HYP portfolio observations

[Shelford]

Dear All

I posted a review of my overall pension a few weeks back here: viewtopic.php?f=56&t=4636

Around a quarter of the pension include a HYP (detail at bottom of post), so I’m posting a review of it here as it’s probably the best place to do so, given the active interests of board members.

Context

I’m 3 years off retirement, by which time I expect to be mortgage-free. I’m married, but my wife is younger than me and anticipates working a bit longer. I have children whose longer term needs are provided for.

The HYP is part of a Hargreaves Lansdown SIPP. Costs are capped at £200 p.a. or 0.06% of total value.

The original aim of the HYP was to provide around £15K of income, as part of a pension portfolio that includes a BTL, a small range of investment trusts, two small DC pensions, and various ETFs/fixed income products.

My simple rules for inclusion/topping up within the HYP are:

-consistent + rising dividends for at least 5 years, ideally much longer
-above 4% yield with a few exceptions for high quality businesses (Unilever, Reckitt, Shell)
- low debt (in general….)
-‘healthy’ dividend cover for its sector
-no sector above 10% of portfolio value or income
-no share above 5% of portfolio value
-FTSE 100/250 companies only i.e. £1b+ capitalisation

Performance

2016 was an extraordinary year for the HYP portfolio, both in terms of capital value and income, as it was for many. As a HYP purist however, my focus is exclusively on income. I don’t tinker or top-slice (or haven’t done for some time as I’ve learned how poor I am at doing so). The outcome of Brexit and to some extent Trump has been an increase in estimated running yield to 4.75%, with an income of £16500, which is above the target I’d set for myself in three years’ time in 2020.

During the year, I made six top-up investments. These were:
ITV plc Ordinary 10p 5780 @ 206.39
BT Group plc Ordinary 5p 980 @ 305.9
HSBC Holdings plc Ordinary USD0.50 225 @ 443.9
Standard Life plc Ordinary 12.22222p 718 @ 278.55
Lloyds Banking Group plc Ordinary 10p 9097 @ 54.96

These had a total capital value of £25,500 in all
 
Since I now wish to balance the equity income risk from my HYP with other parts of my pension portfolio (specifically fixed interest income), the intention from now onwards is to retain the portfolio as is, and reinvest the HYP income elsewhere. A revised goal therefore is for annual income from the HYP to be c. £18000 in 2020, which allows for an increase in running yield over the next three years of 3% per year, which should be achievable.

In short, this is effectively a mature HYP, where I’ve moved from growing the portfolio, to taking income.

Some observations on my investing behaviour over the past 8 years, and how it’s changing

It has taken some time to adjust to the fact that the portfolio is now complete. I’d got used to topping shares up on a regular basis. Now all I wonder about really is income, and the sustainability of share income.

Focus on the income goal: it takes discipline to stop worrying about capital performance. I’ve found it helps to monitor income monthly, and to note (and celebrate) significant milestones viz. the first share to provide £1000 of income

At 29 shares, it’s a largish portfolio, and bigger than the original HYPs created by PYAD et al. I’m happy with the slightly worse performance that a bigger portfolio provides, given diversification in 19 industry sectors helps me sleep at night. I don’t think I’m alone in this.

At any one time with a portfolio of this size, there will be dogs, some of them rabid. Mine at present are Tesco (the evils of performance related pay and rigged bonuses), and FirstGroup (sheer management incompetence + poor research on my part).

Sustainability has become a more important issue for me as I contemplate living off income in three years’ time. With all the chuntering on and off boards about capital performance, it’s easy to lose sight during the build phase of a HYP of its primary purpose: to provide a long term, growing source of income.

My reaction to individual share news has therefore changed. The news of Unilever/Kraft was greeted with gloom (how to replace such a solid performer in the event of a sale?) rather than short-termist joy at a share price uplift

I cast a more gimlet eye on non-performers. By non-performers, I mean dividend cutters. I wonder whether, when it comes to taking income for real, whether I’ll tolerate the likes of FirstGroup. We’ll see.

