The Lemon Fool

It's a provocative title but I don't mean it in a negative way. Instead, I was hoping to get some opinions regarding share selection the lower you go down the pecking order. I'm building a HYP and currently have 10 shares with a plan to buy one new share per month over the next few months. I use a screen to identify candidates as follows:

Mkt Cap > £1500m
Yield > 4%
Years of dividend growth >5
Cover > 1.5
Sector: One I don’t already hold

I’m currently running the screen on the FTSE 100 but occasionally check out the FTSE 350 too. When I buy a share I update my sector filter to remove it for the next run. Once I’ve got a minimum of 15 shares I plan to remove the sector component and start to allow top ups (whilst staying within an overall cap on sector weights).

Running the screen on the FTSE 100 today returns BT and Hammerson. So if things stay the same I’ll run out of valid shares that hit all my safety criteria in the next two months. I’m curious about what to do after that.

If I run the filter on the FTSE 350 I could get one additional share. But would that be the right strategy, I wonder. Instead, I could stay locked on the FTSE 100 and, say, reduce my “years of dividend growth” to >4.

Does anyone have an opinion about the order in which to relax the above criteria?

Let me offer a real example. I mentioned above that Hammerson comes out as one of my next picks. I know that British Land is a stalwart in many of your portfolios so I was curious why it didn’t come out in my filter. On investigation I see that it only has four years of dividend growth. Would I be better off with BLND that “fails” on one criteria or HMSO which hits all of them? Would a FTSE 350 share that hits all the criteria (BWY) be better than a FTSE 100 share that misses one or two (BDEV)?

Clearly if your filter is only throwing up a couple of shares, your filter criteria is drawn too tightly. With only ten shares that should not be the case. I guess continuing to look for new sectors is one that I would drop. Furthermore market cap is no guarantee of safety so I would certainly drop the £1.5 billion to £1 billion.

On the sector issue if you specify say financials as one sector that is going to remove a lot because financials can cover anything form a bank to an insurer to fund managers. Even in the insurance sector there are any different types of businesses and if you pick carefully you will not find much overlap.

Does that help?

Dod

Dod1010 wrote:Clearly if your filter is only throwing up a couple of shares, your filter criteria is drawn too tightly. With only ten shares that should not be the case. I guess continuing to look for new sectors is one that I would drop. Furthermore market cap is no guarantee of safety so I would certainly drop the £1.5 billion to £1 billion.

On the sector issue if you specify say financials as one sector that is going to remove a lot because financials can cover anything form a bank to an insurer to fund managers. Even in the insurance sector there are any different types of businesses and if you pick carefully you will not find much overlap.

Does that help?

Dod

I agree with all of the above plus Support Services covers a multitude of different/diverse companies. Media is another that lumps together disparate companies as does Leisure, so maybe there are more than you think.

If you do find nothing matches your screener then by all means look at 4 years and maybe the reason is "exchange rate" fluctuations if dividends declared not in £, you may need to look deeper.

Raptor.

Clearly if your filter is only throwing up a couple of shares, your filter criteria is drawn too tightly.

No its not. Your filter is looking for quality, and the fact that it only returms 2 shares shows you the market is overvaluing many shares.

I would reduce the yield requirement rather than cover and rising dividends - you are absolutely right to be after quality.

You only have to read the moans hereabouts re PSON, IRV, BLT, AMEC, COB etc etc to see what poor quality can do to your income.

The one relaxation i wouldapply is dividend cover for utilities, maybe.

There's no need to hurry...

toofast2live wrote:

Clearly if your filter is only throwing up a couple of shares, your filter criteria is drawn too tightly.

No its not. Your filter is looking for quality, and the fact that it only returms 2 shares shows you the market is overvaluing many shares.

...

And I am not suggesting 'reducing' quality if that is the right expression. I am only suggesting looking at sector definition and reducing the market cap. Quality does not necessarily reduce because a company has a market cap of 'only' a billion rather than £1.5 billion.

I should have asked the OP to reduce the market cap to £1 billion and see how many more shares that throws up. Maybe not that many but then looking at the sector definition may well open up the selection a bit more.

In the whole universe of shares or at least the FTSE350, I cannot believe there are only two new shares to be found ( in a different sector that is)

The OP is presumably looking at diversification but 10/12 shares will not give him that irrespective of the 'quality' of his 10/12 shares so something will have to give. I was suggesting what that 'something' might be.

