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On the Dividend Letter's demise

General discussions about equity high-yield income strategies
Luniversal
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On the Dividend Letter's demise

#199197

Postby Luniversal » February 5th, 2019, 11:59 pm

A few observations to commemorate the end of Pyad's Dividend Letter.

Contrary to what is widely believed here, Stephen Bland's High Yield Portfolio idea in Nov. 2000 was not an annuity replacement strategy. It was a substitute for insurance bonds, which promised safe income bore outrageous charges.

Back then annuity rates were far fuller than in the QE era, locking in long-dated gilt returns. Over a retiral span of 20-30 years such rates might well work out better for the investor than a HYP on a starting yield of ~3%, i.e. moderately above the index yield at the time. That might be the better outcome whether or not the annuity were index-linked.

After the dotcom crash inflation would flatline at ~3% pa, and the crisis of 2008-10 did nothing to stoke it. In Nov. 2000 an annuitant would have been buying, indirectly, into fixed interest whose pricing was founded on the assumption that inflation would continue 'Keynesian' in high double figures. Instead we got a long upswing in bonds and lamentable annuity returns.

HYP has confounded extrapolation and become a hero somewhat in error: its case would be fortified after 2008 when policy favoured equities by imposing outlandishly cheap money. Asset values bubbled (irrelevant) but to our purpose corporate boards were encouraged to (over)distribute earnings to investors, who thirst for income when base rate dries up.

After a decade of this thoroughly peculiar if not unparalleled backdrop, it may be hard to imagine a reversion to the grey days of near-hyperinflation, when bond yields soared and companies stopped trying to maintain the real purchasing power of dividends. Well, never say never again. I was blooded in 1973-75, and bloodied.

HYP1, true, started on an elevated prospective yield of almost 5% against the FTSE 100's >=2%. Thus it was more competitive with a swindling insurance bond than if it had not strained for immediate income. By picking almost solely from the Big Board, it might have been deemed unrisky despite holding just 15 companies.

But at its launch not only was there a schizoid yield gap in the main index, between boring old blue-chip dividend stocks and low- and no-yield go-go mushroom companies in the TFT field. HYP1's initial juiciness was further pumped by infringing Pyad's own cardinal tenet of diversification: two banks, two miners. Later its skewness- the main objection to HYP1 among critics nowadays- was reinforced by reinvestment of market-trading surpluses into too few new sectors/positions; yields were dangerously chased.

However these are not intrinsic flaws. As an amateur historian of the stock market, I must say that Pyad's claim to originality is completely justified. Never in my experience had anyone previously advocated lifelong, passive equity ownership for rising income alone or even as a primary purpose- it was preached only as a way to keep yourselves warm with divis while waiting for capital profits that would revalue a rising curve in earnings payouts.

All earlier HY share strategies with a superficial resemblance to Pyad's were for 'growth and income' in that order. Neither had anyone urged an equal split between sectorally separated selections to control one's blind spots: the mechanical element was novel. It is amusing that HYP1's capital performance has impressed many more than its jagged income flow. But QE deserves most of the praise or blame.

My backtests and practical implementations, more exhaustive than anyone else's, vindicate the no-tinker, 15-share lump-sum portfolio. In some ways my regimen is more stringent than the inventor's, holding that reinvestment of market-trading proceeds must be in the same amounts as the original selections.

My main aberration is to apply HYP to a separate collection of larger midcaps, since (counter-intuitively) they have not been more apt to disappoint on income than the Footsie's members since 2000. Otherwise no tweaks proposed on TMF or TLF stand up. I see no necessity to assemble a much wider spread of shares, to double up within sectors or fiddle around with fractions of holdings to achieve 'balance', e.g. according to some often-defective sectoral taxonomy. Nor would I relinquish any share unless it had zero hope of paying out anew. Doris is my goddess, 'market trading' the hand that scatters her benisons.

The watchword is 'Good Enough is better than Even Better'. The two LuniHYPs have had their spills and stagnancies. Yet both carry a yield of ~5.5% after seven and six years, backed by an income reserve of 14 or 21 months and protected against RPI inflation- with a less than forlorn hope of occasional, modest but sustainable increases in withdrawable income. Nor have they demanded a lot of admin, a point often discounted by those who enjoy fidgeting.

