Whether HYP (as defined in the guidelines) works

[Alaric]

The man in the street , might be better served with half a dozen assorted income biased investment trusts, many have very long records of increasing dividends and the greater diversification, less need to follow the financial news.

The original author of the "HYP" concept had some antipathy towards Investment Trusts. It might have been charges, which could be an issue, but somehow he thought that it was only FTSE 350 Companies that were worth investing in and the sometimes smaller company or exotic investments permitted in ITs were a "no-no".

I'm inclined to think that if investing for income using UK stock markets, the starting point would be what you would get from a tracker/ ETF following the FTSE 100/350 or All-share. If that didn't give enough and you would accept higher risk in exchange for higher returns or even just higher income, look at shares and ITs where the dividend yield was above the average. But ITs can give higher income with more sustainability than Vodafone or Centrica.

[Itsallaguess]

The HYP strategy has a clear aim - to allow normal people with no investment background to pick up a very simple strategy that allows them, generally and over time, to see good income-returns with very little effort.

Given the length of discussions in the practical board with the minutiae of HYP investing and that no two portfolios are the same.... surely this goes against the spirit of “normal people with no investment background” and “simple” strategy. No disrespect but surely it is a strategy for enthusiasts ?

The man in the street , might be better served with half a dozen assorted income biased investment trusts, many have very long records of increasing dividends and the greater diversification, less need to follow the financial news.

I strongly suspect the average investor, with little investment background, will be overly concerned with the few shares that inevitably perform poorly, overlooking those that do well... I suspect it would be deeply uncomfortable for many.

I didn't realise you'd replied to a post of mine, as you'd removed the attribution from the first quote box above. That's easily done when we might want to edit-down a quote to reply to, so I only mention this so that it's something you might want to keep an eye on in the future. Ensuring that the quote attribution is maintained means that those of us with automatic notifications turned on get a clear alert that someone has replied to one of our messages, so it helps to maintain ongoing conversations. That's easy to miss when those automatic notifications can't work due to the removal of such attribution.

Anyhow, in relation to your post above, you'll have no arguments from me at all there, I'm afraid. This is exactly where I'm at as an income-investor nowadays, with my 'original' HYP now making up around 60% of my invested capital, and the other 40% (which is the most 'recent' 40% invested...) being allocated to a wide variety of income investment-trusts. I expect direct investment into my single-company HYP holdings to be absolutely minimal in an ongoing sense, and for the 40% allocation to income investment-trusts to steadily grow over time.

I have been vocal about this, and the reasons behind a move away from HYP as an income-strategy. In fact I've explained that position in an earlier post on this very thread - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=17614#p220810

I also gave more details in my decision to start moving away from HYP in this post, asking why we only ever saw investors on these boards generally go one way with regards to HYP income-investing (HYP to income-investment-trusts..) - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=15438#p189951

But this thread isn't about me, or what I'd recommend - it's about the HYP Strategy, and I think it *does* work, and *can* work, but it's just that it doesn't, as an income strategy, suit me personally for the reasons given in the above linked post.

I hope this clarifies my view - I'm certainly not overly-recommending HYP as an income-strategy, as I think I've found an improved one (that's improved in many areas..), but if you go back to the first post on this thread (where this thread was split from an earlier, larger thread due to it's topic meandering somewhat..), you'll see why I wanted to post on it - the OP seems to be wanting to write-off a strategy because there's a risk that someone following it might lose capital on a share bought using it.

I wanted to highlight that this is a risk with *investing in general*, and not just a risk *with the HYP strategy*, and I stand by that view...

Cheers,

Itsallaguess

[Alaric]

the OP seems to be wanting to write-off a strategy because there's a risk that someone following it might lose capital on a share bought using it.

Not really, it was being critical of a method which seemingly quite deliberately seeks out shares with a recent track record of price falls (Vodafone etc.) whilst dismissing those with a strong record of dividend increases (Diaego, Unilever).

Increasingly it would seem, shares become high yield not because of stellar dividend performance, but because of price drops. Investing in recovery situations can be profitable, but needs research to find the likely turning points and avoid the complete wipe outs.

[IanTHughes]

the OP seems to be wanting to write-off a strategy because there's a risk that someone following it might lose capital on a share bought using it.

Not really, it was being critical of a method which seemingly quite deliberately seeks out shares with a recent track record of price falls

Quite right too. You should investigate the HYP Strategy which in contrast to the rather silly strategy that you have outlined above, quite deliberately seeks out shares with a high yield and indications of a sustainable, rising dividend.


Ian

[Alaric]

Quite right too. You should investigate the HYP Strategy which in contrast to the rather silly strategy that you have outlined above, quite deliberately seeks out shares with a high yield and indications of a sustainable, rising dividend.

