Better alternatives to HYP

[Lootman]

the value of a share is the discounted sum of its dividends to infinity

Change that to cashflows and you might have a point. Valuing a share like a perpetual bond, which is basically what you are saying, doesn't allow for capital growth nor future capital distributions, which of course would not apply to a perpetual bond.

Again, are those dividends growing or stagnant? Covered or not? There are so many other variables.

Also infinity is rather too long a time. The difference in valuations between, say, 50 year and 100 year bonds is trivial, indicating that when you go out more than a few decades it doesn't really affect anything.

And imputing a dividend to a stock like Berkshire Hathaway, let alone Amazon or FaceBook, will take you nowhere close to its actual valuation, which I would take as a sign of a fundamental flaw in the method. Since the market takes more into accounts than just dividends, so should a valuation model. I'm afraid it just isn't that easy, otherwise we'd all do it

[hiriskpaul]

One of the big flaws in the Gordon Model is as I hinted at, the lack of incorporation of risk. I hold a couple of Provident Financial bonds, yet the market value of those bonds is lower than it would be if I held gilts with the same cashflows. Is the market value wrong? It may be, but it is perfectly rational for the market price of the PF bonds to be lower than the NPV of the cashflows because of uncertainty in receiving cashflows compared to the cashflows on gilts. Similarly it is entirely rational to value the expected cashflows from Unilever shares higher than those from Provident Financial shares.

p.s. that is not to say that the Gordon Model cannot be useful, you just have to be careful to understand what it is telling you.

[Charlottesquare]

the value of a share is the discounted sum of its dividends to infinity

Change that to cashflows and you might have a point. Valuing a share like a perpetual bond, which is basically what you are saying, doesn't allow for capital growth nor future capital distributions, which of course would not apply to a perpetual bond.

Again, are those dividends growing or stagnant? Covered or not? There are so many other variables.

Also infinity is rather too long a time. The difference in valuations between, say, 50 year and 100 year bonds is trivial, indicating that when you go out more than a few decades it doesn't really affect anything.

And imputing a dividend to a stock like Berkshire Hathaway, let alone Amazon or FaceBook, will take you nowhere close to its actual valuation, which I would take as a sign of a fundamental flaw in the method. Since the market takes more into accounts than just dividends, so should a valuation model. I'm afraid it just isn't that easy, otherwise we'd all do it

The model allows for growth, albeit usually the most difficult thing to estimate/forecast. Where no dividend paid one imputes from the market and those earnings not imputed as paid will obviously impact growth assumptions.

http://www.investinganswers.com/financi ... model-5270

[Charlottesquare]

the value of a share is the discounted sum of its dividends to infinity

Change that to cashflows and you might have a point. Valuing a share like a perpetual bond, which is basically what you are saying, doesn't allow for capital growth nor future capital distributions, which of course would not apply to a perpetual bond.

Again, are those dividends growing or stagnant? Covered or not? There are so many other variables.

Also infinity is rather too long a time. The difference in valuations between, say, 50 year and 100 year bonds is trivial, indicating that when you go out more than a few decades it doesn't really affect anything.

And imputing a dividend to a stock like Berkshire Hathaway, let alone Amazon or FaceBook, will take you nowhere close to its actual valuation, which I would take as a sign of a fundamental flaw in the method. Since the market takes more into accounts than just dividends, so should a valuation model. I'm afraid it just isn't that easy, otherwise we'd all do it

Agreed, infinity is not actually required due to NPV considerations. I am not trying to say the model can easily be applied, it cannot, but as a philosophy as to what a share is worth to a holder as an instrument, it has its uses in focusing the mind; as shareholders, at our level, we have no control or power re our share re the company and apart from having accounts thrown at us we merely enjoy the sum of the dividends the company pays.

I more apply it as a mindset rather than a valuation metric per se, though do see it as useful when comparing two competing investments, less so discerning their absolute values.

[Lootman]

Where no dividend paid one imputes from the market and those earnings not imputed as paid will obviously impact growth assumptions.

How do you "impute a dividend from the market"? What assumptions do you make?

I am not trying to say the model can easily be applied, it cannot, but as a philosophy as to what a share is worth to a holder as an instrument, it has its uses in focusing the mind; as shareholders, at our level, we have no control or power re our share re the company and apart from having accounts thrown at us we merely enjoy the sum of the dividends the company pays.

I can see the use of any valuation model that works, and especially one that works better than all the other ones. But I think it really depends on what you want the model to do for you.

So if you want the model to explain and predict valuations then, on the face of it, it's not doing a very good job, at least for shares that pay no dividends, and where you therefore have to make assumptions which themselves need to be tested. Can you, for instance, derive the valuation of Amazon based on this model? Amazon not only has no dividends, but it has no earnings. Yet it is worth hundreds of billions.

