HYP1 is 23 - thread discussing income and capital diversification

[Itsallaguess]

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Pyad has released his 'HYP1 is 23' anniversary post here -

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=41459

I've started this separate thread looking at the HYP1 income and capital diversification so as not to disrupt that thread with this analysis, as I completely understand that it may not interest everyone, and I do want to be respectful of Pyad's great ongoing HYP1 experiment by not including discussion of this specific aspect on that particular HYP1 anniversary thread.

On the above 'HYP1 is 23' thread, pyad has made the following comment -

Conclusions

As I've noted before, the largest holdings move around over the years which to some extent counters the often repeated criticism of a no-tinker portfolio that it ends up concentrating income and capital in a very few shares.

It does, but over time not always in the same shares.

That conclusion, however, doesn't really seem to be backed up by the data from the last ten years of HYP1 income, which shows quite a steady concentration of the larger income-amounts coming from much the same holdings from year to year over that period.

Below are the per-company dividends received since HYP1's 10th birthday, with the largest five contributors highlighted in yellow for each year, and with a percentage figure at the bottom of each year's data that shows how large a percentage of total HYP1 dividend income those highlighted top-five contributors have made -





Below is an income-comparison table looking at how the largest five HYP1 income-producers from last year have faired on HYP1's 23rd birthday -



The above images are sourced from my own spreadsheet.

Cheers,

Itsallaguess

[Alaric]

On the HYP board, a question was asked.

And if so then what should an individual also invest in to provide an income that is more stable and more capable of growing in a steady and sustainable way?

The fairly obvious answer is Income generating ITs, or a HYP run in a manner similar. That is only taking 85% to 90% of the dividends as income and reinvesting the excess or holding as cash. This reserve is then used to stabilise the withdrawn income in poor years for divoidends.

[BullDog]

Thanks Iaag, I think it's a case study in why not to do this. Fortunately, very few people do. I think Lootman sums it up quite succinctly in the original thread.

[Lootman]

Thanks Iaag, I think it's a case study in why not to do this. Fortunately, very few people do. I think Lootman sums it up quite succinctly in the original thread.

Actually I think that Pyad's own words might be more damning:

"the £7,729 (income) for 2023 was down a very unwelcome 30.5% on last year's figure. Interestingly, despite the dividend carnage this year, it is still the fifth highest return out of the twenty three record of HYP1"

If inflation was over 5% for the last year then the purchasing power of HYP1's income was down something like 36% in real terms in just the last year.

And that was the 5th best year ever?

[tjh290633]

I think that there has been an effect of special dividends in prior years, not paid in the current year. In 2022-23, special dividends accounted for over 19% of the total, compared with none so far in the current year, 4% in 2021-22 and 16% in 2020-21.

Here is a comparison of ordinary dividends and t he RPI for my income units since 1987-88:

.             Ordinary    RPI      Ordinary    RPI   
Year to      Divs/unit            Divs/unit         
05-Apr-88         2.83   101.80                     
05-Apr-89         2.25   114.30     -20.38%   12.28%
05-Apr-90         3.40   125.10      51.11%    9.45%
05-Apr-91         4.67   133.10      37.21%    6.39%
05-Apr-92         5.94   138.80      27.25%    4.28%
05-Apr-93         5.52   140.60      -7.12%    1.30%
05-Apr-94         5.31   144.20      -3.81%    2.56%
05-Apr-95         6.45   149.00      21.55%    3.33%
05-Apr-96         6.27   152.60      -2.85%    2.42%
05-Apr-97         7.13   156.30      13.74%    2.42%
05-Apr-98         7.55   162.60       5.93%    4.03%
05-Apr-99         7.92   165.20       4.93%    1.60%
05-Apr-00        10.79   170.10      36.11%    2.97%
05-Apr-01        11.39   173.10       5.61%    1.76%
05-Apr-02        12.46   175.70       9.36%    1.50%
05-Apr-03        11.68   181.20      -6.22%    3.13%
05-Apr-04        11.13   185.70      -4.70%    2.48%
05-Apr-05        13.03   191.60      17.01%    3.18%
05-Apr-06        14.21   196.50       9.11%    2.56%
05-Apr-07        15.18   205.40       6.78%    4.53%
05-Apr-08        18.73   214.00      23.40%    4.19%
05-Apr-09        21.60   211.50      15.30%   -1.17%
05-Apr-10        11.91   222.80     -44.84%    5.34%
05-Apr-11        15.12   234.40      26.98%    5.21%
05-Apr-12        17.78   242.50      17.59%    3.46%
05-Apr-13        19.93   249.50      12.06%    2.89%
05-Apr-14        20.34   254.80       2.05%    2.12%
05-Apr-15        21.35   258.00       4.99%    1.26%
05-Apr-16        21.68   261.40       1.55%    1.32%
05-Apr-17        25.40   270.60      17.17%    3.52%
05-Apr-18        27.02   279.70       6.37%    3.36%
05-Apr-19        26.36   288.20      -2.46%    3.04%
05-Apr-20        29.71   289.50      12.72%    0.45%
05-Apr-21        19.24   301.10     -35.23%    4.01%
05-Apr-22        25.81   334.60      34.10%   11.13%
05-Apr-23        32.13   372.80      24.52%   11.42%
05-Apr-24        27.00   365.40     -15.97%   -1.98%

The current year is not yet complete, and it looks likely that it will be comparable with 22-23.

