Here Are Some Ideas
Posted: September 3rd, 2020, 9:04 am
miner1000 recently asked “Where Are The Ideas?” on HYP-Practical. Unfortunately HYP-P doesn’t want any ideas that do not meet strict rules. Here are a few ideas that might be of interest for those HYPers who aren’t so dogmatic. People should note that I am not a HYP investor and the only HYP-P qualifying share I own is National Grid (and Unilever, which somehow qualifies even though its yield is "low").
I should point out that I consider the HYP-P “no funds rule” to be terrible advice for inexperienced income seeking investors. To me it is like letting a 17-year old who has never ridden a motorcycle start on my 800cc BMW rather than a 50cc Japanese bike or a moped.
I haven’t come across an investment trust (IT) that has stopped paying dividends in 2020, but a lot of HYP qualifying shares have done just that. We’re in a different investment universe today than when HYP first appeared on TMF. Back then stockmarket yields followed the “reverse yield gap”, where market yield was less than the yield available on medium-dated gilts. A consequence of the 2008 financial crisis was that UK stockmarket yields relative to gilts went back to the pre-1950s yield gap, with shares since the crisis continuing to yield more than gilts.
Looking for a 6% yield in today’s investment world, where medium gilts yield just 1%, is taking on board a lot more risk than getting 6% on equities when medium gilts used to yield 5%.
1) Henderson Far East Income (HFEL). 7.4% yield. Don’t expect much capital growth from this. Instant diversification into a non-UK portfolio. It’s one of my smaller holdings. The thread below is “An Alternative to HFEL“, but it has quite a bit of information about HFEL and some alternatives:
https://www.lemonfool.co.uk/viewtopic.php?f=54&t=20063
2) Law Debenture. 4.9% yield. Another investment trust which I own, it is not a typical IT in that it owns a substantial fiduciary services business. This is typically responsible for 30% to 40% of the dividend. Law Debenture recently raised its dividend. Thread linked below:
https://www.lemonfool.co.uk/viewtopic.php?f=54&t=24178
3) There are many more income investment trusts (e.g. Murray International). As I said about HFEL, don’t expect too much growth from them. They’re not intended to generate huge capital gains, though some investors seem to think that they should be getting dividends in excess of 5% and similar capital growth to a non-dividend paying IT. Some investors might be prepared to look at some of the JPMorgan overseas investment trusts which pay 4% of their net asset value every year as a dividend (e.g. JP Morgan Japanese Smaller Companies, which I own). These give great diversification and a higher "income" than you'd normally get from these markets (they're paying out some capital growth as income).
A key feature of investment trusts is that they can hold back dividends for future distribution (open-Ended funds can't do this). The dividends paid by many income focused open-Ended funds have been cut as a result of many UK companies cutting their dividends. In contrast ITs have generally maintained their dividends.
4) Banks. IMHO British banks are terrible investments for income seeking investors. They’re more like bombed-out recovery shares. Some (e.g. Lloyds, RBS) have spent almost half of the last twenty years not paying dividends and 2020 looks like being another dividend drought year. So why not consider Canadian banks, which have a superb track record when it comes to dividends? During the current crisis, whilst British banks have stopped paying dividends the Canadian “big five” have continued to pay. Canadian banks are also far better run than British banks. Below is a link to the recent thread: “An Alternative to UK Bank Shares”
https://www.lemonfool.co.uk/viewtopic.php?f=31&t=23185
5) Unilever. Seriously, you’re getting a 3.2% yield on Unilever and in the context of a portfolio it doesn’t hurt to consider something that pays a bit less but is a much better business. 3.2% is a lot more than many HYP shares are currently paying. Unilever is a quality company with many of Warren Buffett’s economic moats which protect its products from being commoditised (thus eliminating most of their pricing power).
6) Now let us turn to foreign operating companies. One that often springs to mind is the food multinational KraftHeinz. This used to be a high-flyer, back in the days when Berkshire Hathaway teamed up with 3G to merge Kraft with Heinz. That has been a total disaster for investors. On the other hand, investors coming in at today’s price get a yield of 4.6%, which is 3.9% after 15% American withholding tax (bear in mind that this withholding tax can offset against your UK tax bill).
KraftHeinz makes a lot of food that has more appeal to those on lower incomes. Then again in the current economic climate a lot of people are going to be buying more KraftHeinz products and find out that they rather like them (I’ve long been a fan of their tinned macaroni cheese).
If you like the look of oil multinationals, then why restrict yourself to BP and Shell. There are plenty more of these quoted in America and Canada, and these pay pretty decent dividends (don’t ask me for specifics, I no longer hold any oil shares save those indirectly through investment trusts).