On the other hand you might use this model to determine when a share is undervalued or overvalued, for the purpose buying it or shorting it. Then I suppose the real test is whether, over some agreed period of time, a portfolio based on that idea beats the market and/or portfolios based on other ideas.

Interesting to see how an ETF based on that would fare, for instance.

[Charlottesquare]

Where no dividend paid one imputes from the market and those earnings not imputed as paid will obviously impact growth assumptions.

How do you "impute a dividend from the market"? What assumptions do you make?

I am not trying to say the model can easily be applied, it cannot, but as a philosophy as to what a share is worth to a holder as an instrument, it has its uses in focusing the mind; as shareholders, at our level, we have no control or power re our share re the company and apart from having accounts thrown at us we merely enjoy the sum of the dividends the company pays.

I can see the use of any valuation model that works, and especially one that works better than all the other ones. But I think it really depends on what you want the model to do for you.

So if you want the model to explain and predict valuations then, on the face of it, it's not doing a very good job, at least for shares that pay no dividends, and where you therefore have to make assumptions which themselves need to be tested. Can you, for instance, derive the valuation of Amazon based on this model? Amazon not only has no dividends, but it has no earnings. Yet it is worth hundreds of billions.

On the other hand you might use this model to determine when a share is undervalued or overvalued, for the purpose buying it or shorting it. Then I suppose the real test is whether, over some agreed period of time, a portfolio based on that idea beats the market and/or portfolios based on other ideas.

Interesting to see how an ETF based on that would fare, for instance.

You are imho wasting your time trying with Amazon but say looking at Imperial or British American Tobacco, it possibly has use, I am never that keen on the absolute figures produced (probably too gloomy with my growth forecasts) but it does potentially have a place where you have Jam today Jam tomorrow decision making re two alternatives. (lower staring div yield higher growth versus higher starting yield lower growth vis a vis relative prices (bang for your buck)

If individual company ROCE is used to evaluate growth I suspect it would be more useful, albeit past performance is not always ideal re the future.

When I ever get the time I will consider playing with it more and seeing if an input re implied growth based on earnings retention (cover) and ROCE
combined has any merit- maybe Christmas Hols.

My earlier point was more to point out that imho it is dividends and earnings that lead share price growth rather than share price growth that leads earnings and dividends, share prices merely being a market evaluation of entry and exit price.

[DiamondEcho]

[1] Far from being a controversial statement, I think that is merely the reiteration of the consensus view. HYP is an eclectic, fringe strategy that is unknown outside of the UK, and pretty much unknown outside of TMF and TLF. You will find precious few mentions of it in the general financial media, and none outside the UK. ...
[2] I also thinks that HYP targets a fairly narrow demographic segment.

[1] IME it is known outside the UK, indeed HYP-TMF/UK is a mirror of a HYP-TMF/US that preceded it. I lived in the US and followed the latter [90's], before returning [00's] to the UK and finding there was TMF/UK that had it's own iteration.
But well before that 'dividend investing' had a long history in the US. 'The' Benjamin Graham hinged his approach upon it; non-academic summary/you'll notice the x-over > https://cabotwealth.com/daily/value-inv ... -criteria/
Warren Buffet arguably did too, himself relying to a good extent on the tenets of Graham, apparently.

[2] True. HYP was created prior to the mass information age, Graham's in the 1920's. Hence 'invest and forget', since most people had no choice anyway.
Ironic that HYP/UK was promoted via the internet when people then clearly did have choice, and a source for wider knowledge.
Also I think HYP was initially promoted when you had a choice of DIYing shares, or buying funds/etc often on punitive fees. The choice and simplicity of self-directed investing is sooo much simpler these days.

So yes, HYP was written for 20 years ago for an imagined 'Doris', and times have changed.

[NeilW]

No, ITs do not buy a bunch of shares and hope for the best. Or if any do, they are ripping off their investors.

Neither does a large individual firm. It is constantly trading inside its business within a particular area, and with the larger firms - like HSBC you get the international exposure that way.

The analysis of HYP is why bother with a separate layer? You don't need two layers of management to create a virtual conglomerate. You get the same effect from just holding the big firms because they are already conglomerates in their own vertical fields.

[Dod101]

[One think I would be very interested to hear about, if you are happy to share, is what percentage of your investment portfolio is in each of those holdings? More specifically, do you treat an IT as a share equivalent in terms of weighting, or is the portfolio split 50:50 between shares and ITs? I would e very interested to see a rough percentage against each of the above.

Having seen a big chunk of capital in my newly invested HYP I am not looking to make any further investments in it until I have balanced it with some IT purchases, but am interested in what sort of balance others have between directly held equities and ITs.

Terry.

