Maybe a HYP isn't for me?

[nickd01]

Hi All,

I've had a shares portfolio for a while now, but to be honest I've realised I'm less of an avid / active investor than I thought so therefore I'm not doing too well. For example, I only seem to receive a dividend income of £2,773 for the last financial year on assets of around £85k split over around 25 shares and 5 or so ETF / Vanguard products.

I'm a little concerned as I read of many of you 'living off dividends' (Obviously I have no idea of your asset sizes!) but I cannot currently see when this will ever happen. I'm early 40's now and I need to really build assets but I'm a bit worried I've missed the boat.

My question - or I suppose musing - is should I sell out of my single stocks and go for the more passive approach in a few ETF's and Investment Trusts? Or, should I stick with a more rigid HYP approach and try and make it work. I suppose, only I can answer this really but I was wondering if anyone else has had the realisation this might not be the right approach for them?

Maybe I just need to trim the portfolio and be a little more honest with myself. I think, to be honest, I'm maybe panicing a little as I really would like to have the option to cut back work once the mortgage is paid off (Around 15 years I suppose)

Nick

[jackdaww]

I'm early 40's now and I need to really build assets but I'm a bit worried I've missed the boat.

Nick

------------------------------------

missed the boat at your age ?????

you still have half a lifetime to let compound interest do its magic.

the HYP stock screen is not obligatory .

pick good shares , else investment trusts if you havnt the time or inclination .

[staffordian]

Assuming you are adding money on a regular basis, an option would be to leave the HYP as is, and add new money as well as the HYP dividends to a basket of investment trusts.

Once the two are at about the same value, you may have a better idea which option suits you best. Or you could then run both together by adding to both.

Bear in mind that many ITs may will cover what you have already, so either accept that or actively seek out ITs covering other areas, either geographically or sector wise.

It's what I'm doing at the moment, and for me, the jury is still out. The HYP actually gives me a better return income wise, but the total return is better from the ITs. The timescale is too short for this to mean much though...

[tjh290633]

So your average holding is perhaps £2,500? How does the performance of the share part compare with the Fund part? What shares are your 25?

Give us a few more details and we can maybe comment more sensibly. List your holdings by percent weight, not by holding value.

Fundamentally you need to build your investments as much as you can by injecting additional cash, as much as you comfortably can. Note that yields on funds will usually be lower than that from a portfolio of shares, because of management charges. Your yield is about 3%, which sounds a bit on the low side. A sensible HYP ought to be yielding over 4% these days. You have 20 or more years on your side.

Here's a list of the accumulation units of my HYP, since the end of 1998, and the rate of return from each year end to date:

Since        Acc Unit   IRR    
31-Dec-98        5.89     7.72%
30-Dec-99        6.85     7.27%
31-Dec-00        6.68     7.87%
31-Dec-01        6.43     8.63%
31-Dec-02        5.23    10.71%
31-Dec-03        6.38     9.96%
31-Dec-04        7.59     9.31%
30-Dec-05        9.69     7.93%
31-Dec-06       12.25     6.42%
31-Dec-07       12.41     6.94%
31-Dec-08        7.41    13.91%
31-Dec-09       10.24    11.27%
31-Dec-10       12.32    10.07%
31-Dec-11       13.45    10.21%
31-Dec-12       15.80     8.89%
31-Dec-13       19.56     5.62%
31-Dec-14       20.34     6.13%
31-Dec-15       21.42     6.50%
31-Dec-16       24.37     0.85%
29-Dec-17       26.70   -30.83%

The last figure reflects the recent fall in the market over the last 3 months. The current unit value is 24.63. My IRR since April 1987 is just under 10%. As you can see, it varies depending on the starting value (my start value in April 1987 was 1.00). As you may know, a growth rate of 10% leads to a doubling of value in 7 years, but if you are adding cash regularly, you may be able to better that. Regular saving through thick and thin benefits from buying during low periods in the market.

Best of luck.

TJH

[OLTB]

assets of around £85k split over around 25 shares and 5 or so ETF / Vanguard products.

Hi nickd01

As TJH has suggested, if you list your current share/etf portfolio perhaps we could comment in a bit more detail on the portfolio.

Cheers, OLTB.

[Alaric]

I'm a little concerned as I read of many of you 'living off dividends' (Obviously I have no idea of your asset sizes!) but I cannot currently see when this will ever happen. I'm early 40's now and I need to really build assets but I'm a bit worried I've missed the boat.

In terms of living off dividends, think of a number for your required annual income and multiply by between 15 and 25. That gives you a range for the value of assets you might need. You can offset the value of any pension assets against that or include them in the total.