There speaks someone who happily topped up Vodafone before the recent cut and would reject Compass which recently increased its dividend.

[dspp]

I think that the world has moved on a lot from the time when "HYP" was first codified and subsequently developed, almost thirty years ago.

Back then was pre-Vanguard, and pre-online low cost brokerages, and pre the proliferation of low cost index trackers. Back then the IT industry and the brokerages were fattening themselves on very large fees by todays standards. Hence one of the desirable features of HYP was - in effect - a methodology to allow a personalised IT to be constructed with a reasonable chance of success, and so eliminate the fees. And by really pushing hard against trading a whole other set of fees was avoided, as well as a whole other set of bad decision opportunities.

Those days have gone and we as retail investors now have better and cheaper tools in the box: the loco index trackers, and the now-much-cheaper ITs. So, whilst the HYP strategy could usefully evolve to fill in some glaring undocumented gaps (around selling / trimming / rebalancing / loss-avoidance), it is like repeatedly fighting a minor engagement in a forgotten war with obsolete weapons. Or as I have said before, old bald people squabbling over a comb.

However if such guidelines could be documented (as clearly many HYP advocates have them in their heads) then it would be very useful: both as a guide to the perils of HYPing and how to ameliorate them if individuals do want to go that route; and as a aid to HYP-P moderation. Meanwhile, in their absence, I am afraid that: some private investors will not read closely enough between the unwritten lines and will lose money unnecessarily; and the religous battles between orthodox HYP-purists and evolved HYP-pragmatists will continue to go on. The first is very sad, and the second frankly is far too much bickering for my liking.

I would really appreciate it if the HYP community could take on this challenge and this effort. Preferably on this board and definitely not on HYP-P.

regards, dspp

[tjh290633]

Quite right too. You should investigate the HYP Strategy which in contrast to the rather silly strategy that you have outlined above, quite deliberately seeks out shares with a high yield and indications of a sustainable, rising dividend.

There speaks someone who happily topped up Vodafone before the recent cut and would reject Compass which recently increased its dividend.

Have you looked at the yield on Compass? It does not qualify as a new selection and has been on the cusp of disposal for low yield for a few years now.

TJH

[IanTHughes]

Quite right too. You should investigate the HYP Strategy which in contrast to the rather silly strategy that you have outlined above, quite deliberately seeks out shares with a high yield and indications of a sustainable, rising dividend.

There speaks someone who happily topped up Vodafone before the recent cut and would reject Compass which recently increased its dividend.

Quite right, I much prefer a 5.6% yield with a strong possibility of an increasing dividend into the future. Are you suggesting that you prefer starting at 2.25%? How will that improve the income result which, as I am sure you understand by now, is the main aim of the HYP strategy?


Ian

[Alaric]

Have you looked at the yield on Compass? It does not qualify as a new selection and has been on the cusp of disposal for low yield for a few years now.

I have yes. But if you want to compare a level income with an increasing one, a way of doing so is to add the initial rate of return to the rate at which it increases. On that test Compass scores around 9% so well into Vodafone territory as was. It may not be suitable for someone looking for immediate income, but eminently suitable for building a future income on a buy and hold approach. There are other similar stocks around, Diageo and Unilever being two of the more obvious examples.

So if you filtered on the sum of dividend yield and expected dividend increase, the "junk" would be way down the list, particularly if you put in a negative future increase.

Reported dividend yield goes up when market prices fall and conversely goes down when prices rise. The prices of shares of Companies which regularly increase their dividends seem to go to a premium which excludes them from simple minded current yield filters.

[Alaric]

Quite right, I much prefer a 5.6% yield with a strong possibility of an increasing dividend into the future. Are you suggesting that you prefer starting at 2.25%?

I would prefer a 2.25% dividend increasing at 6.5% to 5.6% not increasing. But then I don't do the folly of ignoring capital value. If you want more income, sell something.

[IanTHughes]

Have you looked at the yield on Compass? It does not qualify as a new selection and has been on the cusp of disposal for low yield for a few years now.

I have yes. But if you want to compare a level income with an increasing one, a way of doing so is to add the initial rate of return to the rate at which it increases. On that test Compass scores around 9% so well into Vodafone territory as was. It may not be suitable for someone looking for immediate income, but eminently suitable for building a future income on a buy and hold approach. There are other similar stocks around, Diageo and Unilever being two of the more obvious examples.

