold WPP, now a 'full' holding, but dropped ITV some time ago. Any chance of seeing your full HYP again please? Always interesting to check out other's wares, and informative too.

Ian.

[OLTB]

Morning all

Yesterday I topped up ITV and WPP after having initially bought them using the proceeds from the SKY buyout by Comcast.The capital value of these holdings are now in-line with my other holdings in my HYP. The holdings that are now ripe for top-up are either VOD or IMB and fortunately these are uncontroversial holdings without much need for comment...

Cheers, OLTB.

Thanks for sharing this OLTB. I hold WPP, now a 'full' holding, but dropped ITV some time ago. Any chance of seeing your full HYP again please? Always interesting to check out other's wares, and informative too.

Ian.

Will do Ian - unfortunately work takes me away more and more from TLF so it'll have to be later on today.

Cheers, OLTB.

[OLTB]

Afternoon - here's the state of nation address for my HYP after my top-ups for both ITV and WPP:



Looking at the constituents that are now below HYP average capital value, these are (from the top of my list down):

HSBC (yield 6.10%)
SSE (yield 8.53%)
Vodafone (yield 6.03%)
BAE Systems (yield 4.56%)
Imperial Brands (yield 9.65%)
Persimmon (yield 12.43%)
British Land (yield 5.58%)
IG Group (yield 7.85%)
ITV (yield 7.10%)
WPP (yield 6.11%)

I must have cocked up during my previous top-up calculation as ITV and WPP are still ripe for top-ups! Thinking about it, I didn't calculate what the average HYP level would be after the top-up - bugger.

SI would dictate that I top-up Persimmon as it offers the highest yield, followed by Imperial Brands, then SSE etc.

An alternative option is that last month, I was lucky enough to have been paid a slug of cash from my employer as a pension contribution which is just enough to add a complete new additional holding. I wouldn't want to duplicate sectors or allocate any more financials or retail, or utilities which leads me to a potential new holding of Smith (DS) (SMDS) at a yield of 4.50%. Some recent comments on the boards have been that 'good enough' is better than highest dividend.

I could, of course, add to Merchants (which pays a higher yield and adds diversification) but saw in a post elsewhere that Merchants dividend increases aren't keeping up with CPI (let alone RPI), which is what I need the HYP to do.

Some extreme Pickering needed...

Cheers, OLTB.

[Gengulphus]

SI would dictate that I top-up Persimmon as it offers the highest yield, followed by Imperial Brands, then SSE etc.

If I assume that by SI, you mean "Strategic Ignorance", what strategic ignorance actually suggests is that you should ignore all opinions about what long-term futures the companies have, including your own. That has so little to do with what you say that I wonder whether you're using it as an abbreviation for something else...

I don't actually know of anything that dictates that you should top up shares in that order - the closest I know is the usual technique for trying to achieve the HYP aim of being invested in shares with high, sustainable yields, which is to consider the shares for purchase in order from the highest yield down. The considering is basically to look at whether you think the dividend is sustainable (and preferably growable) and only buy if you do (and that the purchase fits your HYP from the diversification point of view, but you've already done that by only looking at shares with below-average weightings). If you don't, move on to considering the next share. Doing the considering in that order is basically just a labour-saving technique - you could e.g. consider Imperial Brands first, but then you'd need to consider Persimmon as well regardless of your conclusion about the sustainability of the Imperial Brands dividend - but skipping the consideration of sustainability and simply buying regardless is not a good idea!

Probably you already know this and are just expressing what you do in an oversimplified way. But some readers here may be new and unfamiliar with what is good HYP practice, so that they get misled by the oversimplified wording, and also "just buy the highest yield first" is a favourite target of those who want to attack HYP strategies. So I think it's worth pointing the oversimplification out...

Gengulphus

[OLTB]

SI would dictate that I top-up Persimmon as it offers the highest yield, followed by Imperial Brands, then SSE etc.

If I assume that by SI, you mean "Strategic Ignorance", what strategic ignorance actually suggests is that you should ignore all opinions about what long-term futures the companies have, including your own. That has so little to do with what you say that I wonder whether you're using it as an abbreviation for something else...