I'd suspect many here have had a financial windfall or two to help build their assets. These may include redundancy, inheritance or sale of a business.

[nickd01]

Thanks all for your replies; apologies for the delay in responding. Below are my holdings, as a percentage of notional. I tried to format it neatly, honestly - any tips?!

I don't sell much, maybe I should, hence why theres probably a bit of "mess" that'd need cleaning. I don't sell losses as I don't need the cash and you never know - it might come back. Maybe I should be a bit stricter and cut losses?

I also see most of you keep a much more detailed record of how your portfolio is performing; I must admit despite writing code and managing systems that do exactly that for an Asset Manager I do little of that myself.

Stock                                %ofNotional    Profit/Loss %
Anglo American Plc Ord USD0.54945            1.33%        -33.59%
AstraZeneca Plc Ord Shs $0.25                3.13%        81.21%
Aviva Plc Ord Shs 25p                        2.90%        43.16%
BAE Systems Plc Ord Shs 2.5p                 2.47%        75.83%
BANCO SANTANDER SA EUR 0.50 REGD             0.24%       -82.57%
Beazley Plc Ord Shs 5p                       8.07%       378.18%
BP Plc Ordinary shares of USD$0.25           1.24%        -8.10%
British American Tobacco Plc Ord Shs 25p     3.73%        66.82%
British Land Company Plc Ord Shs 25p         2.17%        17.53%
Dixons Carphone Plc Ord Shs 0.1p             0.21%       -81.88%
ETFS Commodity Securities Ltd WTI Crude Oil  0.59%       -64.78%
Fundsmith Fundsmith Equity I Acc             5.27%        70.22%
GlaxoSmithKline Ordinary Shares of 25 pence  3.06%        21.49%
iShares Plc Core FTSE 100 UCITS ETF (Dist)  10.99%        11.38%
iSHARES FTSE 250 UCITS ETF GBP (DIST)       12.44%        17.99%
JP Asset Management Natural Resources C Acc  0.89%       -47.21%
Kier Group ord 1p                            2.01%       -10.68%
Legal & General Group Ord Shs 2.5p           6.88%       178.19%
Lloyds Banking Group Plc Ord Shs 10p         0.37%       -66.96%
National Grid Plc Ord Shs 12 204/473         2.13%        31.20%
Persimmon Plc Ord Shs 10p                    8.56%       173.29%
Provident Fin. Ordinary Shares of 20 8/11p   1.26%       -34.49%
RSA Insurance Group Plc Ord Shs GBP1.00      2.40%         6.87%
Sainsbury (J) Plc Ord Shs 28 4/7p            2.07%       -18.32%
SSE Plc ord 50p                              1.56%        19.37%
Tate & Lyle ord 25p                          1.80%         3.57%
United Utilities Ordinary Shares of 5 Pence  1.26%       -27.42%
Vgrd Group Inc (IRL) Gbl Small-Cap Idx Acc-· 5.12%        26.31%
Vanguard Inv. UK FTSE DvpWldExUK EqIdx A     3.07%         4.79%
Vodafone Group Plc Ord USD 0.20 20/21        2.78%       -14.76%

[JohnB]

If you are not enjoying it, then why do it? Heresy in a HYP forum, but why not switch to trackers and reduce the fees and the admin. I'd hate to have 25 share holdings of paperwork to handle.

If you are building a retirement pot, its total return you are interested in rather than dividends anyway, and just do a model running forward with 3.5% total return as you save and spend to give a feel whether you are on course. That's a cautious number trackeresque number, I'd want more for the agro of an active approach.

[pendas]

I'd question whether you need a high yield income portfolio at the moment. I'd concentrate on capital appreciation.
Income can be purchased with capital at a time nearer to your retirement. You have a large number of holdings of modest size at the moment which increases your dealing costs and reinvesting the dividends is a further cost.

[dspp]

Your holdings are not so different than mine in general, though specifics are different. I've just had a rummage and found my last annual review:

viewtopic.php?f=56&t=4396&p=44109&hilit=dspp#p44109

The HYP part of both our portfolios prioritises dividend yield now over capital growth later. That's a bit of a sweeping generalisation, but it tends to mean that a HYP share can 'safely' yield 4-6%. Anything over this level may well have something odd about it that implies a high amount of risk. So let's say that you have 5% yield average and that you have 75% of your equity in that (I am eyeballing your %, not getting the calculator out).