Ove 8 years, I’ve learned to be patient. My original investment in Lloyds in 2008 was with hindsight a disaster from an income point of view, but patience – and further investments since on the back of a more robust business – means it should come good. Other shares that have been through the mill include BP, William Hill, Aviva, RSA, BT. They’ve all had their moments.

Previous tinkering (I sold Persimmon and Sage inter al in the past) I’ve come to regret. This has qualified my enthusiasm to sell or top-slice

Comments - as always - welcome!

Shelford

Company Name            | Ticker | Sector                              | Current price (p) | Shares held | Current Value | Value as % of Total | Value Weighting | Latest / Forecast Yield | Latest / Forecast Cover | Latest / Forecast P/E | Yield Weighting | Weighting Total | Top-Up Order | Expected Dividend
Marks and Spencer Group | MKS    | General Retailers                   |            357.50 |        1713 |     £6,123.98 |               1.76% |               3 |                   5.10% |                     1.6 |                 12.70 |              12 |              15 |            2 |           £312.32
Vodafone Group          | VOD    | Mobile Telecommunications           |            203.70 |        5476 |    £11,154.61 |               3.21% |              12 |                   6.20% |                     0.5 |                 30.10 |               5 |              17 |            3 |           £691.59
Centrica                | CNA    | Gas, Water & Multiutilities         |            198.00 |        4232 |     £8,379.36 |               2.41% |               6 |                   6.00% |                     1.3 |                 12.80 |               6 |              12 |            1 |           £502.76
William Hill            | WMH    | Travel & Leisure                    |            294.10 |        2676 |     £7,870.12 |               2.26% |               5 |                   4.40% |                     1.9 |                 12.30 |              18 |              23 |           10 |           £346.29
Aviva                   | AV     | Life Insurance                      |            532.50 |        1975 |    £10,516.88 |               3.03% |              10 |                   5.10% |                     1.9 |                  9.60 |              12 |              22 |            9 |           £536.36
British Land Company    | BLND   | Retail REITs                        |            661.50 |        1532 |    £10,134.18 |               2.92% |               9 |                   4.70% |                     1.2 |                 17.80 |              16 |              25 |           11 |           £476.31
BT Group                | BT-A   | Fixed Line Telecommunications       |            305.60 |        3149 |     £9,623.34 |               2.77% |               8 |                   5.40% |                     1.7 |                 10.80 |              11 |              19 |            4 |           £519.66
BP                      | BP     | Oil & Gas Producers                 |            444.80 |        3075 |    £13,677.60 |               3.93% |              19 |                   7.20% |                     0.9 |                 16.10 |               1 |              20 |            6 |           £984.79
SSE                     | SSE    | Electricity                         |           1406.00 |         890 |    £12,513.40 |               3.60% |              15 |                   6.50% |                     1.3 |                 12.00 |               4 |              19 |            4 |           £813.37
RSA Insurance Group     | RSA    | Nonlife Insurance                   |            619.00 |         818 |     £5,063.42 |               1.46% |               2 |                   3.80% |                       2 |                 13.20 |              19 |              21 |            7 |           £192.41
FirstGroup              | FGP    | Travel & Leisure                    |            136.20 |        3399 |     £4,629.44 |               1.33% |               1 |                   2.30% |                     4.7 |                  9.40 |              27 |              28 |           14 |           £106.48
TUI AG Reg Shs (DI)     | TUI    | Travel & Leisure                    |           1164.00 |         977 |    £11,372.28 |               3.27% |              14 |                   5.00% |                     1.6 |                 11.80 |              14 |              28 |           14 |           £568.61
Lloyds Banking Group    | LLOY   | Banks                               |             70.00 |       20746 |    £14,522.20 |               4.18% |              21 |                   5.60% |                     1.9 |                  9.10 |               9 |              30 |           17 |           £813.24