Finally for those interested as to why HYP-P has rules against considering foreign shares and funds. A few days ago I posted something about this on a thread in “Biscuit Bar”. This goes back to the days before HYP ever existed, and its origins are in the TMF Value Shares board:
https://www.lemonfool.co.uk/viewtopic.php?f=21&t=25056&p=337124#p337124
I should point out that I consider the HYP-P “no funds rule” to be terrible advice for inexperienced income seeking investors. To me it is like letting a 17-year old who has never ridden a motorcycle start on my 800cc BMW rather than a 50cc Japanese bike or a moped.
I haven’t come across an investment trust (IT) that has stopped paying dividends in 2020, but a lot of HYP qualifying shares have done just that. We’re in a different investment universe today than when HYP first appeared on TMF. Back then stockmarket yields followed the “reverse yield gap”, where market yield was less than the yield available on medium-dated gilts. A consequence of the 2008 financial crisis was that UK stockmarket yields relative to gilts went back to the pre-1950s yield gap, with shares since the crisis continuing to yield more than gilts.
Looking for a 6% yield in today’s investment world, where medium gilts yield just 1%, is taking on board a lot more risk than getting 6% on equities when medium gilts used to yield 5%.
1) Henderson Far East Income (HFEL). 7.4% yield. Don’t expect much capital growth from this. Instant diversification into a non-UK portfolio. It’s one of my smaller holdings. The thread below is “An Alternative to HFEL“, but it has quite a bit of information about HFEL and some alternatives:
https://www.lemonfool.co.uk/viewtopic.php?f=54&t=20063
2) Law Debenture. 4.9% yield. Another investment trust which I own, it is not a typical IT in that it owns a substantial fiduciary services business. This is typically responsible for 30% to 40% of the dividend. Law Debenture recently raised its dividend. Thread linked below:
https://www.lemonfool.co.uk/viewtopic.php?f=54&t=24178
3) There are many more income investment trusts (e.g. Murray International). As I said about HFEL, don’t expect too much growth from them. They’re not intended to generate huge capital gains, though some investors seem to think that they should be getting dividends in excess of 5% and similar capital growth to a non-dividend paying IT. Some investors might be prepared to look at some of the JPMorgan overseas investment trusts which pay 4% of their net asset value every year as a dividend (e.g. JP Morgan Japanese Smaller Companies, which I own). These give great diversification and a higher "income" than you'd normally get from these markets (they're paying out some capital growth as income).
A key feature of investment trusts is that they can hold back dividends for future distribution (open-Ended funds can't do this). The dividends paid by many income focused open-Ended funds have been cut as a result of many UK companies cutting their dividends. In contrast ITs have generally maintained their dividends.
4) Banks. IMHO British banks are terrible investments for income seeking investors. They’re more like bombed-out recovery shares. Some (e.g. Lloyds, RBS) have spent almost half of the last twenty years not paying dividends and 2020 looks like being another dividend drought year. So why not consider Canadian banks, which have a superb track record when it comes to dividends? During the current crisis, whilst British banks have stopped paying dividends the Canadian “big five” have continued to pay. Canadian banks are also far better run than British banks. Below is a link to the recent thread: “An Alternative to UK Bank Shares”
https://www.lemonfool.co.uk/viewtopic.php?f=31&t=23185
5) Unilever. Seriously, you’re getting a 3.2% yield on Unilever and in the context of a portfolio it doesn’t hurt to consider something that pays a bit less but is a much better business. 3.2% is a lot more than many HYP shares are currently paying. Unilever is a quality company with many of Warren Buffett’s economic moats which protect its products from being commoditised (thus eliminating most of their pricing power).
6) Now let us turn to foreign operating companies. One that often springs to mind is the food multinational KraftHeinz. This used to be a high-flyer, back in the days when Berkshire Hathaway teamed up with 3G to merge Kraft with Heinz. That has been a total disaster for investors. On the other hand, investors coming in at today’s price get a yield of 4.6%, which is 3.9% after 15% American withholding tax (bear in mind that this withholding tax can offset against your UK tax bill).
KraftHeinz makes a lot of food that has more appeal to those on lower incomes. Then again in the current economic climate a lot of people are going to be buying more KraftHeinz products and find out that they rather like them (I’ve long been a fan of their tinned macaroni cheese).
If you like the look of oil multinationals, then why restrict yourself to BP and Shell. There are plenty more of these quoted in America and Canada, and these pay pretty decent dividends (don’t ask me for specifics, I no longer hold any oil shares save those indirectly through investment trusts).
Finally for those interested as to why HYP-P has rules against considering foreign shares and funds. A few days ago I posted something about this on a thread in “Biscuit Bar”. This goes back to the days before HYP ever existed, and its origins are in the TMF Value Shares board:
https://www.lemonfool.co.uk/viewtopic.php?f=21&t=25056&p=337124#p337124