I don't actually know of anything that dictates that you should top up shares in that order - the closest I know is the usual technique for trying to achieve the HYP aim of being invested in shares with high, sustainable yields, which is to consider the shares for purchase in order from the highest yield down. The considering is basically to look at whether you think the dividend is sustainable (and preferably growable) and only buy if you do (and that the purchase fits your HYP from the diversification point of view, but you've already done that by only looking at shares with below-average weightings). If you don't, move on to considering the next share. Doing the considering in that order is basically just a labour-saving technique - you could e.g. consider Imperial Brands first, but then you'd need to consider Persimmon as well regardless of your conclusion about the sustainability of the Imperial Brands dividend - but skipping the consideration of sustainability and simply buying regardless is not a good idea!

Probably you already know this and are just expressing what you do in an oversimplified way. But some readers here may be new and unfamiliar with what is good HYP practice, so that they get misled by the oversimplified wording, and also "just buy the highest yield first" is a favourite target of those who want to attack HYP strategies. So I think it's worth pointing the oversimplification out...

Gengulphus

You're quite right Gengulphus and apologies to any new readers - by SI, I meant Strategic Ignorance. I was over simplifying and I haven't mentioned that I will also take into account the current income being paid by the HYP constituents so that this isn't too skewed one way or the other. I'll post another table showing the income being paid by each constituent as a percentage of total income.

Cheers, OLTB.

[kempiejon]

which leads me to a potential new holding of Smith (DS) (SMDS) at a yield of 4.50%. Some recent comments on the boards have been that 'good enough' is better than highest dividend.

I could, of course, add to Merchants (which pays a higher yield and adds diversification) but saw in a post elsewhere that Merchants dividend increases aren't keeping up with CPI (let alone RPI), which is what I need the HYP to do.

OLTB, my personal bench mark for high for top ups or new picks is my own portfolio average, currently this sits at 4.6% just now, I do hold SMDS so they must have inched in previously. You mentioned MRCH at about 4.5% mind you can buy the Vanguard or iShares FTSE100 trackers and nearly match that, much wider diversification - though cap weighted and inflation matched increases I think.

Still, as we're HYPers you could look at better yield with Pennon in utilities 5.5% or BT in telecoms or IAG International Consolidated Airlines both over 6%, history on IAG could be better but I think there have been some corporate reshuffles. I hold but have some misgivings about Persimmon so won't add any more to my HYP, might be cover is below my preferred 1.5 or because the dividends are specials and they are not forecast for increases - SSE have flagged a reduction so you'd want to check that if you need an increasing yield.

[OLTB]

Following on from my previous post, here's the percentage breakdown of income generated by my HYP constituents:



For an 18 sector HYP, I'm not too sure what an acceptable level of income from one constituent should be, but from my own comfort level, I certainly wouldn't want to exceed 10% and maybe even 7.5% ( so that rules out Persimmon and Imperial Brands). I know that TJH sets a limit at 5%, but he has more constituents than me.

If any experienced HYP investors are prepared to give me some guidance, I would welcome that!

Cheers, OLTB.

[idpickering]

Thanks for taking the time to put up your HYP OLTB, and I must say, it looks in good order to me. I have all of yours save for SSE, IG Group, ITV, Merchants and TUI. As for Smith DS, as you might know, I bought into them on 22 May 19, and was glad to get them on board, offering diversification, and a decent yield. With regards to income, I try to stick to max 5% per share, and 10% per sector, in my 30 share HYP.
Cheers,

Ian.

[tjh290633]

Following on from my previous post, here's the percentage breakdown of income generated by my HYP constituents:



For an 18 sector HYP, I'm not too sure what an acceptable level of income from one constituent should be, but from my own comfort level, I certainly wouldn't want to exceed 10% and maybe even 7.5% ( so that rules out Persimmon and Imperial Brands). I know that TJH sets a limit at 5%, but he has more constituents than me.

If any experienced HYP investors are prepared to give me some guidance, I would welcome that!