Sky                     | SKY    | Media                               |            992.50 |         958 |     £9,508.15 |               2.74% |               7 |                   3.50% |                     1.7 |                 16.90 |              22 |              29 |           16 |           £332.79
GlaxoSmithKline         | GSK    | Pharmaceuticals & Biotechnology     |           1588.50 |         806 |    £12,803.31 |               3.68% |              16 |                   5.50% |                     1.4 |                 14.10 |              10 |              26 |           12 |           £704.18
Royal Dutch Shell 'B'   | RDSB   | Oil & Gas Producers                 |           2062.00 |         784 |    £16,166.08 |               4.65% |              26 |                   7.20% |                     0.9 |                 14.80 |               1 |              27 |           13 |         £1,163.96
Severn Trent            | SVT    | Gas, Water & Multiutilities         |           2355.00 |         472 |    £11,115.60 |               3.20% |              11 |                   3.60% |                     1.3 |                 21.70 |              21 |              32 |           18 |           £400.16
Standard Life           | SL     | Life Insurance                      |            375.80 |        4541 |    £17,065.08 |               4.91% |              28 |                   5.90% |                     1.4 |                 12.10 |               7 |              35 |           21 |         £1,006.84
Tesco                   | TSCO   | Food & Drug Retailers               |            176.60 |        3717 |     £6,564.22 |               1.89% |               4 |                   1.70% |                       3 |                 18.60 |              29 |              33 |           20 |           £111.59
HSBC Holdings           | HSBA   | Banks                               |            663.80 |        2891 |    £19,190.46 |               5.52% |              29 |                   6.60% |                     1.2 |                 12.40 |               3 |              32 |           18 |         £1,266.57
National Grid           | NG     | Multiutilities                      |           1014.50 |        1552 |    £15,745.04 |               4.53% |              25 |                   4.60% |                     1.4 |                 15.60 |              17 |              42 |           23 |           £724.27
Unilever                | ULVR   | Food Producers                      |           4005.00 |         371 |    £14,858.55 |               4.27% |              22 |                   3.00% |                     1.5 |                 22.00 |              24 |              46 |           28 |           £445.76
Diageo                  | DGE    | Beverages                           |           2275.00 |         571 |    £12,990.25 |               3.74% |              17 |                   2.80% |                     1.7 |                 20.90 |              25 |              42 |           23 |           £363.73
AstraZeneca             | AZN    | Pharmaceuticals & Biotechnology     |           4649.00 |         334 |    £15,527.66 |               4.47% |              24 |                   4.90% |                     1.3 |                 15.50 |              15 |              39 |           22 |           £760.86
Tate and Lyle           | TATE   | Food Producers                      |            768.50 |        1969 |    £15,131.77 |               4.35% |              23 |                   3.80% |                     1.7 |                 15.50 |              19 |              42 |           23 |           £575.01
BHP Billiton            | BLT    | Mining                              |           1117.00 |        1015 |    £11,337.55 |               3.26% |              13 |                   5.70% |                     1.6 |                 10.40 |               8 |              21 |            7 |           £646.24
Reckitt Benckiser Group | RB     | Household Goods & Home Construction |           7164.00 |         184 |    £13,181.76 |               3.79% |              18 |                   2.40% |                       2 |                 21.50 |              26 |              44 |           27 |           £316.36
Informa                 | INF    | Media                               |            657.50 |        2188 |    £14,386.10 |               4.14% |              20 |                   3.20% |                     2.3 |                 13.40 |              23 |              43 |           26 |           £460.36
Compass Group           | CPG    | Travel & Leisure                    |           1571.00 |        1047 |    £16,448.37 |               4.73% |              27 |                   2.30% |                       2 |                 20.80 |              27 |              54 |           29 |           £378.31

