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Guidance on yield please

General discussions about equity high-yield income strategies
AsleepInYorkshire
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Guidance on yield please

#215775

Postby AsleepInYorkshire » April 17th, 2019, 9:56 pm

Hi,

I've read the guidance for posting on HYP boards provided by Clariman. Hopefully I've understood it well enough and I am posting to the correct board.

Within that guidance is a comment indicating that shares in a HYP picked for inclusion on the HYP Board should be above the FTSE average yield. I'm sort of crossing T's I think - or if you prefer "overthinking" but what about those yields which actually aren't going to be paid (because of profit reductions) near the top of the yield table? Should they be discounted or included please?

For example Galliford announce a profit warning which [logically] reduces the yield at year end. Thus the current yield of 13% is more likely to be less than 10%. Also (well if I'm going to overthink I may as well do it well :oops: ) do 0% yields get discounted?

Thank you for your time

AiY

tjh290633
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Re: Guidance on yield please

#215791

Postby tjh290633 » April 17th, 2019, 11:00 pm

Where a company has issued a profit warning you have two options. Put that share on hold as far as top-ups or new purchases are concerned, or else make your own assessment (or use that consensus of brokers/analysts views that you can find elsewhere) of what the probable dividend is going to be.

What you obviously do not do is rely on the historical yield based on dividends paid in the past. What do you mean by:

do 0% yields get discounted?


TJH

Alaric
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Re: Guidance on yield please

#215792

Postby Alaric » April 17th, 2019, 11:02 pm

AsleepInYorkshire wrote: but what about those yields which actually aren't going to be paid (because of profit reductions) near the top of the yield table? Should they be discounted or included please?


You've pinpointed what can be a major weakness in the strategy of searching for stocks with high dividend yields, namely that a reason why a stock has a high yield is because its share price has collapsed. It's a question of taste whether to plough on regardless or investigate further.

IanTHughes
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Re: Guidance on yield please

#215800

Postby IanTHughes » April 17th, 2019, 11:56 pm

Alaric wrote:
AsleepInYorkshire wrote: but what about those yields which actually aren't going to be paid (because of profit reductions) near the top of the yield table? Should they be discounted or included please?

You've pinpointed what can be a major weakness in the strategy of searching for stocks with high dividend yields, namely that a reason why a stock has a high yield is because its share price has collapsed. It's a question of taste whether to plough on regardless or investigate further.

Which of course is why the HYP Strategy searches for stocks with a high but sustainable dividend.

A warning that profits may well reduce means that the historical dividend record is useless for current yield calculation purposes. It also means that any dividend forecasts made before the profit warning are equally useless. You must make your own mind up but in my view, a profit warning makes the share in question NOT SUITABLE for HYP investment.

Why do you see that as a weakness in the Strategy?


Ian

Alaric
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Re: Guidance on yield please

#215807

Postby Alaric » April 18th, 2019, 12:56 am

IanTHughes wrote:Why do you see that as a weakness in the Strategy?


Implicit profit warnings are ignored. Vodafone is a test case at the moment. Is the current yield the bargain of the century or a signal that not all is right? Those seeking income with exposure to Vodafone through corporate bonds are content with a much lower yield.

IanTHughes
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Re: Guidance on yield please

#215808

Postby IanTHughes » April 18th, 2019, 1:13 am

Alaric wrote:
IanTHughes wrote:Why do you see that as a weakness in the Strategy?

Implicit profit warnings are ignored. Vodafone is a test case at the moment. Is the current yield the bargain of the century or a signal that not all is right? Those seeking income with exposure to Vodafone through corporate bonds are content with a much lower yield.

I can only repeat what I said before:
IanTHughes wrote:Which of course is why the HYP Strategy searches for stocks with a high but sustainable dividend.

So, if you think the dividend is sustainable, then Vodafone Group (VOD ) would be an HYP candidate. On the other hand, if you think that the dividend is not sustainable, then Vodafone Group (VOD) would not be an HYP candidate.

If you need a less complicated explanation, you will have to look elsewhere, sorry.


