Context
I retired at the end of 2013 aged 58 and took my DB pension early (with the inevitable actuarial reduction), and decided to boost my retirement income by investing in a portfolio of income generating IT’s and a HYP. I used part of my pension lump sum, and a number of languishing old cash ISA’s to finance all this. I chose these 2 investment methods of increasing my income, as I had read about both on TMF (IT baskets and HYP), thanks to such contributors as Luniversal and pyad, plus many others too many to mention.
I have invested roughly equal amounts in the IT’s and HYP, and most of the investments were made in 2014. Since then, I have topped up both portfolios with some extra bits of cash, and most of the dividends generated, having discovered I did not need to spend as much in retirement as I had anticipated.
So looking back after 5 years, how have these 2 portfolios worked out, and what have I learnt?
Current Status of the 2 portfolios
My HYP currently looks like this:
Value Div Fcst
Share Epic Sector %Total %Total Yield
Unilever ULVR Food Producers 6.19% 3.15% 3.20%
BAE Systems BA Aerospace & Defence 3.77% 2.81% 4.70%
Sainsbury (J) SBRY Food & Drug Retailers 4.90% 3.66% 4.70%
Royal Dutch Shell 'B' RDSB Oil & Gas Producers 7.39% 6.81% 5.80%
HSBC Holdings HSBA Banks 7.52% 7.05% 5.90%
Vodafone Group VOD Mobile Telecommunications 4.28% 6.05% 8.90%
National Grid NG Multiutilities 2.91% 2.78% 6.00%
GlaxoSmithKline GSK Pharmaceuticals & Biotechnology 12.34% 10.40% 5.30%
South32 Limited (DI) S32 Mining 3.45% 5.26% 9.60%
Legal and General Group LGEN Life Insurance 7.46% 7.12% 6.00%
Galliford Try GFRD Construction & Materials 2.54% 5.21% 12.90%
Imperial Brands IMB Tobacco 5.88% 7.75% 8.30%
Lloyds Banking Group LLOY Banks 3.49% 2.88% 5.20%
Marston's MARS Travel & Leisure 4.62% 5.58% 7.60%
Stagecoach Group SGC Travel & Leisure 2.33% 2.41% 6.50%
Capita CPI Support Services 1.62% 0.00% 0.00%
SSE SSE Electricity 4.12% 4.65% 7.10%
British Land Company BLND Retail REITs 3.40% 2.86% 5.30%
WPP WPP Media 4.77% 4.85% 6.40%
BHP Group BHP Mining 7.04% 8.73% 7.80%
Portfolio Running Yield = 6.29%
Value Div
Sector %Total %Total
Food Producers 6.19% 3.15%
Aerospace & Defence 3.77% 2.81%
Food & Drug Retailers 4.90% 3.66%
Oil & Gas Producers 7.39% 6.81%
Banks 11.01% 9.93%
Mobile Telecommunications 4.28% 6.05%
Multiutilities 2.91% 2.78%
Pharmaceuticals & Biotechnology 12.34% 10.40%
Mining 10.49% 13.99%
Life Insurance 7.46% 7.12%
Construction & Materials 2.54% 5.21%
Tobacco 5.88% 7.75%
Travel & Leisure 6.95% 7.99%
Support Services 1.62% 0.00%
Electricity 4.12% 4.65%
Retail REITs 3.40% 2.86%
Media 4.77% 4.85%
Total 100.00% 100.00%
Note: 1...'Value %Total' is the portfolio value of the share as a % of the total portfolio
2...'Div %Total' is the expected dividend of the share based on forecast yield
as a % of the total portfolio expected dividend
I recently reviewed 5 years of this HYP in a post on the HYP board, so I won’t repeat all the twists and turns as they are well described here (although there have been a couple of recent top-ups!):
viewtopic.php?f=15&t=16153
My IT portfolio looks like this:
Value Div Fcst
Share Epic Sector %Total %Total Yield
Henderson Far East Income Ltd. HFEL Equity Investment Instruments 13.25% 18.22% 5.90%
BlackRock World Mining Trust BRWM Equity Investment Instruments 8.84% 9.88% 4.80%
City of London Inv Trust CTY Equity Investment Instruments 13.10% 12.83% 4.20%
Dunedin Income Growth Inv Trus DIG Equity Investment Instruments 13.25% 14.21% 4.60%
Scottish American Inv Company SCAM Equity Investment Instruments 14.53% 9.82% 2.90%
Murray International Trust MYI Equity Investment Instruments 11.10% 11.38% 4.40%
BMO Capital & Income Investmen BCI Equity Investment Instruments 13.79% 10.93% 3.40%
Aberdeen Standard Equity Incom ASEI Equity Investment Instruments 12.13% 12.72% 4.50%
Portfolio Running Yield = 4.29%
Value Div
Sector %Total %Total
Equity Investment Instruments 99.99% 99.99%
Total 100.00% 100.00%
Note: 1...'Value %Total' is the portfolio value of the share as a % of the total portfolio
2...'Div %Total' is the expected dividend of the share based on forecast yield
as a % of the total portfolio expected dividend
In choosing the constituents of the IT portfolio, I aimed to achieve the following (back in 2014):
An overall yield >4%
Overall discount rather than premium, and no large premiums
TER <1% overall
Income growing at least as fast as CPI inflation.
