Selection criteria in these unusual times

[TUK020]

I'm interested in how HYP practitioners have been reacting to the effects of this pandemic on their portfolio.

Chris

Chris,
Cross posted from HYP-P
Main single company purchase in the last 3 months has been L&G, which keeps with standard HYP selection criteria.
However, the bulk of new moneys invested have gone into ITs - perceived as more likely to ride out the storm.
Some of the new moneys have gone into growth ITs, not just income - I am not yet drawing down for retirement, and while I am trying to 'prove out' an income strategy before I need to draw it, I do want to hedge my bets on a capital basis.
tuk020

[csearle]

Main single company purchase in the last 3 months has been L&G, which keeps with standard HYP selection criteria.
However, the bulk of new moneys invested have gone into ITs - perceived as more likely to ride out the storm.
Some of the new moneys have gone into growth ITs, not just income - I am not yet drawing down for retirement, and while I am trying to 'prove out' an income strategy before I need to draw it, I do want to hedge my bets on a capital basis.
tuk020

Thanks I think that this crisis has certainly bolstered the case for ITs (or for building-in substantial reserves into one's HYP.

Cheers,
Chris

[88V8]

Thanks for the X-post.
I have a large collection of the usual HYP suspects, and am not presently inspired to add.
Have made many HYP, IT, FI, purchases over the last couple of months, but likely to be income ITs and Fixed Interest fttb.

I am not yet drawing down for retirement, and while I am trying to 'prove out' an income strategy before I need to draw it, I do want to hedge my bets on a capital basis.

Good plan.
However.....
A strategy that will build up your portfolio pre-retirement, is not necessarily optimal in drawdown. At that point I would be looking more towards Fixed Interest as a bedrock. Not however during the building stage, due to the erosive effects of inflation.
And... proving a strategy... no strategy is good for ever. PYADic HYP was a perfectly good strategy, once upon a time.

V8

[Wizard]

My selection for yielding shares was initially focussed on adding shares to my portfolio that have until very recently been priced such that the yield has been a bit low. Unilever, Diageo and Johnson Matthey for example. I have been somewhat foregiving of Covid inspired blips if I believe that longer term the companies will return broadly to their prior paths.

I have also bought a few shares that are really down still, such as IAG, Rolls Royce and Melrose. I believe these may well return to paying a dividend that if the share prices stay low will give a reasonable yield. Alternatively if the market recognises the return to normality with a big rise in share price and the yield is not good I would have the option to harvest capital growth and redeploy it. But I think these are inherently more risky than the group above.

I am now though of the view that I need to look outside the UK as I am just too concentrated there. Following the theme of looking more for good growth over time, rather than headline stella yield now I bought CocaCola yesterday at just over $45 giving a yield a bit above 3.6%. As access to many of the markets other than the US and Canada seems more complicated, not least on the tax front I am starting to look at ITs for better Asia and mainland European exposure.

As an aside, does anyone have a view on how the level of dividend cutting has been in mainland Europe and Asia versus the UK? I believe the cuts in the UK are more than in N. America, where yields were lower, but am not sure I have heard comment on other European and Asian markets.

[Wizard]

Thanks for the X-post.
I have a large collection of the usual HYP suspects, and am not presently inspired to add.
Have made many HYP, IT, FI, purchases over the last couple of months, but likely to be income ITs and Fixed Interest fttb.

I am not yet drawing down for retirement, and while I am trying to 'prove out' an income strategy before I need to draw it, I do want to hedge my bets on a capital basis.

Good plan.
However.....
A strategy that will build up your portfolio pre-retirement, is not necessarily optimal in drawdown. At that point I would be looking more towards Fixed Interest as a bedrock. Not however during the building stage, due to the erosive effects of inflation.
And... proving a strategy... no strategy is good for ever. PYADic HYP was a perfectly good strategy, once upon a time.

V8

My bold.

I do not buy that as a universal truth. I believe Moorfield did the numbers at least once, showing the potential income growth from an FI investment, eg a preference share, with a better starting yield can grow faster through dividend reinvestment than an ordinary share with a lower starting yield, dividend growth and dividend reinvestment.