Cheers, OLTB.

OLTB, I set my limit originally at 10% when I had 18 or 20 holdings. It came about because I had two shares, Lloyds TSB and the then Zeneca, well above that level in 1997. I realised that I was overexposed to them and took steps to bring their level down below what became my limit.

Just where you set the limit depends on how many holdings you have and the portfolio value. Let's assume that the minimum economic trade is about £1,000 so that imposing a limit of 10% only makes sense if the average holding value is of the order of £2,000 or so.

Later I made the limit twice the median holding value, and, as the number of holdings rose above 30, I reduced that to 1.5 times the median value. It does affect the frequency at which limit is breached. Currently I have to trim holdings back 2 or 3 times a year. With the limit at twice the median it might be once every 2 years. I would be unhappy with holdings that large, which would become a long way from the nominally equally weighted state.

With the lower limit, trimming provides typically 2 top-up sums. With the higher limit, it would be nearer 4. It all depends on what you are comfortable with.

TJH

[TUK020]

An alternative option is that last month, I was lucky enough to have been paid a slug of cash from my employer as a pension contribution which is just enough to add a complete new additional holding. I wouldn't want to duplicate sectors or allocate any more financials or retail, or utilities which leads me to a potential new holding of Smith (DS) (SMDS) at a yield of 4.50%. Some recent comments on the boards have been that 'good enough' is better than highest dividend.

Adding more ideas:
HICL Infrastructure Trust?
Tobaccos are heavily sold down at the moment, BATS?

Moderator Message:
Whilst trusts are surely an interesting way of investing, the guidelines for this board make it fairly clear that for the HYP Practical board Investment Trusts or open ended funds should not be included. Please bear that in mind. Thanks - Chris (edited)

[Gengulphus]

For an 18 sector HYP, I'm not too sure what an acceptable level of income from one constituent should be, but from my own comfort level, I certainly wouldn't want to exceed 10% and maybe even 7.5% ( so that rules out Persimmon and Imperial Brands). I know that TJH sets a limit at 5%, but he has more constituents than me.

If any experienced HYP investors are prepared to give me some guidance, I would welcome that!

Since 18 lots of 5% adds up to 90% total, which falls short of 100%, it isn't even possible for your portfolio to adhere to a 5% limit. And if you chose to use a 100%/18 = 5.5555...% limit, it would only be possible by making the portfolio exactly equally-weighted by income - which of course it would cease to be as soon as any of its shares announced an increased or cut dividend (or had its forecasts changed if you use forecast dividends) or any of your holdings' share counts changed (by purchase, sale or corporate action). So in practice, adhering to the limit for more than a few weeks wouldn't be possible. (And for capital weightings rather than income weightings, it wouldn't be possible in practice for more than a few seconds while the markets were open...)

I.e. with that 5.5555...% limit, the slightest 'drift' in the portfolio's income contribution causes the limit to be breached. With a higher limit, some 'drift' is possible without such breaches, and the higher the limit, the more 'drift' can be tolerated. So basically, one wants to raise the limit high enough to get rid of the need for too-frequent remedial action but not so high that one becomes too over-exposed to single-company and single-sector income risks.

There is of course a trade-off involved in that, and it's a judgement call where that trade-off is optimised. My personal judgement is a rule of thumb that the limit is best placed in the rough region of 150% divided by the number of holdings or sectors, depending on whether one is looking for a holding size limit or a sector size limit. The exact limit is not at all critical, though, so choose a memorable round-number limit in the general area over an unmemorable precise result of the division.

In this case, 150%/18 = 8.3333...%, and I would probably choose an 8% limit - but neither 7.5% nor 10% is out of the question.

Edit: One other thing to say is that if one imposes multiple limits - e.g. both on capital weightings and on income weightings, or both on holding weightings and on sector weightings, one probably wants to err on the high side in setting the limits. E.g. if I wanted to set both an income weighting limit and a capital weighting limit on sectors for an 18-sector portfolio, I would probably choose setting them both at 10% over setting them both at 8%.