Good enough. Thanks, Pyad, and keep beating us up.
-

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Re: On the Dividend Letter's demise

#199200

Postby Lootman » February 6th, 2019, 12:14 am

Luniversal wrote:Pyad's claim to originality is completely justified. Never in my experience had anyone previously advocated lifelong, passive equity ownership for rising income alone or even as a primary purpose- it was preached only as a way to keep yourselves warm with divis while waiting for capital profits that would revalue a rising curve in earnings payouts.

If there is one theme to divine from the history of the markets in the last 40 years it is that passive investing mostly out-performs attempts at active out-performance. So there is nothing original about that - rather it has been mainstream thinking, hence the massive growth of index funds and ETFs.

Now, you might have a point if income is the sole determinant. But numerous studies have shown that 60% or so of market returns derive from capital gains and not income. And moreover that chasing high yields can lead to disaster, as your own yield "zones" have indicated.

UK higher yield shares represent about 3% of the global market capitalisation of equities. You may be correct that a 100% allocation to them will out-perform a more neutral allocation, at least at times. But where is your proof that it does so on a risk-adjusted basis long-term?

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Re: On the Dividend Letter's demise

#199203

Postby Alaric » February 6th, 2019, 1:56 am

Luniversal wrote: it was preached only as a way to keep yourselves warm with divis while waiting for capital profits that would revalue a rising curve in earnings payouts.
-


The term "junk bond" is familiar, meaning a entity whose borrowings have a finite chance of defaulting, hence the higher return.

The term "junk equity" isn't established, but could equally apply to companies that distribute more than they make in profits.

It's an observation that focusing on likely total return can be important in avoiding disasters.

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Re: On the Dividend Letter's demise

#199204

Postby Itsallaguess » February 6th, 2019, 4:54 am

Luniversal wrote:
My main aberration is to apply HYP to a separate collection of larger mid-caps, since (counter-intuitively) they have not been more apt to disappoint on income than the Footsie's members since 2000.

Otherwise no tweaks proposed on TMF or TLF stand up.


Stand up to what?

Your opinion?

Cheers,

Itsallaguess

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Re: On the Dividend Letter's demise

#199242

Postby tjh290633 » February 6th, 2019, 9:53 am

Itsallaguess wrote:
Luniversal wrote:
My main aberration is to apply HYP to a separate collection of larger mid-caps, since (counter-intuitively) they have not been more apt to disappoint on income than the Footsie's members since 2000.

Otherwise no tweaks proposed on TMF or TLF stand up.


Stand up to what?

Your opinion?

Cheers,

Itsallaguess

In my opinion there are two modifications which have been shown to reduce risk to income.

The first is that any capital released by a takeover should be reinvested in one or more new shares at about the median holding value at the time.

The second is to limit the exposure to any one holding by placing a limit on the value of that holding. That limit for a 15 share portfolio should be 10% of the portfolio value. Alternatively twice the median holding value can be used.

The big defect of HYP1 was to reinvest the cash from a takeover in a single share.

TJH

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Re: On the Dividend Letter's demise

#199253

Postby 88V8 » February 6th, 2019, 10:28 am

Luni, thankyou for that reminder. Those who do not know history, etc.
It is easy to forget that we are investing in a market which is still distorted by QE and consequent cheap debt.

Rebalancing... Doris does not rebalance.
The eggs basket issue, vs selling one's winners. Hmmm.

As to proving that tweaks do or do not work, impossible imho. Any 'proof' would depend on the start and end points, and by the time the pudding is cooked the original ingredients will no longer be available anyway.

I'll take Luni's 'opinion', although I must confess a failure to limit myself to 15 shares. Perhaps I could pretend that I'm running two HYPs. :)

V8

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Re: On the Dividend Letter's demise

#199258

Postby Luniversal » February 6th, 2019, 10:54 am

"Stand up to what?

Your opinion?"

My research, and my own results.

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Re: On the Dividend Letter's demise

#199260

Postby Luniversal » February 6th, 2019, 10:57 am

Now, you might have a point if income is the sole determinant

Income is HYP's only goal.

You may be correct that a 100% allocation to them will out-perform a more neutral allocation, at least at times.

I made no such claim. The only 'performance' I care about is my income v. British inflation. Hence 'Good Enough'.