[Alaric]

, showing the potential income growth from an FI investment, eg a preference share, with a better starting yield can grow faster through dividend reinvestment than an ordinary share with a lower starting yield, dividend growth and dividend reinvestment.

It relies on the market always pricing consistently, but it can be shown that a fixed income of i should lead to the same outcome as an initial income of j and a growth of g when i = j + g.

[dealtn]

At that point I would be looking more towards Fixed Interest as a bedrock. Not however during the building stage, due to the erosive effects of inflation.

Why is the "erosive effects of inflation" less of an issue (to you at least) in drawdown?

[moorfield]

I believe Moorfield did the numbers at least once, showing the potential income growth from an FI investment, eg a preference share, with a better starting yield can grow faster through dividend reinvestment than an ordinary share with a lower starting yield, dividend growth and dividend reinvestment.

viewtopic.php?p=5208#p5208

This is the post you are thinking of Wizard, and the question I was investigating was "How long does it take for a high and rising dividend income to overtake a higher and fixed dividend income?" (nb. spending not reinvesting that dividend). It took 20 years for the notional ordinary share to catch up with the notional preference share. In comparison, men and women retiring at 65 are expected to live on average a further 14 and 17 years respectively (I looked that up).

I am kicking myself for recycling some of my SAN into HSBA last year, especially as those prefs were bought at a distressed price. That said only those possessing mighty cojones would buy RE.B now, and that's a cumulative pref.

[88V8]

Why is the "erosive effects of inflation" less of an issue (to you at least) in drawdown?

Because it [probably] has less time to take effect. Inflation over, say forty years, can make a big hole in a static payment. Even at today's anomalous inflation rates. Over 15-20 years, less so.

...the question I was investigating was "How long does it take for a high and rising dividend income to overtake a higher and fixed dividend income?" (nb. spending not reinvesting that dividend). It took 20 years for the notional ordinary share to catch up with the notional preference share. In comparison, men and women retiring at 65 are expected to live on average a further 14 and 17 years respectively (I looked that up).

I too have made that calculation. How long for the annual income to catch up, then how much longer for the cumulative income. It depends of course on the starting yield of each component.

When Prefs were yielding 8% and the FTSE 4%, it was a one-way bet.
But if one is investing at a time when FI is fully priced, as it was not long ago, the differential compared say to an IT or some HY equities is likely to be less compelling.

My enthusiasm in drawdown - as I have been for 13 years - stems not only from the yield differential, but from the fact that the income stream is very unlikely to be cut. As demonstrated in these recent times. Hence my term 'bedrock'.

V8

[tjh290633]

Many years ago, when I was looking at how to buy an annuity out of one of my pension funds, I compared the options of Level, 5% escalating and LPI escalating.

In terms of amount received each year, the 5% escalating version caught up with the level version after 12 years, but in terms of total amount paid out, it will take about 22 years.

The LPI version took 13 years to catch up in therms of annual payment, but will take 25 years to equal the total amount paid out.

I can also compare the dividend/income unit for my HYP with the RPI:

.            Ordinary    Rebased     RPI       Change      Change
Year to      Divs/unit   Divs/unit   Rebased   Divs/unit   RPI   
05-Apr-88         2.86      100.00    100.00                     
05-Apr-89         2.72       94.81    112.28      -5.19%   12.28%
05-Apr-90         4.24      147.94    122.89      56.05%    9.45%
05-Apr-91         5.42      189.25    130.75      27.92%    6.39%
05-Apr-92         7.52      262.34    136.35      38.62%    4.28%
05-Apr-93         6.91      241.32    138.11      -8.01%    1.30%
05-Apr-94         6.27      218.85    141.65      -9.31%    2.56%
05-Apr-95         7.48      261.07    146.37      19.29%    3.33%
05-Apr-96         7.38      257.48    149.90      -1.38%    2.42%
05-Apr-97         8.40      293.36    153.54      13.93%    2.42%
05-Apr-98         8.88      310.04    159.72       5.69%    4.03%
05-Apr-99         8.46      295.34    162.28      -4.74%    1.60%
05-Apr-00        11.33      395.51    167.09      33.92%    2.97%
05-Apr-01        11.73      409.64    170.04       3.57%    1.76%
05-Apr-02        13.02      454.50    172.59      10.95%    1.50%
05-Apr-03        12.10      422.26    178.00      -7.09%    3.13%
05-Apr-04        11.62      405.63    182.42      -3.94%    2.48%
05-Apr-05        12.07      421.42    188.21       3.89%    3.18%
05-Apr-06        13.12      458.13    193.03       8.71%    2.56%
05-Apr-07        14.04      490.19    201.77       7.00%    4.53%
05-Apr-08        24.32      849.07    210.22      73.21%    4.19%
05-Apr-09        21.17      739.15    207.76     -12.95%   -1.17%
05-Apr-10        11.06      386.20    218.86     -47.75%    5.34%
05-Apr-11        16.71      583.44    230.26      51.07%    5.21%
05-Apr-12        17.46      609.34    238.21       4.44%    3.46%
05-Apr-13        19.91      694.93    245.09      14.05%    2.89%
05-Apr-14        20.47      714.45    250.29       2.81%    2.12%
05-Apr-15        21.33      744.60    253.44       4.22%    1.26%
05-Apr-16        21.67      756.58    256.78       1.61%    1.32%
05-Apr-17        24.93      870.11    265.82      15.00%    3.52%
05-Apr-18        29.23    1,020.51    274.75      17.29%    3.36%
05-Apr-19        29.25    1,020.97    283.10       0.04%    3.04%
05-Apr-20        31.57    1,102.06    284.38       7.94%    0.45%

TJH

[88V8]

I can also compare the dividend/income unit for my HYP with the RPI

You really do have a peerless set of records.
Mmm, look at the rpi in 88. Those of us who lived through the 70s have a bit of a complex about inflation.

V8

[tjh290633]

I can also compare the dividend/income unit for my HYP with the RPI

You really do have a peerless set of records.
Mmm, look at the rpi in 88. Those of us who lived through the 70s have a bit of a complex about inflation.

V8

That becomes apparent when I look at some of my other records. 1976 had an increase of 23.4%.

TJH

[Wizard]

I am buying IT's. My HYP is frozen for now.

I wondered if that is that a short term freeze due to Covid-19, or a longer term freeze? If the latter I wondered why?

[funduffer]

I am buying IT's. My HYP is frozen for now.

I wondered if that is that a short term freeze due to Covid-19, or a longer term freeze? If the latter I wondered why?

It is short term.

At the moment, there are so many dividend cuts that it is impossible to select HYP shares with any confidence.

Until we know the final shape of the pandemic and the expected economic outlook, I think buying discounted IT’s that are still paying a decent income is a saf-ish haven for now.

The IT’s I have been buying are largely international, as I also feel geographic diversification is a risk mitigation at this time.

Time to re-look at buying HYP? - maybe the autumn, we’ll see.

FD

[Wizard]

I am buying IT's. My HYP is frozen for now.

I wondered if that is that a short term freeze due to Covid-19, or a longer term freeze? If the latter I wondered why?

It is short term.

At the moment, there are so many dividend cuts that it is impossible to select HYP shares with any confidence.

Until we know the final shape of the pandemic and the expected economic outlook, I think buying discounted IT’s that are still paying a decent income is a saf-ish haven for now.

The IT’s I have been buying are largely international, as I also feel geographic diversification is a risk mitigation at this time.

Time to re-look at buying HYP? - maybe the autumn, we’ll see.

FD

Thanks for that FD.

I agree that increased global diversification opens up a vast array of sensible alternatives beyond those available to an HYP investor, as it seems limiting purchases to the FTSE350 is a clear and unambiguous requirement for a portfolio to be called an HYP. I believe the counter argument is that many UK listed companies have internationally diversified income sources, but personally I find that an insufficient counterbalance. While it is possible to buy some international shares directly, that is not the case for all and there are also tax considerations for many of them, which means in many cases ITs are the best option.