Gengulphus

[OLTB]

An alternative option is that last month, I was lucky enough to have been paid a slug of cash from my employer as a pension contribution which is just enough to add a complete new additional holding. I wouldn't want to duplicate sectors or allocate any more financials or retail, or utilities which leads me to a potential new holding of Smith (DS) (SMDS) at a yield of 4.50%. Some recent comments on the boards have been that 'good enough' is better than highest dividend.

Adding more ideas:
HICL Infrastructure Trust?
Tobaccos are heavily sold down at the moment, BATS?

Moderator Message:
Whilst trusts are surely an interesting way of investing, the guidelines for this board make it fairly clear that for the HYP Practical board Investment Trusts or open ended funds should not be included. Please bear that in mind. Thanks - Chris (edited)

Hi TUK020

Thanks for the above and I have an investment in HICL which is in my IT portfolio - it’s a good dividend payer.

I’d like to steer clear of more tobacco as my current holding of IMB generates a sizeable slug of income already.

Cheers, OLTB.

[monabri]

I note that 18% of the income is derived from 2 cyclical shares, BHP and Persimmon. Maybe further selection or top ups should come from shares which are 'defensive' such as Utilities ..this would be an easy option if it wasn't for the perceived (real?) political risk . There might be something to be gleaned from an assessment of (income) risk due to the % of cyclical v defensive shares.

I would also look at both the dividend and dividend growth rates for each share and derive an estimate of divi growth rate for the portfolio as a whole.

Share A % x growth % = x %
Share B % x growth % = y %
Share C % x growth % = z%

Them add up x,y &z to obtain a current estimate of divi growth rate for the portfolio. Shares such as RDSB, GSK, HSBA, WPP are not going to contribute as their divi is not growing. The value of a static dividend ( in pounds) in 2019 versus 2034. (Noting recent announcements re VOD and SSE on their divi). Having got a guessitmate of the divi growth rate , advance it forward 15 years to get a flavour of likely income. Is the calculated divi growth rate above RPI? If it isn't, then there's an issue straight away...and I suspect there may be based on the percent of static or divi cutters.

In summary, there is a danger of static dividends on quite a few of the shares held in the portfolio combined with a large chunk of income from cyclical shares.


(However, I think the real issue for OLTB is 'time'...income is needed in 15 years not now. Perhaps new and dividend monies should be directed to growthier investment vehicles? ). The income stream is for 30 years or more in 15 years time!!


Sorry, best to have this discussion now than in 15 years.

[OLTB]

I note that 18% of the income is derived from 2 cyclical shares, BHP and Persimmon. Maybe further selection or top ups should come from shares which are 'defensive' such as Utilities ..this would be an easy option if it wasn't for the perceived (real?) political risk . There might be something to be gleaned from an assessment of (income) risk due to the % of cyclical v defensive shares.

I would also look at both the dividend and dividend growth rates for each share and derive an estimate of divi growth rate for the portfolio as a whole.

Share A % x growth % = x %
Share B % x growth % = y %
Share C % x growth % = z%

Them add up x,y &z to obtain a current estimate of divi growth rate for the portfolio. Shares such as RDSB, GSK, HSBA, WPP are not going to contribute as their divi is not growing. The value of a static dividend ( in pounds) in 2019 versus 2034. (Noting recent announcements re VOD and SSE on their divi). Having got a guessitmate of the divi growth rate , advance it forward 15 years to get a flavour of likely income. Is the calculated divi growth rate above RPI? If it isn't, then there's an issue straight away...and I suspect there may be based on the percent of static or divi cutters.

In summary, there is a danger of static dividends on quite a few of the shares held in the portfolio combined with a large chunk of income from cyclical shares.


(However, I think the real issue for OLTB is 'time'...income is needed in 15 years not now. Perhaps new and dividend monies should be directed to growthier investment vehicles? ). The income stream is for 30 years or more in 15 years time!!


Sorry, best to have this discussion now than in 15 years.

Hi monabri and thanks for the post above - very useful and got me thinking...