Ian

Dod101
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Re: Guidance on yield please

#215822

Postby Dod101 » April 18th, 2019, 7:22 am

The OP needs to go back to first principles. A High Yield Portfolio has to consist of shares which yield a higher yield than the market which in this case is taken to mean the FTSE100, but as has been said there is not much point in buying a share which yields well above the market average if it cuts the dividend at the next dividend declaration. Thus you look for shares with a higher than average sustainable yield.

Generally speaking if a share is yielding much higher than the market average for a long period that would indicate that the market is telling us something.
Maybe
(a) the share has gone ex growth (tobaccos)
(b) it is in a market which has a real or perceived political threat (utilities)
(c) it is in a market which has a long tradition of cutting corners and has a 'it'll be all right on the night' attitude (many contractors) .
(d) there is a real risk of a dividend cut.

There are no doubt other reasons for a high yield some benign some not. The result is that I and some others, tend to treat a yield of much more than say 50/60% above the market average as of concern. That is only a guide not necessarily a call for action. Currently Galliford Try falls very much into that category and of course it has issued a profits warning which must put the dividend at risk. The current average yield is around 4.2% or so and thus I look at any share yielding more than say 6.5% very carefully. The market is usually quite efficient so why would it leave the price of a share alone if the yield is say 8/9%. The shares should be being bought up and demand will push up the price and bring the dividend back to the average or thereabouts. Shell and HSBC both offer yield around or a bit above the market average but that is because, although their dividends are probably sustainable they have not been increased for some time. Furthermore it could be argued that because of their megacap they are the market average.

Investing is much more art than science. 0% yields certainly get discounted. Why would you buy a share for a HYP if there is no yield?

Dod

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Re: Guidance on yield please

#215839

Postby Alaric » April 18th, 2019, 8:28 am

IanTHughes wrote:So, if you think the dividend is sustainable, then Vodafone Group (VOD ) would be an HYP candidate.


What's the time period for "sustainable"? What's the target price at the end of the "sustainable" period. How do you tell whether an apparent high yield is no more than the market average, but supplemented in effect by a return of capital through dividends?

OhNoNotimAgain
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Re: Guidance on yield please

#215842

Postby OhNoNotimAgain » April 18th, 2019, 8:34 am

A high yield is a product of two factors; the dividend payment and the share price.

The first is determined by the Board and the second by the stock market.

Investors need to decide who is more likely to be correct about the next payment.

88V8
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Re: Guidance on yield please

#215854

Postby 88V8 » April 18th, 2019, 9:27 am

A luminary of TMF who only occasionally posts nowadays, developed a methodology in which the yield was 'zoned' and anything exceeding 160% of the FTSE average was deemed dangerous.
Currently the average is 4.35% so anything exceeding 7% would be very questionable, unless one believes that one's predictive skills exceed those of the market.

As a rule of thumb I consider this a good starting point.

A caveat; he used historic yields, on the basis that the future is unknowable. As already commented, the apparent yield figures on websites sometimes mislead, the past is not always a guide to the future.

V8

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Re: Guidance on yield please

#215885

Postby GoSeigen » April 18th, 2019, 10:52 am

88V8 wrote:A luminary of TMF


I'm sure he's a nice chap, but this is a misnomer for someone who doesn't get the basics of securities pricing.

I agree with other posters that the OP should make his own judgment. IIRC the HYP rules required yield to be above the average but did not dictate selection of the highest yielding stocks. But their rejection would be based on the application of other HYP principles, e.g. sector diversification.

GS

IanTHughes
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Re: Guidance on yield please

#215899

Postby IanTHughes » April 18th, 2019, 11:32 am

Alaric wrote:
IanTHughes wrote:So, if you think the dividend is sustainable, then Vodafone Group (VOD ) would be an HYP candidate.

What's the time period for "sustainable"?

As far forward as you can reliably see into the future. In other words, now. :D

Seriously, all you can normally attempt to judge is whether, at the next dividend announcement, the dividend is likely to be maintained, increased or decreased. The information items that you have to hand are the latest Annual Results maybe bolstered by Interim Results, Trading Updates and other information made public by the Company in question.

Alaric wrote:What's the target price at the end of the "sustainable" period.