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Re: On the Dividend Letter's demise

#199262

Postby Grumpsimus » February 6th, 2019, 11:10 am

88V8 wrote:Luni, thankyou for that reminder. Those who do not know history, etc.
It is easy to forget that we are investing in a market which is still distorted by QE and consequent cheap debt.

Rebalancing... Doris does not rebalance.
The eggs basket issue, vs selling one's winners. Hmmm.

As to proving that tweaks do or do not work, impossible imho. Any 'proof' would depend on the start and end points, and by the time the pudding is cooked the original ingredients will no longer be available anyway.

I'll take Luni's 'opinion', although I must confess a failure to limit myself to 15 shares. Perhaps I could pretend that I'm running two HYPs. :)

V8


It is not a failure to limit yourself to 15 shares. HYP1 was a demo and 15 shares was chosen to illustrate the concept. Later I understand PYAD suggested that 15 to 20 shares was appropriate for a HYP.

I have seen academic research which suggested that a portfolio of 20 diversified shares would by adequate and there was no further benefit after reaching 25 shares. I know that a few people have very large HYPs 40 to 50 shares, this just appears to cause extra admin with little benefit.

Recently, I saw some research suggesting most professional investment managers were pretty good at selecting shares to buy, but were much worse a deciding when to sell. It ties in well with HYP were all the effort is in selecting shares and you never sell, well hardly ever. Also you save on fees.

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Re: On the Dividend Letter's demise

#199291

Postby TUK020 » February 6th, 2019, 12:52 pm

Grumpsimus wrote:It is not a failure to limit yourself to 15 shares. HYP1 was a demo and 15 shares was chosen to illustrate the concept. Later I understand PYAD suggested that 15 to 20 shares was appropriate for a HYP.

I have seen academic research which suggested that a portfolio of 20 diversified shares would by adequate and there was no further benefit after reaching 25 shares. I know that a few people have very large HYPs 40 to 50 shares, this just appears to cause extra admin with little benefit.


The number of shares is to some extent a function of the time in "build" mode before moving to "harvest".

The level of risk reduction given by portfolio size indicates that 15 shares is really the minimum you should aim for in setting up a portfolio. After 25 shares, the level of risk reduction is into diminishing returns (not the same as 'no further benefit').

However, if you then continue to build the investment pot, by reinvesting dividends for example, there may well be more attractively priced opportunities than any of your existing shares when you have money to invest. Over time, it is likely that the 'natural' portfolio size in terms of number of shares will grow.

I am sure TJH has the records to show this effect.

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Re: On the Dividend Letter's demise

#199294

Postby micrographia » February 6th, 2019, 1:09 pm

TUK020 wrote:The number of shares is to some extent a function of the time in "build" mode before moving to "harvest".

The level of risk reduction given by portfolio size indicates that 15 shares is really the minimum you should aim for in setting up a portfolio. After 25 shares, the level of risk reduction is into diminishing returns (not the same as 'no further benefit').

However, if you then continue to build the investment pot, by reinvesting dividends for example, there may well be more attractively priced opportunities than any of your existing shares when you have money to invest. Over time, it is likely that the 'natural' portfolio size in terms of number of shares will grow.

I am sure TJH has the records to show this effect.


What TUK020 said. The pool of HYP shares changes over time, so one accumulates a wider range of shares - in my HYP the simplest example is probably Big Oil where top ups go to BP or RDSB based solely on which is yielding higher at the time. This also happened to be beneficial in preserving my income stream when the BP dividend took a kicking, but I don't hold both for diversification purposes.

There is also no extra admin involved with a big HYP. With an online broker, there is no admin involved :D ; you might choose to run your own spreadsheets etc but there is no need to. On the other hand the point made about the savings on management fees are rarely given the attention they deserve IMO - for 2018 my HYP "management charge" was 0.2% and that was with a lot more trading than usual. Makes a passive tracker look kind of expensive :shock:

Regards, EEM.

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Re: On the Dividend Letter's demise

#199306

Postby Lootman » February 6th, 2019, 1:36 pm

Luniversal wrote:Now, you might have a point if income is the sole determinant

Income is HYP's only goal.

You may be correct that a 100% allocation to them will out-perform a more neutral allocation, at least at times.