You also have some managed active funds (e.g. Fundsmith) and some passive index trackers (e.g. Vanguard DevWrldExUK). Directionally these tend to be non-HYP-ish as they either target capital growth explicitly, or a mix of capital growth & div yield. The point is that they would naturally drag down your overall average dividend yield. Let's say that they yield (say) 2.5% and are 25% of the portfolio, then your overall average would be 4.375%.

That's before you get to the role of mge fees, which on an actively managed fund are quite a drag. All the academic research indicates that the mge fees are not worth it for most people. That is why most people are better advised to 'just' go with index funds where the fees are pretty much just the admin element, not the clever mge element, hence you (and me) picking Vanguard and suchlike.

Taking the fees into account, and considering that dividend lag may be an issue (is it ?) then your actual yield of 3.26% vs my guesstimate of 4.3% is not so bad. However what matters is your TOTAL RETURN. This is anathema to the purist HYP, who only consider TR as being a by-product of dividend reinvestment, but is highly relevant to the rest of us. You probably ought to be targetting about 7% TR with (say) 3% coming from dividends and (say) 4% coming from organic capital growth. At 7% TR then your money doubles every ten years. Mind you there is a need to compensate for inflation to get that to real terms, but there is no better way out there to do this than through investing in something.

Looking at your overall needs if you have £85k now and 15-years to run to mortgage free, and are say 42 now / 57 then, then you could reasonably aim for £235k @57 with no mortgage and a 7%TR. Personally that would be perfectly survivable for me, but your spending needs might be very different, as I am after all a hermit . If it is not survivable / desirable then you must save more. Consume less now so as to consume more later. TINA. Any other pathway increases risk.

As to your actual portfolio the only thoughts I can sensibly give is to:
1. Emphasise passive index trackers over active funds, so as to minimise drag element of fees.
2. Emphasise index trackers over more individual shares, so as to reduce personal time involved.
3. But probably do those with new money (save more), and reinvested dividends, not by selling & rebuying.

Good luck, DYOR, don't take anything I have to say as advice.

regards, dspp

[Itsallaguess]

If you are not enjoying it, then why do it?

Heresy in a HYP forum, but why not switch to trackers and reduce the fees and the admin.

I'd hate to have 25 share holdings of paperwork to handle.

Just regarding your last point, around the potential admin-headache of holding a relatively large number of shares, the reality is that holding a large number of HYP-like shares is actually no real day-to-day hassle at all, and I'd hate for someone who might be interested in the strategy to be put off by your statement when it's simply not true as far as I'm concerned.

I actually agree with you on your first point, and if a strategy is simply not a 'good-fit' from a personal perspective, then it's going to be difficult to live with for any length of time, and if there's other aspects to that other than the 'potential-for-admin' perspective, then that's fine, but as someone who's held over 40 individual holdings in various on-line accounts for a good number of years now, any grumble about the potential for admin-time is simply a non-starter as far as I'm concerned.

Could you please explain why you think it's an issue?

Where is the time spent when having to constantly deal with this 'paperwork'?

Cheers,

Itsallaguess

[Alaric]

Where is the time spent when having to constantly deal with this 'paperwork'?

Perhaps the poster was thinking back to the days of certificated holdings and dividend cheques through the post. That did involve a lot of paper filing, record keeping and running to the bank. Run it as an online account and the number of holdings doesn't make a lot of difference unless you want to actively manage the lot of them.

[daveh]

I'm a little concerned as I read of many of you 'living off dividends' (Obviously I have no idea of your asset sizes!) but I cannot currently see when this will ever happen. I'm early 40's now and I need to really build assets but I'm a bit worried I've missed the boat.

In terms of living off dividends, think of a number for your required annual income and multiply by between 15 and 25. That gives you a range for the value of assets you might need. You can offset the value of any pension assets against that or include them in the total.

I'd suspect many here have had a financial windfall or two to help build their assets. These may include redundancy, inheritance or sale of a business.

No, just single with now (what I would consider) a decent income so able to plough a decent amount each month into my HYP, though when I started investing was on about £20k and paying a mortgage. I started in ~May 2000 investing generally £250 per month into my HYP initially and later £500 a month and reinvesting dividends. Annual return on a total returns basis has been ~8%pa which is OK and I could (just) if I really had to live off my dividend income now, but would probably have to take my work pension early in a couple of years time to have anywhere close to my present standard of living.

For the OP you have definitely not missed the boat when I was in my 40s my dividend income would have been similar and it is amazing how it grows exponentially as income is reinvested and more money added each month, so you have plenty of time to build your assets to a decent level.

[nickd01]

Thanks all for the informative feedback.