Compass Group (CPG) can be purchased today with a yield of 2.18% while Vodafone Group (VOD) will come with a yield of 6.23%. Now, assume that the CPG dividend is increased by 10% each and every year going forward while the VOD dividend is held at its current level. Only in the 13th year would the income from CPG be greater than that for VOD. Furthermore, it would not be until the 20th year that the total accumulated income received from CPG would finally overtake that from VOD. And remember, that is assuming NO DIVIDEND GROWTH AT ALL for VOD

If one builds in a 2% increase for VOD against the 10% for CPG it would be a wait of 15 years for a greater annual income and 24 years for a larger total accumulated income.

The prices of shares of Companies which regularly increase their dividends seem to go to a premium which excludes them from simple minded current yield filters.

In my view, when proposing a strategy with the aim of producing an income stream, it is the "LOW" Income approach which is simple minded.


Ian

[Itsallaguess]

the OP seems to be wanting to write-off a strategy because there's a risk that someone following it might lose capital on a share bought using it.

Not really, it was being critical of a method which seemingly quite deliberately seeks out shares with a recent track record of price falls (Vodafone etc.) whilst dismissing those with a strong record of dividend increases (Diaego, Unilever).

Increasingly it would seem, shares become high yield not because of stellar dividend performance, but because of price drops. Investing in recovery situations can be profitable, but needs research to find the likely turning points and avoid the complete wipe outs.

I think you're overselling the Vodafone issue.

The HYP strategy takes a portfolio approach, spreading invested capital around companies and sectors, to lessen the effects of single-company shocks. I've been interested in the HYP idea for long enough to see that it's not happening 'increasingly' as you're trying to suggest, as it's always been a risk, and is something that HYP investors need to both be aware of and try to cope with.

Of course we all remember these Vodafone issues, as they are high-visibility companies and are not expected to stumble too much, but to demonstrate why I think you're overplaying the Vodafone card, I'll show below what a 40% dividend cut in a single-company holding might do for a 20-share HYP portfolio, remembering that this is exactly what's happened with Vodafone in this instance -



As you can see, with all other things being equal, a 40% Vodafone dividend cut might reduce the overall dividend income from a 20-share HYP portfolio by 2%.

Even with that said, let's not forget that over the course of a year's worth of portfolio dividends, this is assuming that all the other 19 share-holdings keep their own dividends at exactly the same level. How likely do you consider that to be, across 19 other income-investments?

Taking the above into account, I'd suggest that an income-investment strategy such as HYP, which by default is likely to require some level of income-buffering and back-up cash, could consider a 2% overall dividend drop which is actually likely to be less than that when we take the possible increases from the other 19 holdings, to be investment-noise and nothing else.

As an aside - you've brought the examples of Diageo and Unilever up as though they're somehow 'immune' to these types of investment-risk issues. What makes them so special that we should consider them immune - do they carry zero risk in their business-models?

Cheers,

Itsallaguess

[IanTHughes]

Quite right, I much prefer a 5.6% yield with a strong possibility of an increasing dividend into the future. Are you suggesting that you prefer starting at 2.25%?

I would prefer a 2.25% dividend increasing at 6.5% to 5.6% not increasing. But then I don't do the folly of ignoring capital value. If you want more income, sell something.

What makes you think that the Vodafone Group (VOD) dividend will not grow at all? How can you possibly know that the future will pan out exactly as you predict? Are you claiming mystic powers of fortune telling? Are you seriously saying that your selection criteria is better because you can see into the future?

Investment advice like that, I for one avoid like the plague!


Ian

[Alaric]

What makes you think that the Vodafone Group (VOD) dividend will not grow at all?

It's struggling for cash to finance all its spending requirements on new infrastructure. It's also got that debt to equity swop that it's using to finance the German acquisition. It's not making that much profit.

[IanTHughes]

What makes you think that the Vodafone Group (VOD) dividend will not grow at all?

It's struggling for cash to finance all its spending requirements on new infrastructure. It's also got that debt to equity swop that it's using to finance the German acquisition. It's not making that much profit.

You are Mystic Meg and I claim my £10


Ian

[bluedonkey]

One of the really good things going for it is that it teaches an aversion to trading, and that is very important as we know that almost all investors - whether amateur or professional - lose money by trading.

One of the original authors, or perhaps the original author, was a personal tax accountant and was advocating his idea as an alternative use for the 25% tax free lump sum at retirement. With it being a lump sum and quite a few years ago, it would not have been possible to invest using ISAs to any great extent. It would follow then that selling, even to rebalance would introduce the additional complication of capital gains tax. Is that the cause of the aversion to even occasional trading?

If the portfolio is ISA based, avoiding trading for CGT reasons is irrelevant.

Yes, Stephen Bland was/is a Chartered Accountant.