[monabri]

I arranged the table in a different order - see below.

In terms of pure yield - could you do better by reducing Compass (4.73% of your holding) with a yield of 2.3% and diverting say 25%+25% (by value)
to two of LGEN /RIO/RMG /IMB/ "something else" with a higher yield? (mindful of sector percentages in Life Insurance).

It's more a question of can I tweak it and at what risk? a return of 2.3% doesn't seem all that attractive when you can get 3.4% (or more) in a bog standard tracker.

Ditto Tesco. Yes they might come back good but at what level of yield and how long will it take to get to a decent level of say 5%? Fortunately it's only a small % of the total portfolio.

In fact, if you were to add Imperial Brands (IMB) and Royal Mail, you would have 2 new sectors. IMB results look pretty good.

I can see the attraction of Lloyds and I topped up (but not as much as you!!) and I also think that ITV and BT were good HYP choices ; athough ITV might be subject to "external factors" (yawn - possible take over ).

Just some thoughts!
monabri

[moorfield]

A revised goal therefore is for annual income from the HYP to be c. £18000 in 2020, which allows for an increase in running yield over the next three years of 3% per year, which should be achievable.

Previous tinkering (I sold Persimmon and Sage inter al in the past) I’ve come to regret. This has qualified my enthusiasm to sell or top-slice

Shelford,

I picked those quotes which (to me) are the most important I think you've touched on. I think that's quite achieveable and would encourage you to not unnecessarily tinker with individual holdings from here if your overall portfolio income remains on track - it looks well capable of absorbing the odd dividend hiccup. Good Luck! - I'm about 10 years behind you so keen to read how you make the adjustment from building to drawdown phase.

M

[JohnnyCyclops]

At 29 shares, it’s a largish portfolio, and bigger than the original HYPs created by PYAD et al. I’m happy with the slightly worse performance that a bigger portfolio provides, given diversification in 19 industry sectors helps me sleep at night. I don’t think I’m alone in this.

At any one time with a portfolio of this size, there will be dogs, some of them rabid. Mine at present are Tesco (the evils of performance related pay and rigged bonuses), and FirstGroup (sheer management incompetence + poor research on my part).

A lovely post, thank you. Your approach echoes mine, although I'm a few years off retiring. HYP income will provide part of the non-working income needs.

Again, selectively quoting above, I recognise myself in the larger-portfolio, sleep more soundly, camp. HYP's all about diversification. Which I think helps with the second point, the failures or dogs (Tesco, Cobham, Balfour Beatty and Amec FW here). As I reported last week, income is up year-on-year nothwithstanding Cobham becoming the most recent to stop the dividend. With 35 holdings, and an average income per stock of ~3%, losing (or cutting) any one dividend doesn't hole us below the waterline, and I can sleep soundly.

JC

[Shelford]

Thanks for your comments.

Tinkering: there is a huge temptation to change/sell off non-performers, and I've done so in the past. And then regretted the decision 2-3 years later as the shares I sold (Sage, Persimmon) came roaring back both in terms of share price and more importantly, income, and surpassed the performance of the replacements.

Clearly, there has to be a line somewhere beyond which disposal is the only option, and drawing this line will differ according to investors' criteria and investing philosophy (if they have one...). At present, I'm prepared to wait for 2-3 years to see whether Tesco/Firstgroup can self-heal. The latter is performing better than it has done over past couple of years in terms of income. Tesco still has a big way to go. In the context of Brexit uncertainties, and big competition from discounters such as Aldi, it won't be an easy ride for UK supermarkets.

[77ss]

Thanks for your comments.

Tinkering: there is a huge temptation to change/sell off non-performers, and I've done so in the past. And then regretted the decision 2-3 years later as the shares I sold (Sage, Persimmon) came roaring back both in terms of share price and more importantly, income, and surpassed the performance of the replacements.

Agreed.

Another factor is whether or not the non-performer is held in a tax shelter. I am slow to dump non-performers in a tax shelter, but outside, one may be able to offset the loss against excess capital gain. Mitigates the pain somewhat, and if one is sitting on an uncomfortably overweight holding with a substantial gain.....

[baldchap]

Sorry, nothing constructive to add Shelford unless praise counts.
An excellent thread of great interest to somebody still on the journey.

[moorfield]

Clearly, there has to be a line somewhere beyond which disposal is the only option, and drawing this line will differ according to investors' criteria and investing philosophy (if they have one...). At present, I'm prepared to wait for 2-3 years to see whether Tesco/Firstgroup can self-heal.

Indeed. The "line" I've chosen to draw is the actual vs. target overall income table I keep elsewhere here. It hasn't been crossed yet (since 2009) and has so far survived dividend cuts (INF, SVT, CNA), rights issues (INF that I can recall), spin offs (VOD/VZ.) and chunky capital losses (CLLN). I am reinvesting dividends though so I will have to relax the growth rate I use once I start drawdown (probably I will then revert to using the RPI rate of the day).