Whatever the market price is at that time.

Alaric wrote:How do you tell whether an apparent high yield is no more than the market average, but supplemented in effect by a return of capital through dividends?

Oh that is easy. If the dividend turns out to be sustainable, then the High Yield is a true High Yield. If, on the other hand, the dividend turns out not to be sustainable, then the High Yield is merely an illusion. I would have thought that much was obvious


Ian

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Re: Guidance on yield please

#215996

Postby Gengulphus » April 18th, 2019, 3:44 pm

AsleepInYorkshire wrote:I've read the guidance for posting on HYP boards provided by Clariman. Hopefully I've understood it well enough and I am posting to the correct board.

Within that guidance is a comment indicating that shares in a HYP picked for inclusion on the HYP Board should be above the FTSE average yield. I'm sort of crossing T's I think - or if you prefer "overthinking" but what about those yields which actually aren't going to be paid (because of profit reductions) near the top of the yield table? Should they be discounted or included please?

That guidance doesn't say which form of yield you should use (***). The two main forms both have their disadvantages. Historical yield (dividends actually paid by the company for its last completed financial year, divided by the current share price) is inevitably out of date, not taking at least some recent news into account - i.e. basically the issue you raise. Forecast yield (the forecast dividend for the company's financial year that is currently not yet completed, divided by the current share price) is highly dependent on which analyst's forecasts you use - or more likely, rather less dependent on which data source's 'consensus forecast dividend' (*) one uses - and is still liable to be somewhat out of date, because news about the company will take some time to feed through into all the individual analysts' forecasts. Personally, I recommend using both, looking for the reason for any unusual relationship between them (forecast dividend below historical dividend or unusually highly above it) and checking the company's recent RNS announcements for any news that might not yet have got into the forecasts.

By the way, on a point of detail, when I talk about "completed" financial years in the above, I really mean "completed and reported on": for example, quite a few companies use March 31st financial year ends, so will have completed their 2018-2019 financial year a bit over a couple of weeks ago, but we won't know what their historical dividend is for that year until they report their final results, probably sometime next month. So even immediately after they do report those results, their historical dividend could be regarded as a month or two out of date, and at the moment, their historical dividend figures are for their 2017-2018 financial year and their forecast dividend figures for the already-over 2018-2019 financial year.

That guidance also says:

"Selection criteria may include the yield, the dividend record and a history of increases. Debt level and free cash flow should be considered. Personal feelings can affect the choice, including ethical considerations. Additional criteria may be used by individuals."

I.e. you're entirely at liberty to do any further checks you feel appropriate on the company and take them into account when discussing it, and indeed the guidance encourages you to take account of debt level and free cash flow. Personally, I prefer (**) the old TMF guidance's wording that "With high dividend yields, and safety factors that suggest that their dividend income is sustainable and will hopefully grow. Typical safety factors used are one or more of high market capitalisation, good dividend cover, a good record of dividend growth, and low gearing. HYP strategies vary in which safety factors they use, so no individual safety factor is essential - but having some of them is!", since that made it clear that doing some checks on the sustainability of the dividends is not an optional extra.

However, I would not recommend altering the yield figures produced by the normal calculations, because that's simply begging for readers to post querying why your figures differ from the ones they're getting. Far better IMHO to post the straightforwardly calculated figure in the table and say e.g. "However, I consider Galliford Try's historical dividend highly likely to be cut, given its recent profit warning, so I'm discounting its apparent high yield for being too unsafe" in text afterwards.

(*) In quotes because they're really a variety of average rather than a consensus. E.g. if half the analysts are forecasting that the company will hang on and maintain its dividend, while the other half are forecasting that it will give in to the financial pressure it's under to cut and decide to cut by 40%, the consensus forecast will be for the dividend to be 20% down on the previous dividend - even though no analyst might be forecasting anything near that! IMHO the only way to properly use the word "consensus" to describe that situation is to say that there is no consensus between analysts...

(**) But then I would! - TMF used (with my permission) my wording on that with at most minor editing.

(***) Edit: I think either would be accepted, but discussing why inevitably goes into a subject area forbidden on TLF, so I won't.

Gengulphus


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