I made no such claim. The only 'performance' I care about is my income v. British inflation. Hence 'Good Enough'.

"Good enough" is a pretty unambitious investment objective. But at least you seem to admit that there are better investment options out there for total return.

The idea behind citing that "income is the only goal" was in effect an acknowledgement that an emphasis on high yield may impair capital returns. As Alaric pointed out, high yield bonds are also known as junk bonds. So rather than accept that drawback the official line became "capital doesn't matter". If a strategy has a big flaw then just pretend that the flaw doesn't matter.

Of course in practice almost every practitioner here does cite their market values and capital returns. In fact even pyad did that when HYP1 went behind on income but was ahead on capital. And of course you have eulogised the capital performance of CTY. So it seems to be a case of say one thing but do another.

If you really believed that capital didn't matter then you'd buy an annuity to reduce the risk of a drop in equity income. But of course then you'd lose all that capital that you don't care about!

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Re: On the Dividend Letter's demise

#199310

Postby Lootman » February 6th, 2019, 1:47 pm

micrographia wrote:There is also no extra admin involved with a big HYP. With an online broker, there is no admin involved :D ; you might choose to run your own spreadsheets etc but there is no need to. On the other hand the point made about the savings on management fees are rarely given the attention they deserve IMO - for 2018 my HYP "management charge" was 0.2% and that was with a lot more trading than usual. Makes a passive tracker look kind of expensive :shock:

Yes, if run prudently the amount of admin work can be trivial for a HYP or for that matter any portfolio of 15 to 30 shares, which I'd assume is what most people here have. Although that is more true in a tax shelter than in a taxable account, where you'd have to account for dividends received and capital gains. There are also corporate actions to deal with now and then. So not quite "no admin" but certainly not a lot.

As for the annual cost of running the portfolio, I actually would have thought that 0.2% is quite high. I assume that includes things like stamp duty, spreads, commissions and any fees your broker charges?

That said there are trackers that are cheaper than that, e.g. Vanguard's VUKE ETF that invests in the same space and charges 0.06% a year, and with no stamp duty. It's not specifically a HY product but does have a decent yield since so does the UK market as a whole. But you are correct - I am not aware of a HY tracker-type fund that is cheaper than 0.2% Vanguard has a UK Equity Income fund which costs 0.12% a year although it's been a bit hit and miss so it hasn't tempted me; nor has VUKE although I do hold other Vanguard collectives for foreign exposure.

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Re: On the Dividend Letter's demise

#199314

Postby micrographia » February 6th, 2019, 2:05 pm

Lootman wrote:Yes, if run prudently the amount of admin work can be trivial for a HYP or for that matter any portfolio of 15 to 30 shares, which I'd assume is what most people here have. Although that is more true in a tax shelter than in a taxable account, where you'd have to account for dividends received and capital gains. There are also corporate actions to deal with now and then. So not quite "no admin" but certainly not a lot.

As for the annual cost of running the portfolio, I actually would have thought that 0.2% is quite high. I assume that includes things like stamp duty, spreads, commissions and any fees your broker charges?

That said there are trackers that are cheaper than that, e.g. Vanguard's VUKE ETF that invests in the same space and charges 0.06% a year, and with no stamp duty. It's not specifically a HY product but does have a decent yield since so does the UK market as a whole. But you are correct - I am not aware of a HY tracker-type fund that is cheaper than 0.2% Vanguard has a UK Equity Income fund which costs 0.12% a year although it's been a bit hit and miss so it hasn't tempted me; nor has VUKE although I do hold other Vanguard collectives for foreign exposure.


I'm still in the building phase but even so I'm usually under 0.1% p/a - an unusually high number of purchases last year. All costs included, all in an ISA. Costs should continue to get lower as the portfolio grows and, despite account inactivity fees, when I finally put it to it's intended use :)

Regards, EEM.

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Re: On the Dividend Letter's demise

#199326

Postby Pastcaring » February 6th, 2019, 3:05 pm

All seems nonsense to me,people trying to complicate things that are so simple.

Dividends rise,share prices rise.

You' d really struggle to find anybody lazier than I am when it comes to investing.Five minutes a year is enough time to spend listening to anything to do with finance.

In the real world always work on the KISS principle.