I have changed my income target for the HYP from meeting half my anticipated retirement income required, to just covering my fixed direct debits. These direct debit costs come in at £770 p.m. (£9,240 p.a.) and the sooner I get to this target income, the more relaxed I will be. Hopefully, increasing dividends over the years will ensure that the real income value is maintained. I have been surprised at how quickly the income has built (although I have been lucky enough to have had some pension lump sums paid in by my employer over the last few years), but also am aware that I need to afford food in retirement. If the worst comes to the worst and I have enough from HYP covering fixed bills, and between me and Mrs OLTB, we have our State Pensions (£1,456 p.m. between us), that should keep us in tea and toast for a bit. It wont be that desperate of course as my IT and passive portfolio aren't going to disappear in thin air . Also, Mrs OLTB will have a small local authority pension that she will be in receipt of which will pay for my Werther's.

Time is on my side(ish) as you're right in that I cant see me retiring until I'm 63/64 (probably 64) and as I'm 50 later this year, I have a few years to go. It maybe that you are quite right and dividends are redirected elsewhere, but my hand may be forced to HYP if the income starts to drop.

My third anniversary full HYP review is due end of August!

Cheers, OLTB.

[Gengulphus]

I would also look at both the dividend and dividend growth rates for each share and derive an estimate of divi growth rate for the portfolio as a whole.

Share A % x growth % = x %
Share B % x growth % = y %
Share C % x growth % = z%

Them add up x,y &z to obtain a current estimate of divi growth rate for the portfolio. Shares such as RDSB, GSK, HSBA, WPP are not going to contribute as their divi is not growing. The value of a static dividend ( in pounds) in 2019 versus 2034. (Noting recent announcements re VOD and SSE on their divi). Having got a guessitmate of the divi growth rate , advance it forward 15 years to get a flavour of likely income. Is the calculated divi growth rate above RPI? If it isn't, then there's an issue straight away...and I suspect there may be based on the percent of static or divi cutters.

There is a mathematical problem with that method of calculating the portfolio dividend growth rate, i.e. as a weighted average of the individual holdings' dividend growth rates, weighted by the holdings' dividend income weightings ("Share A %" needs to be interpreted as that weighting, i.e. the holding's dividend income divided by the total portfolio dividend income, and not as the holding's capital weighting). It works fine in the short term, as an exact answer for the year in which the growth rates were measured, and as a likely-to-be-close estimate for the next few years. But in the longer term, it becomes increasingly inaccurate, even if all the shares maintain their dividend growth rates exactly - the problem is basically that as the years go by, the differing growth rates cause the weightings to shift in favour of the better-growing shares.

As a highly simplified example to illustrate the principle, consider a 2-holding portfolio, with each holding producing £100.00 of dividends at the start, share A's dividend growing at 6% per year and share B's dividend not growing (so a dividend growth rate of 0%). So you get a portfolio dividend growth rate of 50% * 6% + 50% * 0% = 3%. And that is accurate in year 1: £100.00 + £100.00 = £200.00 dividend income grows to £106.00 + £100.00 = £206.00 dividend income, which is indeed a 3% increase. In year 2, the £206.00 dividend income grows to £112.36 + £100.00 = £212.36, which is a 3.087% increase - so 3% is just slightly inaccurate. In year 3, the £212.36 dividend income grows to £119.10 + £100.00 = £219.10, which is a 3.174% increase - just a bit more inaccurate... And so it goes on, and after 15 years, the inaccuracy has grown quite large: in year 15, the dividend income is £239.66 + £100.00 = £339.66, while in year 16, it is £254.04 + £100.00 = £354.04, a 4.234% increase on year 15. Which is quite a major inaccuracy, especially considering that it is a growth rate inaccuracy and so gets compounded in the income received: if the portfolio dividend growth rate had actually been 3% throughout, it would have grown from its initial £200.00 to £320.94 in year 16, so £354.04 is a bit more than 10% bigger than a growth rate of 3% would predict.