I have pretty much achieved all these.
I also wanted diversification – geographical (MYI, SCAM, HFEL), sectorial (BRWM), size (ASEI), but with an overall UK bias (CTY, DIG, BCI). In retrospect, BRWM was a poor choice, choosing a cyclical sector (mining) that was bound to run into trouble at the low part of the cycle, which it did in 2016 with a dividend cut.
Performance
As I withdraw some dividends, I track performance by unitisation of both portfolios, using income units. Thus, income per unit, and unit price give an indication of income and capital performance that can be compared with inflation, and the FTSE AS respectively.
The start dates for the 2 portfolios was slightly different (I largely invested in the IT’s first), so for convenience, and to minimise the effects of dividend drag, I will use the financial years 2014-15 to 2018-19 for the basis of the comparison.
Also, I have normalised unit price for both IT’s , HYP and the FTSE AS to the value of 1.0 as of 5/4/2015, and income per unit as the value 1.0 for the period 6/4/14 to 5/4/15. This allows them to be compared directly.
For income, the 5-year performance is as follows:
Overall, HYP income per unit has grown by 19% over 5 years, and that from the IT’s by 26%, both easily outstripping inflation. This is slightly flattering as the Base year (2014-15) is still subject to some dividend drag, making the growth rate seemingly higher in the next year. Even so, it has been relatively straight forward to outstrip inflation, although the path has not been smooth from year to year.
Perhaps more important, is the HYP (currently at 6.29%) has a much higher yield than the IT's (4.29%), and this has been the case throughout the 5 year period. If income is vital to you, HYP will give you more bang for your buck!
For capital, the 5-year performance is as follows:
Overall, over 5 years, HYP unit price has fallen nearly 10% (mostly in Year 4), whereas the FTSE AS has risen 8%. Not great, but given this is an income strategy, capital should be secondary. I try not to worry about this too much!
On the other hand, the IT’s have outpaced the FTSE AS gaining +15% over the same 5 year period, largely driven by the US-focussed SCAM. You could argue I should use a different benchmark than the FTSE AS for the IT’s, but it is not that important to me, so I don’t want to spend any effort on this.
Note, although I have normalised the capital value, in reality the HYP and IT portfolios have roughly equal value (within 5%) and have had very similar amounts of original capital invested in each.
Lessons Learned
So over 5 years of investing in income generating IT’s and a HYP, what have I learnt? Here are a few lessons:
• IT’s take little work, and on the whole are reliable producers of income
• A HYP is more work, but perhaps more interesting if you enjoy investigating companies.
• A HYP is more volatile, with dividend cuts, specials, and corporate actions occurring regularly. Even Doris with her non-tinkering HYP needs to stay awake.
• A HYP can generate more income (higher yield) than IT’s, but probably at the expense of a lower income growth rate. It will be interesting to compare again after 10 years!
• The IT portfolio has more closely followed the FTSE AS on capital value, whereas the HYP has fallen behind particularly from 2017 onwards. I think this has probably been a general trend for FTSE high yield shares over this period.
Overall, I intend to stick with both the HYP and IT’s, at least until I draw my state pension in 4 years’ time. At that point, I may switch entirely to IT’s - but the jury is still out.
On the other hand, HYP is fun and IT’s are boring! I do enjoy reading the blogs and researching my next top-up, so I may continue with both portfolios just for this!
Thanks for reading if you got this far, and I would be interested in any comments.
FD