CBA continues to plod on throwing off six figures a year in income for me,while I do nothing except hands firmly under the arts end.

As for MQG ( ASX) ,well to date from last year up around 21% including dividends.

So much easier to follow the crowd isn,t it.Always think for yourself,the crowd will invariably be wrong.

MQG was a surprise,no way did I expect it to rise that much.Now salesmen ,erm, experts are jumping on the bandwagon.That worries me.I don' t like it when people agree with me.

Leave it alone for 30 yrs,do nothing,turn off all that silly daily noise and opinions ,amazing how easy it is.

Studies will prove whatever they are paid to prove.

I always worked on double the shareholding every 12 years,double the price every 12 years.Tends to mean slowish growth, it can produce great wealth.

So MQG would be from $ 60 when I bought them in 2006 to $120 approx today.

Give it until the end of this year ,13 years is close enough to 12 for me.2000 shares at whatever price they are at at the end of this year.

Studies will prove whatever they are meant to prove in 2036.

MQG will be worth whatever it will be worth in 2036.I' ll be dead but I still think MQG will still be there.There is a chance they can go under,the chance you have to take.You' ll have around 6000 shares in MQG in 2036.

Just turn off all that useless bloody noise and have a quiete minute or two a year to think for yourself.

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Re: On the Dividend Letter's demise

#199329

Postby Pastcaring » February 6th, 2019, 3:14 pm

And of course the people that spend their entire lives in the chicken little suits are for amusement purposes only.

Other than that keep well away from them.

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Re: On the Dividend Letter's demise

#199339

Postby Itsallaguess » February 6th, 2019, 3:45 pm

Luniversal wrote:
Itsallaguess wrote:
Luniversal wrote:
Otherwise no tweaks proposed on TMF or TLF stand up.


Stand up to what?

Your opinion?


My research, and my own results.


Excellent news.

I always thought that you'd only really tended to research and publish results for data-sets that backed up your own claims - and very often with a hindsight-bias to that research at that....

It's great news to hear that you've also done research and published results for all the HYP tweaks that have been proposed by others over the years on both TMF and TLF.

Any chance of a link to that research, and those results? I'm sure I won't be the only one interested to read them - especially after making such a bold claim as you have....

Cheers,

Itsallaguess

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Re: On the Dividend Letter's demise

#199346

Postby tjh290633 » February 6th, 2019, 4:11 pm

Regarding the size of portfolios, in my case a lot of the expansion in numbers was down to companies spinning off subsidiaries. Examples are:

ICI begat Zeneca

British Gas begat Centrical and Lattice

Hanson begat USI, Millennium Chemicals, Energy and Imperial Tobacco

GEC begat Marconi and BAE Systems

Bass begat Six Continents which begat Intercontinental Hotels and Mitchell's and Butler's

Scottish Power begat Thus

Whitbread begat Costa

Cadbury begat Dr Pepper

And no doubt several more. I did not retain all of the spun off companies. Not all occurred in my portfolio.

TJH

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Re: On the Dividend Letter's demise

#199356

Postby funduffer » February 6th, 2019, 5:05 pm

I may be wrong, but as I understand it, pyad never advocated a "building phase", nor re-investment of dividends.

Rather, he advocated buying a HYP with a retirement lump sum, and withdrawing all the dividends to live on.

Many of the HYP tweaks advocated on TLF are actually because many HYPers use their HYP to accumulate capital in the portfolio prior to withdrawing dividends at a later date (as evidenced from a poll run last year - I can't find the post though).

I am not saying that some of the tweaks like re-balancing with re-invested dividends is a bad thing, just that the original HYP method never envisaged this ever occurring (except in the exceptional circumstances of capital returns).

I would agree that HYP1 capital returns could have been used to improve diversification.

FD

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Re: On the Dividend Letter's demise

#199428

Postby Backache » February 6th, 2019, 10:25 pm

Grumpsimus wrote:
I have seen academic research which suggested that a portfolio of 20 diversified shares would by adequate and there was no further benefit after reaching 25 shares. I know that a few people have very large HYPs 40 to 50 shares, this just appears to cause extra admin with little benefit.
.

However diverse the sectors HYP may not produce a truly diverse selection of shares that an academic paper might suggest as almost by definition they are shares in companies that are not using capital to grow .


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