The source of the inaccuracy is that the differing dividend growth rates cause the income weightings to shift from year to year, in favour of the higher- yielding shares. Thus two holdings each with initial income weightings of 50% become two holdings with income weightings of £254.04/£354.04 = 71.75% and £100/£354.04 = 28.25% just because they have dividend growth rates of 6% and 0% respectively. In the very long term, indeed, the portfolio dividend growth rate will approach 6% (and more generally, will approach the maximum of the individual holdings' dividend growth rates rather than their current weighted average) as the portfolio becomes completely dominated by the holding with the highest dividend growth rate. But that's talking about impractically long terms, far longer than anyone here is likely to be contemplating. A portfolio dividend growth rate that's a good deal closer to the maximum than the weighted average might reasonably be reached in the long-but-not-impractically-long term (e.g. 5% is reached in year 29 for those individual holding growth rates of 0% and 6%), but to seriously be described as "approaching 6%" will take order of a century or more.

Those shifting weightings have the good effect of making the current portfolio dividend growth rate an underestimate of how it will grow do of course also mean that it becomes increasingly unbalanced, so that if a company-specific or sector-specific disaster hits the portfolio's previous better-growing holdings, it has a disproportionately big effect. I.e. you're getting the higher-than-original growth at the cost of higher-than-original risk, and in practice, you're likely to take some measures to rebalance the portfolio (even if they're only directing new-money investment and dividend reinvestment away from the bigger holdings), with the consequence that you don't fully take the higher-than-original growth.

But of course there are other practical concerns besides how long people are interested in the future of the portfolio and how unbalanced they allow their HYPs to become, which brings me on to an IMHO more important practical point...

(However, I think the real issue for OLTB is 'time'...income is needed in 15 years not now. Perhaps new and dividend monies should be directed to growthier investment vehicles? ). The income stream is for 30 years or more in 15 years time!!

Sorry, best to have this discussion now than in 15 years.

The point about possibly directing money towards "growthier investment vehicles" is entirely valid, provided one actually manages to choose them! Strategies for trying to do that are not a subject for this board (I don't think TLF has anywhere more specific than the very general-purpose Investment Strategies board, so I'll content myself with saying that my practical experience of trying it is that it's easier said than done!

What all my experience of share investments (both HYP and more growth-oriented) says is that predictions about their long-term growth are very likely to go wrong. That's not just a matter of such predictions going wrong about the company: even if they're entirely correct and the company does indeed continue to grow rapidly for 30 years, that will do you no good if a predator has snapped it up in a year or two of weakness along the way, or even a year or two of perceived weakness - perceived weakness of course being just as good at depressing the market price and the level of offer that shareholders are likely to accept as the genuine variety. That's probably more likely than not in 30 years, even for the comparatively stable companies likely to chosen for HYPs.

The net result is that I don't think it's a good idea to base one's long-term plans on the portfolio's current dividend growth rate - not just because doing so is inaccurate mathematically, but also because the assumptions underlying the mathematics are likely to turn out to be false in practice. And that implies that it isn't a matter of having this discussion now rather than in 15 years' time: sure, we should have it now, but we should recognise that any results of such a discussion now are likely to need reviewing and quite likely revising from time to time over the 15 years.

In short, I would suggest not doing anything more with the current portfolio dividend growth rate now than as an indicator that your plans are in vaguely the right ballpark - but keep an eye on it and gradually sharpen the plans up over the next 15 years.

Gengulphus

[Alaric]

[ It works fine in the short term, as an exact answer for the year in which the growth rates were measured, and as a likely-to-be-close estimate for the next few years. But in the longer term, it becomes increasingly inaccurate, even if all the shares maintain their dividend growth rates exactly - the problem is basically that as the years go by, the differing growth rates cause the weightings to shift in favour of the better-growing shares.

I would suggest projecting forward share by share for a few years at most and then assume all shares grow their dividends at equal rates, either because they revert to mean or you make then do so by rebalancing. You need an assumption about future pricing as well to do the hypothetical rebalancing. That shares hold the same dividend yield is a a possible assumption, so if you assume the dividend goes up x% a year, the price does as well.