Lootman made a comment on the other thread:

Looking through the income figures I see there are no less than 10 years when the income amount was below that of a previous year.

Looking at my figures, there have been 5 such occasions in my portfolio over the same time period, 6 if 23-24 is added to them.

Maybe this is a factor of the higher number of holdings in my portfolio, from about 25 in 2001-2 to the current 37.

TJH

[Itsallaguess]

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Even with HYP1 income down by over 30% this year, the following table highlights the continuing reliance on a very small number of holdings for the bulk of this year's reduced HYP1 dividends, with just two shares delivering nearly half of the remaining overall income, and nearly 65% of HYP1 income coming from just 4 of the 16 currently paying investments -




Cheers,

Itsallaguess

[Itsallaguess]

Looking through the [HYP1] income figures I see there are no less than 10 years when the income amount was below that of a previous year.

So whilst "one poor dividend year does not negate the underlying principle of HYP investing", isn't 10 poor years out of 22 an indication that the cashflows are too volatile for someone to rely 100% upon such a strategy?

And if so then what should an individual also invest in to provide an income that is more stable and more capable of growing in a steady and sustainable way?

One of the longest-running income-investment studies that we're lucky to have available on this site is Arb's multi-stream approach that contains 12-years worth of income-data to compare three distinct income-investing approaches -

• HYP (portfolio of single UK-facing shares)

• ArbIT (portfolio of more global-facing income-IT's)

• OEIC (portfolio of more global-facing income-OEIC's)

His latest Q3 2023 chart, and a link to the thread discussing these most recent results is shown below -




Source - https://lemonfool.co.uk/viewtopic.php?f=31&t=40990


On that same thread, funduffer later posted a similar comparison chart of his own long-term income-investment results, although it should be noted that his OEIC component (which has subsequently been sold) only consisted of a single UK-centric OEIC which held UK-facing investments similar to HYP, whilst his IT portfolio continues to be of a more global-facing nature -




Cheers,

Itsallaguess

[daveh]

Interestingly that all three of Funduffer's streams are similar with the UK centric HYP slightly ahead until mid 2020 when the two UK centric streams fall off a cliff before recovering whilst the more international IT stream takes a smaller hit and rapidly recovers such that it has now well ahead. However, the three streams now seem to be performing similarly, but the big gap between them is down to the smaller drop in 2020 for the internationally focused ITs. So what happened in 2020 to cause the UK economy to perform so badly (COVID) and why did it drop so much compared to the rest of the world?

[Itsallaguess]

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Similar to the previous income-focussed data, below is a table showing the continuing gravitational nature of HYP1 when it comes to allocated capital.

As we can see, just three holdings account for just shy of 50% of overall HYP1 capital, with the other 13 holdings playing a quickly dwindling role in propping up the remaining HYP1 capital structure, with 6 tail-end holdings accounting for just 9% of HYP1 invested capital -




Cheers,

Itsallaguess

[moorfield]

The fairly obvious answer is Income generating ITs, or a HYP run in a manner similar.

The irony here being that all the same principles can apply - buy high yield, diversification across sectors, hold, do nothing other than deal with corporate actions. Only the implementation of, 15 ITs, say, would be different. And I believe you would see a much less volatile income stream from such a portfolio of high yield.

[moorfield]

‎
Even with HYP1 income down by over 30% this year, the following table highlights the continuing reliance on a very small number of holdings for the bulk of this year's reduced HYP1 dividends, with just two shares delivering nearly half of the remaining overall income, and nearly 65% of HYP1 income coming from just 4 of the 16 currently paying investments -

With RIO and BATS this looks likely to continue for a few years yet doesn't it. The hope then is that IHG starts paying out more.

[kempiejon]

Although it's pedantic the Persimon returns 2012-2022 have been described as a return of capital and that return has now finished. So the massive drop in dividend recorded as 65% might not be technically correct and well presaged. I remember thinking that if PSN have an end point for their largess does that make them a good long-term income pick as we know the stream will be turned off and this has been well timetable on investors relation's communication. Ambiguously PSN refer to the capital returns as being paid as dividends. https://www.persimmonhomes.com/corporat ... formation/
I am pleased to see that my HYP contains all of HYP1's largest dividend payers except the also ran Intercontinental Hotels which I do not recall ever being shortlisted by me. Of course my portfolio built gradually over the years pays more heed to individual weightings than the one hit version due to new money, reinvested dividends and long ago doubling 15 picks.
The lessons to be learned about over concentration in income and capital seem obvious now and didn't HYP1 have some interesting ways of dealing with corporate actions?