Dod

I was suggesting what that 'something' might be.

The alternative? Wait until the overvaluation disappears.

toofast2live wrote:

I was suggesting what that 'something' might be.

The alternative? Wait until the overvaluation disappears.

And he may wait a long time.

Dod

toofast2live wrote:The one relaxation i wouldapply is dividend cover for utilities, maybe.

And the same applies to REITs, which have to distribute a very high percentage by law, and thus may be missed by such a filter on cover.

I initially start my screening via digital look by looking at a cap of min £1bn, and a yield of 3.2%. That throws up 40 or so stocks from the upper index. Then I fine tune thereafter .

Hth

Ian

Hypster wrote:I'm building a HYP and currently have 10 shares with a plan to buy one new share per month over the next few months. I use a screen to identify candidates as follows:

Mkt Cap > £1500m
Yield > 4%
Years of dividend growth >5
Cover > 1.5
Sector: One I don’t already hold



Does anyone have an opinion about the order in which to relax the above criteria?

Stop using screens!

You may think that you are applying sensible parameters, but do you really know what is going on behind the scenes?

Buy a copy of the Daily Telegraph; pick a few shares that look interesting and take it from there. Surely it is ideas that you are looking for rather than shares that (may) fit some predefined straightjacket.

Buy a copy of the Daily Telegraph; pick a few shares that look interesting and take it from there.

Hmm, that's an awful like "screening", but just using the old Mark 1 eyeballs and the DT, and ignoring factors such as cover, rising dividends, gearing and other factors that actually matter.

By all means use the DT - but it's no argument against screening.

What I would do is take the FTSE100 (or 350) and rank the shares by yield. There will be one or two at the top end which can be discounted, but work down the list picking out the highest yielding share in each sector as you go.

What I found was that the data was often imprecise, for example only counting two dividends on a share which pays out quarterly, or conflating Euro and USD dividends without conversion to GBp. Having picked a share, then go their web site and start looking at their annual reports to confirm what you have found.

As someone pointed out above, property shares which are REITs have to pay out a high percentage of their UK rental income as dividends in the form of PIDs.

Shares come into favour and go out of favour during the course of the year. This means that you find bargains popping up from time to time, like DGE, RB. or ULVR. Catch them when they are available at the right yield.

TJH

Thank you for your replies; they have given me lots of food for thought. At some point over the coming weeks I'll post my portfolio and then review candidates taking into account the comments here.

I would have said 'Do not use mechanical screening' except that I assumed that the OP is a relative newcomer to investing and he needs to start somewhere. I do not use screening, and actually I do not use many of the so called 'safety' factors either. I need to know something of the company's culture and history but that is about it. I get a feel for the culture by reading as much as I can about it from the news reports and the Chairman's comments in the Annual Report which I read assiduously before buying. I would never ever buy 'blind' even if a company passed all the mechanical screening tests I could think of. That is probably why I have relatively small number of shares in my portfolio.

Dod

I screen as a starting point per a set of criteria that appeared on the original HYP board [annotated in my records as below]:
----------
'HYP-post 52443
Cost not to exceed 5% of the total portfolio cost [clearly this is aiming for a 20-stock portfolio]
Income contribution not to exceed 5% of the total portfolio income
Weight after top-up not to exceed 1.5 times the median holding weight
FTSE-100 AVG = 4.6% [this was a reference point at the time I made the notes, I'd suggest you x-check the latest figure]
Take top three highest yielding share per sector, and sift via these criteria
Prospective yield >= 4%,
Prospective P/E <= 10
Market cap >= 500m
Dividend cover >= 1.2+
-----------
Some thoughts:
I don't know now when that was written, so some tweaks might be required to achieve a parallel result to that intended.
Either way the suggestion [original post in this topic] of a market-cap hurdle of 1500M is setting it about right. I give consideration to the FTSE-100 and say the top 30-50 members of the '250' index [by market cap].
Clearly being 'High Yield', the portfolio must yield more than the '100' index.
I also give consideration to the aggregate broker rating*. Broker ratings are a pretty dirty game, but they can reveal some genuine structural issues, so I look at the most recent, and see if there is any recent change of rating/mood and what is behind it.


*Example: Right-most column here http://www.digitallook.com/index/FTSE_2 ... ation/desc