[Lootman]

Compass Group (CPG) can be purchased today with a yield of 2.18% while Vodafone Group (VOD) will come with a yield of 6.23%. Now, assume that the CPG dividend is increased by 10% each and every year going forward while the VOD dividend is held at its current level. Only in the 13th year would the income from CPG be greater than that for VOD. Furthermore, it would not be until the 20th year that the total accumulated income received from CPG would finally overtake that from VOD. And remember, that is assuming NO DIVIDEND GROWTH AT ALL for VOD

If one builds in a 2% increase for VOD against the 10% for CPG it would be a wait of 15 years for a greater annual income and 24 years for a larger total accumulated income.

Yes, if you ignore capital then that is the case. But when you incude capital then it seems fairly obvious that a share increasing its dividend every year will also increase its share price by at least similar amounts, else the yield would creep up and eventually exceed 100%.

So unless you really, truly believe that capital is utterly irrelevant (and few do even if they say they do) then you are only giving half of the picture. I believe this is why Bland invented terms like "capital doesn't matter" and "annuity replacement" - because he knew very well what the glaring structural weakness in HYP was: It borrows money from the future to pay you more today.

One of the original authors, or perhaps the original author, was a personal tax accountant

Yes, Stephen Bland was/is a Chartered Accountant.

I believe that he mostly did tax returns for people. He once claimed that was where his investment ideas came from i.e. from "seeing thousands of portfolios". I never understood why he thought that was credible. I've seen thousands too but derive my investment knowledge from elsewhere.

Bland's main edge was that, as an accountant, he understands balance sheets. If you believe that you can gain an edge by reading them, then good for you. Personally I have never read one in my life and presume that is what is in them is public and therefore priced in. In any event such an activity is hardly the kind of thing envisaged as an "easy" method of investment for the average small investor or retiree.

[Alaric]

Now, assume that the CPG dividend is increased by 10% each and every year going forward while the VOD dividend is held at its current level.

What will happen to the respective share prices? I reject the notion that capital values are unimportant. In the circumstances you describe, the likely effect on share prices is that Vodafone remains static or worse whilst Compass increases at 10% so as to retain its original dividend yield.

Unless you have a self imposed rule, it's not as if you cannot at some future date sell Compass at its enhanced price to boost your income by buying something with a higher but fixed income. It's going to cost 1/2% in terms of stamp duty and a bit of dealing commission. If it's in an ISA or SIPP there are no Gains tax issues.

[Alaric]

because he knew very well what the glaring structural weakness in HYP was: It borrows money from the future to pay you more today.

If the intent is to boost retirement income, that's probably what you have to do. Equally a few Preference Shares could have been thrown into the mix to give some lower risk ballast to the income. Some posters have used that approach.

Bland's main edge was that, as an accountant, he understands balance sheets. If you believe that you can gain an edge by reading them, then good for you.

Given that the Accounts for some Companies can be a creative work, understanding how they've been put together is a form of legal insider knowledge. That can particularly apply as to whether a Company is earning enough to pay, maintain or increase its dividend.

I doubt markets are that perfect as unexpected Company collapses are still a regular occurrence. Fraud and external events can contribute to that as well as dubious accounting.

[IanTHughes]

Compass Group (CPG) can be purchased today with a yield of 2.18% while Vodafone Group (VOD) will come with a yield of 6.23%. Now, assume that the CPG dividend is increased by 10% each and every year going forward while the VOD dividend is held at its current level. Only in the 13th year would the income from CPG be greater than that for VOD. Furthermore, it would not be until the 20th year that the total accumulated income received from CPG would finally overtake that from VOD. And remember, that is assuming NO DIVIDEND GROWTH AT ALL for VOD

If one builds in a 2% increase for VOD against the 10% for CPG it would be a wait of 15 years for a greater annual income and 24 years for a larger total accumulated income.

Yes, if you ignore capital then that is the case. But when you incude capital then it seems fairly obvious that a share increasing its dividend every year will also increase its share price by at least similar amounts, else the yield would creep up and eventually exceed 100%.

Once more, a rising Income Stream is the principal aim of the HYP Strategy. Seriously, if you cannot understand and accept that frankly rather simple statement, I for one do not believe that you have anything to offer with regard to the management of the HYP Strategy.

But lets assume for the moment that you do accept that HYP in an Income Strategy that searches out sustainable dividends with the potential for dividend growth, then you should also understand that my above example, with a dividend not growing at all, was solely for the purposes of demonstrating how long one would have to wait for income from a low yield to catch that from a high yield.

I personally, would much prefer an initial 7% yield with a growing dividend to an initial 3% yield with a growing dividend. You, it appears to me, along with others such as Alaric, disagree. You would prefer to choose the initial 3% yield with a growing dividend and reject an initial 7% yield with a growing dividend. Remarkably, you then go on to claim that your low yield alternative would produce a better Income outcome, the principal aim of the HYP Strategy, over the long term. Could you please show me how you work this out?


Ian