[tjh290633]

‎
Similar to the previous income-focussed data, below is a table showing the continuing gravitational nature of HYP1 when it comes to allocated capital.

As we can see, just three holdings account for just shy of 50% of overall HYP1 capital, with the other 13 holdings playing a quickly dwindling role in propping up the remaining HYP1 capital structure, with 6 tail-end holdings accounting for just 9% of HYP1 invested capital -

Compared with my own tinkered HYP, with 35 holdings, the top 11 for share of income account for 50% of the total:

Rank   EPIC   % Income   Cum Inc
   1   WDS       5.31%     5.31%
   2   TW.       5.18%    10.49%
   3   BATS      5.16%    15.65%
   4   LGEN      4.65%    20.30%
   5   AV.       4.55%    24.84%
   6   IMB       4.43%    29.27%
   7   VOD       4.23%    33.50%
   8   BLND      3.85%    37.35%
   9   BHP       3.81%    41.17%
  10   SMDS      3.80%    44.96%
  11   RIO       3.66%    48.62%
  12   NG.       3.40%    52.02%
  13   IGG       3.38%    55.40%
  14   KGF       3.26%    58.66%
  15   ADM       3.17%    61.82%
  16   PHP       3.16%    64.98%
  17   BP.       3.01%    67.99%
  18   BT.A      2.95%    70.94%
  19   LLOY      2.94%    73.88%
  20   UU.       2.53%    76.41%
  21   SHEL      2.42%    78.82%
  22   TSCO      2.27%    81.09%
  23   SSE       2.06%    83.15%
  24   GSK       1.98%    85.13%
  25   ULVR      1.88%    87.01%
  26   SGRO      1.75%    88.76%
  27   S32       1.65%    90.41%
  28   BA.       1.57%    91.98%
  29   DGE       1.43%    93.41%
  30   AZN       1.36%    94.77%
  31   PSON      1.27%    96.04%
  32   TATE      1.14%    97.17%
  33   IMI       1.09%    98.26%
  34   RKT       1.08%    99.34%
  35   HLN       0.66%   100.00%

At the other end, the bottom 14 account for a mere 20% of the income. The weights of my portolio can be seen at viewtopic.php?p=628947#p628947 and the heaviest was a mere 4.16% at that date. (Currently 4.23%).

One of the failings of HYP1 was its imbalance after shares were taken over, and all the proceeds were ploughed into a single replacement share. My preference would have been to add the new share at then median weight and top up lower than median shares as appropriate.

TJH

[tjh290633]

Although it's pedantic the Persimon returns 2012-2022 have been described as a return of capital and that return has now finished. So the massive drop in dividend recorded as 65% might not be technically correct and well presaged.

That's why I have worked on ordinary dividends only. Returns of capital and special dividends count as income, but need to be viewed with caution.

TJH

[funduffer]

Interestingly that all three of Funduffer's streams are similar with the UK centric HYP slightly ahead until mid 2020 when the two UK centric streams fall off a cliff before recovering whilst the more international IT stream takes a smaller hit and rapidly recovers such that it has now well ahead. However, the three streams now seem to be performing similarly, but the big gap between them is down to the smaller drop in 2020 for the internationally focused ITs. So what happened in 2020 to cause the UK economy to perform so badly (COVID) and why did it drop so much compared to the rest of the world?

My income IT portfolio consists of 4 UK-centric IT's (AEI, CTY, DIG and CTUK), 4 international IT's (SAIN, MYI, HFEL, JEGI), 1 commodity IT (BRWM), 2 renewable infrastructure companies (UKW, NESF), and 2 infrastructure companies (GCP, HICL). The latter 4 have only been added relatively recently.

In the time I have held these IT's, I have only had cuts in just one of them - BRWM. Every other member of the portfolio has increased or maintained their dividend in the time I have held them (up to 10 years in the case of several).

The same is not true of the HYP. I have had many cuts, both before the pandemic, and especially in the 2020-21 period. For example - VOD, HSBA, LLOY, GSK, BHP, IMB, SHEL, SBRY, MARS, SSE, BLND, WPP, ABDN, VTY, RIO have all cut there dividends in the time I have held them, as well as CLLN going bust.

Now maybe I am just rubbish at HYP stock picking, but the performance of the OEIC I held (Fidelity Moneybuilder Dividend fund) suggests whoever runs that fund is not much better!

IT's have the advantage of smoothing their dividends over the cycle from their reserves, and can use gearing to some extent, as well as doing their own stock picking.