I do agree with the posters that say what I really need now is capital appreciation; income isn't important and maybe that's where I've been going astray. I think this is sub-conciously why I've invested into some Funds / Trackers to try and grow capital and not be so dependent on individual shares if their capital drops.

Maybe I sell some of my biggest gainers and invest in to some more passive growth funds for the next 10 years to 'build the pot'. I'll read some of the Investment Trust board.

I then need to get my pensions and rental property sorted out so that it all magically falls in to place for retirement....

[JohnB]

I have one individual share holding from years back, LLoydsTSB, and get AGM invitations, short/long annual reports restructuring notifications, and dividend cheques/slips (not that they paid any for years). I guess if I'd bought that through a broker the dividend paperwork would go, but don't you still get all the other letters?

(I also deal with a lot more for mum, as her shares do like to chop and change)

[Itsallaguess]

I have one individual share holding from years back, LLoydsTSB, and get AGM invitations, short/long annual reports restructuring notifications, and dividend cheques/slips (not that they paid any for years).

I guess if I'd bought that through a broker the dividend paperwork would go, but don't you still get all the other letters?

Thanks for the explanation.

As a holder of over 40 individual investments via various online brokers, I honestly can't remember the last time I received anything at all through the post about any of my holdings.

I will receive the odd corporate announcement via email, which I can choose to action online if I hold a particular preference, but these are very few and far-between, and more often than not the default position if I were to ignore them completely is often the one I'd actively choose if I were to take a look myself.

I don't think your experience regarding paper-holdings should be used as a general warning to people regarding any potential issue about 'admin-time', as it's simply not typical at all in terms of it being a modern-day issue with on-line brokers.

Cheers,

Itsallaguess

[dspp]

Thanks all for the informative feedback..........

Maybe I sell some of my biggest gainers and invest in to some more passive growth funds for the next 10 years to 'build the pot'. I'll read some of the Investment Trust board..

Also check out Passive Investing - Index tracking funds and ETFs : viewforum.php?f=55

There is more to life than Investment Trusts, unless you love paying those mge fees ...........

- dspp

[SalvorHardin]

There is a lot of self-selection at work regarding people on TLF who live off dividends. Most investors do not fall into this category; for them their retirement income will be a mixture of pension (occupational and state), investment income and part-time work.

I reckon that none of us on TLF who live off dividends made our early retirement money via a HYP. The sources will almost certainly be one or more of: spectacular investment returns (probably in shares which don’t pay dividends), massively underspending their income, selling their business, inheritance or marriage. The better investment returns over twentyish years are not going to be achieved via the typical HYP candidate (higher total returns tend to be generated by the lower yielding shares such as Diageo and Unilever).

Bear in mind that people can live in retirement off a lot less than they were earning. For one thing it’s quite expensive to work (especially in London) and most retirees will have paid off their mortgage and aren’t making any further pension contributions. For example, a £500,000 portfolio which yields 3% generates £15,000 p.a. That’s not too far off what someone on national average earnings gets after paying tax, national insurance and the costs incurred by being in work. Now I can live off that quite comfortably because my mortgage is paid off, I have no debts and keep a fairly tight rein on expenditure (I don’t have to though as my portfolio is much larger and generates much more income).

What scuppers many people’s finances is overspending on stuff that they don’t need, in particular buying positional/status/Veblen goods to impress their neighbours and colleagues. The kind of person who upon seeing that a neighbour has bought a new car decides that they too must have a new car, who goes to exotic places on holiday primarily to boast that they have been to exotic places on holiday and sneers at any of their neighbours who shop at Lidl and own a very old motor.

https://en.wikipedia.org/wiki/Veblen_good

The book on this topic is “The Millionaire Next Door”, written in the mid-1990s. Here the authors were surprised to discover that the majority of millionaires in America were not clustered in the more affluent white-collar communities. Instead they were disproportionately middle-class and working-class, many owning their own businesses, who didn’t buy status goods. The high-income communities found it harder to accumulate wealth because they spent most of their income on buying consumer goods and “Keeping up with the Jones” (British newspapers often have articles about people earning £100,000+ who can't save anything because of their massive consumption habit).

https://en.wikipedia.org/wiki/The_Millionaire_Next_Door

[tjh290633]

I reformatted your original list and got rid of the Tabs, which were the problem. I've now looked at it a bit more:

Stock                                          %ofNotional   Profit/Loss %   % Median   Funds    Equities   % Median
Anglo American Plc Ord USD0.54945                    1.33%         -33.59%     58.21%               1.33%     62.44%
AstraZeneca Plc Ord Shs $0.25                        3.13%          81.21%    136.98%               3.13%    146.95%
Aviva Plc Ord Shs 25p                                2.90%          43.16%    126.91%               2.90%    136.15%
BAE Systems Plc Ord Shs 2.5p                         2.47%          75.83%    108.10%               2.47%    115.96%
BANCO SANTANDER SA EUR 0.50 REGD                     0.24%         -82.57%     10.50%               0.24%     11.27%
Beazley Plc Ord Shs 5p                               8.07%         378.18%    353.17%               8.07%    378.87%
BP Plc Ordinary shares of USD$0.25                   1.24%          -8.10%     54.27%               1.24%     58.22%
British American Tobacco Plc Ord Shs 25p             3.73%          66.82%    163.24%               3.73%    175.12%
British Land Company Plc Ord Shs 25p                 2.17%          17.53%     94.97%               2.17%    101.88%
Dixons Carphone Plc Ord Shs 0.1p                     0.21%         -81.88%      9.19%               0.21%      9.86%
ETFS Commodity Securities Ltd WTI Crude Oil          0.59%         -64.78%     25.82%    0.59%                      
Fundsmith Fundsmith Equity I Acc                     5.27%          70.22%    230.63%    5.27%                      
GlaxoSmithKline Ordinary Shares of 25 pence          3.06%          21.49%    133.92%               3.06%    143.66%
iShares Plc Core FTSE 100 UCITS ETF (Dist)          10.99%          11.38%    480.96%   10.99%                      
iSHARES FTSE 250 UCITS ETF GBP (DIST)               12.44%          17.99%    544.42%   12.44%                      
JP Asset Management Natural Resources C Acc          0.89%         -47.21%     38.95%    0.89%                      
Kier Group ord 1p                                    2.01%         -10.68%     87.96%               2.01%     94.37%
Legal & General Group Ord Shs 2.5p                   6.88%         178.19%    301.09%               6.88%    323.00%
Lloyds Banking Group Plc Ord Shs 10p                 0.37%         -66.96%     16.19%               0.37%     17.37%
National Grid Plc Ord Shs 12 204/473                 2.13%          31.20%     93.22%               2.13%    100.00%
Persimmon Plc Ord Shs 10p                            8.56%         173.29%    374.62%               8.56%    401.88%
Provident Fin. Ordinary Shares of 20 8/11p           1.26%         -34.49%     55.14%               1.26%     59.15%
RSA Insurance Group Plc Ord Shs GBP1.00              2.40%           6.87%    105.03%               2.40%    112.68%
Sainsbury (J) Plc Ord Shs 28 4/7p                    2.07%         -18.32%     90.59%               2.07%     97.18%
SSE Plc ord 50p                                      1.56%          19.37%     68.27%               1.56%     73.24%
Tate & Lyle ord 25p                                  1.80%           3.57%     78.77%               1.80%     84.51%
United Utilities Ordinary Shares of 5 Pence          1.26%         -27.42%     55.14%               1.26%     59.15%
Vgrd Group Inc (IRL) Gbl Small-Cap Idx Acc-          5.12%          26.31%    224.07%    5.12%                      
Vanguard Inv. UK FTSE DvpWldExUK EqIdx A             3.07%           4.79%    134.35%    3.07%                      
Vodafone Group Plc Ord USD 0.20 20/21                2.78%         -14.76%    121.66%               2.78%    130.52%
                                                                                                                    
Total                                              100.00%                              38.37%     61.63%           
Median                                               2.29%                               5.12%      2.13%

You are 38% funds and 62% equities. Looking at the comparison, taking percentage median as a guideline, you are horribly unbalanced, both in shares and in funds. For the shares, with 23 holdings, I would set twice the median holding value as an absolute limit for any one share. Some are probably ripe for disposal. A good case for a measure of rebalancing.

Regarding the funds, if you wish to keep them, I would go for a simple mix of one global and one UK oriented, and I would go for ITs rather than ETFs or OEICS. You may feel otherwise.

TJH

[Lootman]

around the potential admin-headache of holding a relatively large number of shares, the reality is that holding a large number of HYP-like shares is actually no real day-to-day hassle at all, and I'd hate for someone who might be interested in the strategy to be put off by your statement when it's simply not true as far as I'm concerned.

In a tax-sheltered account that may be true. It may be that only corporate actions will require any attention.

But in a taxable account then the work does increase with more holdings, because of the need to determine and report dividends and gains. It is for that reason that I hold smaller positions in my ISA and (a smaller number of) larger positions in my taxable account.