I'd like to note that in Pyad's linked post above, he has this view of the ZONE theory -
The other weakness in the above is the mention of "In this market, too high a yield should maybe be looked at with more suspicion" implying things are different now.
In my view, this time it's not different. It never is for the HYP strategy.
There is no "this market", there is only "the market".
Sure you need to look closely at a very HY share but you always did, not just in "this market". However it is wrong in my view is to reject it automatically on the sole ground that it is very HY.
That's what the zones idea does and I think it flawed.I personally think that the focus above on the '
this market' idea actually confuses the issue, and if we remove that side-issue from the above passage, then Pyad seems to simply be saying the following -
1. You need to
look closely at a very high-yield share.
2. You
always needed to do this.
3. It's 'wrong' to simply 'reject' something
automatically, just because it's a very high-yield share.
4. Because of the above, the ZONAL idea is flawed.
So with the above points split out from Pyad's view of the ZONAL subject, then it seems that we're left with the idea that we simply 'don't need' the ZONAL idea for self-protection, so long as we do some additional, potentially difficult and laborious, hard investigations into potential very-high-yield investments, and doing so should highlight those very-high-yield investment options that might look too risky, and leave some that don't look as risky, and which might warrant investing in for income.
That all seems fair enough, and is difficult to argue against on the face of it.
Except.....
Hands up who actually *does* this 'additional due-diligence' when venturing into very-high-yield territory?
If we decide that we either can't, or we've not got enough time available, or that we simply don't have the experience to carry out such additional checks, then what do we do then? The HYP instruction manual seems very light indeed in this area of income-investment....
The options seem to be -
a. We simply don't invest in very-high-yield options, given that we're not willing to put the additional work in to separate the wheat from the chaff...
or
b. We perhaps look for
alternative pointers as to where such danger lies....
And when Luni can demonstrate that his 'Danger Zone' theory can indeed highlight the future potential for dividend-issues, as shown in the link below, then I think it becomes a useful *option* for people who may simply not want to, or are not able to carry out the additional due-dilligence that Pyad insists is required on very-high-yield shares -
From Luni -
Meanwhile, here is a later example of zones in action-- the last of my monthly yield lists, calculated on Dec. 23, 2016.
At that point my database held 195 past and present HYP-able shares, but only 71 had good enough five-year dividend records and yielded enough (90% or more of the All-Share yield, then 3.5%) to be potentially eligible for one of my 'sturdometer' monthly portfolios. Of these 52 were in the Optimal Zone and 19 in the red zones, as below:
From a quick check of what has befallen their payouts since, 14 of 19 red-zoners came to grief: suspending, passing or freezing the rate. Two, Carillion and Interserve, were wipeouts.
Only eight of 52 in the OZ misbehaved similarly, and on the whole, the red yielders have suffered worse: only Pearson among them has begun to restore a cut dividend. (AstraZeneca, Shell and BBA Aviation pegged the dividend in dollars, but it grew in sterling terms.) The worst that befell 'Goldlilocks' yielders was Provident Financial's pass, which it began to mend before becoming a bid prospect. Otherwise the OZ saw five freezes and two serious 'rebasings' but no busts.https://www.lemonfool.co.uk/viewtopic.php?f=15&t=17704&p=222398#p222398So it's great for Pyad to knock the idea with a view that 'obviously' tougher checks need to be made on very-high-yield share options, but beyond that there seems to be very little detail on how to actually
do that, and what 'good' or 'bad' might look like after carrying out such detailed checks....
If the HYP Strategy contained details of what these 'additional checks' needed to be, then I think that would go some way towards helping followers of the HYP strategy not having to seek out alternative methods of highlighting such risks, but in the
absence of those additional guidelines, and in specific recognition of Luni's results above, then I think there's a useful part for the 'Danger Zone' theory to play in our selection-strategies, even if it's simply as an additional check-off during the final selection processes.
Yes, it might remove what could turn out to be a few relatively 'safe' options, but if it also removes the bulk of the 'unsafe' options, then it might well provide a benefit to those who would prefer to stay in the centre-lane of the income-investing highway, and well outside that risky third-lane rat-run.....
Cheers,
Itsallaguess