[Gengulphus]

During the year, I made six top-up investments. These were:
ITV plc Ordinary 10p 5780 @ 206.39
BT Group plc Ordinary 5p 980 @ 305.9
HSBC Holdings plc Ordinary USD0.50 225 @ 443.9
Standard Life plc Ordinary 12.22222p 718 @ 278.55
Lloyds Banking Group plc Ordinary 10p 9097 @ 54.96

Is there a sixth? If so, I'd be interested to know what it is.

Gengulphus

[Gengulphus]

Did this reformatting of Shelford's table, with some editing down of text to reduce column widths, to make its full content readable on my screen without sideways scrolling, and others might as well benefit as well as me! Not everyone will, of course - it still needs a fairly wide screen/window due to the amount of content.

Gengulphus

[77ss]

Since I now wish to balance the equity income risk from my HYP with other parts of my pension portfolio (specifically fixed interest income), the intention from now onwards is to retain the portfolio as is, and reinvest the HYP income elsewhere. A revised goal therefore is for annual income from the HYP to be c. £18000 in 2020, which allows for an increase in running yield over the next three years of 3% per year, which should be achievable.

In your planning, just bear in mind that come a market crash your dividend income could drop by (say) 30%.

Not doom-mongering, but they come along every now and then. W don't know when, we don't how severe and we don't know how long the recovery will take.

[Shelford]

Thanks for your input. The sixth top up was Informa. Must have missed a sentence off the email.

Safety margin: yes Sensible point about market falls. I intend to save up two years worth of income to act as a cushion, and take only 4% in income

[YeeWo]

Thanks for posting this in such detail. I'm being in no way critical, a few points/questions:-
- £350k portfolio value which will generate circa £16.5k dividends per annum?
- Of your 29 stocks I hold 10 - BLND, BP, BT-A, DGE, GSK, HSBA, RB, RDSB, ULVR & VOD.
- I speculated on Sky towards the end of 2016 and sold out due regulatory delays. Is it worth holding for best-case scenario of £10.75?
- Again Tesco I disposed of recently, the whole sector is killing each other. The acquisition of Booker is going to take an indeterminate amount of time and is Management conceding that the economics of the core-business cannot be fixed.
- In terms of spreading risk beyond 15-20 stocks diversification has an increasingly-limited potency. Did you arrive at 29 by design or accident?
- TUI and FirstGroup must presumably be investments that you're "holding-on" with? Do you intend retaining these?
- Do you have dates you actually made purchases and do you calculate XIRR figures for investment including Dividends received?
- Presumably you're waiting with baited-breath for the BT results on 11 May?
- Archie Normans' appointment as Chairman of M&S may very well herald a renaissance!!!
- Compass seems an awful lot of investment-buck for a Tiny dividend-bang?!
- Do ROCE metrics come into your decision making process?
Thanks again for posting this........
Good Luck,
YW.

[Bouleversee]

Yee Wo said:

" Compass seems an awful lot of investment-buck for a Tiny dividend-bang?!"

Have you looked at the share price and dividend histories over the past 5 years? I don't know when the OP bought his but my guess is that the size of the investment-buck is due to their huge rise and that he is getting a pretty good yield on his original investment. I certainly am and won't be selling and reinvesting in the likes of CLLN, which I also hold and are losing me a high percentage of my investment. I wonder what the yield was when he first bought and what it is now on that sum. Perhaps he'd like to tell us.

I haven't been tempted to top slice or sell my Persimmon yet either (though I did give my non-ISA holding to grandchildren), now one of my largest ISA holdings. I don't worry about being overweight due to success; what I do regret is not getting rid of some of the duds but it is hard to know which are likely to recover and which not. Perhaps I should get rid of Halfords and Mothercare, for instance, and even M&S is only back to what I paid many years ago. Next is a disaster but I'll give them the benefit of the doubt for a year or two longer if they/I survive that long. Hopefully Archie Norman will improve things at M&S so they can stay for a while,too.

We will have to see what the next budget brings to know how best to balance income and growth in non-ISA portfolios but the pure HYP approach will probably need some reappraisal, won't it?