Coming back to HYP1, the lumpy income would be a problem if this was your only source of income, and you would have to reserve any excess to cope with this. This then begs the question, are you better off running a UK-centric HYP with reserving excess income, or just holding high yield UK+international IT's and let the managers do all this for you.

My experience suggests the latter is more reliable for income.

FD

[moorfield]

The same is not true of the HYP. I have had many cuts, both before the pandemic, and especially in the 2020-21 period. For example - VOD, HSBA, LLOY, GSK, BHP, IMB, SHEL, SBRY, MARS, SSE, BLND, WPP, ABDN, VTY, RIO have all cut there dividends in the time I have held them, as well as CLLN going bust.

... CNA, MKS, CURY, PSON, CCL, BT, DEC, DLG ... the list just goes on and on...

My income IT portfolio consists of 4 UK-centric IT's (AEI, CTY, DIG and CTUK), 4 international IT's (SAIN, MYI, HFEL, JEGI), 1 commodity IT (BRWM), 2 renewable infrastructure companies (UKW, NESF), and 2 infrastructure companies (GCP, HICL). The latter 4 have only been added relatively recently.

In the time I have held these IT's, I have only had cuts in just one of them - BRWM. Every other member of the portfolio has increased or maintained their dividend in the time I have held them (up to 10 years in the case of several).

You've chosen well, most of those are "dividend heroes", as are CHI, HHI (UK), CTPE (Private Equity), INPP (Infrastructure), NCYF (Debt), SOI (International) which I now hold, instead of a litany of woes such as your list. Some ITs link their dividends to NAV so will inevitably cut from time to time - EAT (Europe) for example and some are just too good to miss while on deep deep discounts - THRL (property).

[Bubblesofearth]

My income IT portfolio consists of 4 UK-centric IT's (AEI, CTY, DIG and CTUK), 4 international IT's (SAIN, MYI, HFEL, JEGI), 1 commodity IT (BRWM), 2 renewable infrastructure companies (UKW, NESF), and 2 infrastructure companies (GCP, HICL). The latter 4 have only been added relatively recently.

In the time I have held these IT's, I have only had cuts in just one of them - BRWM. Every other member of the portfolio has increased or maintained their dividend in the time I have held them (up to 10 years in the case of several).

The same is not true of the HYP. I have had many cuts, both before the pandemic, and especially in the 2020-21 period. For example - VOD, HSBA, LLOY, GSK, BHP, IMB, SHEL, SBRY, MARS, SSE, BLND, WPP, ABDN, VTY, RIO have all cut there dividends in the time I have held them, as well as CLLN going bust.

Now maybe I am just rubbish at HYP stock picking, but the performance of the OEIC I held (Fidelity Moneybuilder Dividend fund) suggests whoever runs that fund is not much better!

IT's have the advantage of smoothing their dividends over the cycle from their reserves, and can use gearing to some extent, as well as doing their own stock picking.

Coming back to HYP1, the lumpy income would be a problem if this was your only source of income, and you would have to reserve any excess to cope with this. This then begs the question, are you better off running a UK-centric HYP with reserving excess income, or just holding high yield UK+international IT's and let the managers do all this for you.

My experience suggests the latter is more reliable for income.

FD

If you start with the same level of capital as HYP1 back in 2001 then how would the income and capital have performed for this basket of IT's?

BoE

[daveh]

Although it's pedantic the Persimon returns 2012-2022 have been described as a return of capital and that return has now finished. So the massive drop in dividend recorded as 65% might not be technically correct and well presaged.

That's why I have worked on ordinary dividends only. Returns of capital and special dividends count as income, but need to be viewed with caution.

TJH

I decided (recently) on a consistent way of treating specials etc. If they come with a share consolidation I treat them as a return of capital, if they don't I treat them as a dividend. I treated the PSN payments as dividends as they didn't come with share consolidations, but I did consider that once they end point of their "capital return plan" the payments could well go down particularly if there was a faltering of the housing market. To be fair PSN has paid me ~2.5 times my purchase cost in "dividends" and I'm still showing a capital gain, though it was much larger not so long ago.

[funduffer]

If you start with the same level of capital as HYP1 back in 2001 then how would the income and capital have performed for this basket of IT's?

BoE

I am afraid I have no idea, as I started my HYP and IT portfolios in 2013/14.

[Dod101]

Irrespective of all the caveats to this HYP and the explanations for what has happened to the income the outcome would be a disaster for a Doris or indeed anyone trying to live off the income. I can speak with complete authority as I rely totally on the income from my portfolio for income. I have no other income than the SP. I can assure you that that sharpens the mind and is one reason why I hold no miners or house builders (except Gleeson which is not one of the biggies)

I regard the HYP under discussion is a complete disaster.

Dod