I derive my income to live off from what I call my HYP (because that is what it is as far as I am concerned) It is not a HYP by the very restricted definition contained in the newly published rules for a HYP on the HYP Practical Board. I have just checked. Depending on how a sector is defined I seem to have 9 sectors containing 17 individual shares. The big question is the finance sector. I have only one bank, but several insurers in different guises and I double up in tobacco, utilities, land and pharmas, none of which conforms to the TLF HYP.

My HYP is made up of 17 individual shares of 79% of value, 4 ITs with 13% and 4 corporate bond funds with 8%

Individually, they are
Unilever 8.49%
Shell 7.38%
HSBC 7.28%
L & G 6.34%
Imperial Brands 5.80%
BAT 5.02%
SSE 4.86%
B Land 4.33%
Chesnara 4.02%
Phoenix 3.89%
Schroder N/V 3.25%
Nat Grid 3.12%
Astra Zeneca 3.09%
Vodaphone 2.37%
Glaxo 2.08%
Segro 1.86%
Admiral 1.83&

The ITs are
Edinburgh 4.03%
Murray International 4.09%
Murray Income 2.25%
Temple Bar 2.81%

These may not all add up to exactly 100% because there is a certain amount of rounding. The individual share are unbalance partly because of the big increase in Unilever this year but most because the size of the holdings reflect my feelings on each share although I wold not mind increasing Segro which I rather like. I think I already said but the only change this year has been buying Murray Income, Admiral and bit more PHP with the proceeds from London & St Lawrence when it was wound up. In all this High Yield Portfolio or a variation on it as served me well over at least the last ten years and I regard it as now fairly settled. It works for the real world.

I have another smaller portfolio for capital growth which contains more ITs and individual shares but hardly any income.

Hope it may be of some interest.

Dod

[GrandOiseau]

Isn't about risk, investor knowledge, cost, time, dividends follow a different path to the share price and capital and smoothness of return.

[Wizard]

One think I would be very interested to hear about, if you are happy to share, is what percentage of your investment portfolio is in each of those holdings?..

HYP is made up of 17 individual shares of 79% of value, 4 ITs with 13% and 4 corporate bond funds with 8%

Individually, they are
Unilever 8.49%
Shell 7.38%
HSBC 7.28%
L & G 6.34%
Imperial Brands 5.80%
BAT 5.02%
SSE 4.86%
B Land 4.33%
Chesnara 4.02%
Phoenix 3.89%
Schroder N/V 3.25%
Nat Grid 3.12%
Astra Zeneca 3.09%
Vodaphone 2.37%
Glaxo 2.08%
Segro 1.86%
Admiral 1.83&

The ITs are
Edinburgh 4.03%
Murray International 4.09%
Murray Income 2.25%
Temple Bar 2.81%

Many thanks for that Dod, much appreciated.

Terry.

[Dod101]

Isn't about risk, investor knowledge, cost, time, dividends follow a different path to the share price and capital and smoothness of return.

This is a little cryptic for me. Can I ask what exactly are you getting at?

Dod

[GrandOiseau]

Isn't about risk, investor knowledge, cost, time, dividends follow a different path to the share price and capital and smoothness of return.

This is a little cryptic for me. Can I ask what exactly are you getting at?

Dod

Reasons for HYP

Finding shares that are undervalued on the fundamentals or high growth or whatever means you have of picking 5 and 10 baggers requires more investor knowledge than picking boring HY shares. And of course for the former the returns are higher as is the risk. And returns can be extremely lumpy. Etc...

HYP is I would suggest born of a need for investors have enough knowledge and sophistication to go beyond an index or fund but perhaps lacking in that time, expertise and/or with a need for more consistent (if less) returns.

Hence I guess why it's a niche.

[moorfield]

I derive my income to live off from what I call my HYP (because that is what it is as far as I am concerned) It is not a HYP by the very restricted definition contained in the newly published rules for a HYP on the HYP Practical Board. I have just checked.

As do I (albeit reinvesting not living).

Perhaps we need a new acronym to brand ourselves with here - HYP++ ? Founded on HYP, but an extension of it.

I am left wondering also if I should be asking the mods to change all the titles on my Portfolio thread!

[MoVert]

Finding shares that are undervalued on the fundamentals or high growth or whatever means you have of picking 5 and 10 baggers requires more investor knowledge than picking boring HY shares. And of course for the former the returns are higher as is the risk. And returns can be extremely lumpy. Etc...

Hence I guess why it's a niche.

I've managed to find a couple of 5+ baggers in my 20 odd share HYP - Halma and DS Smith. Luck is always a factor, as long as you let winners ride a few years. I still hold DS Smith , but I sold off Halma a bit back. The capital was enough to buy a lot more income. Sufficient in fact to drive my dividends to exceed my outgoings. What a happy day that was.

I have two other holdings that look like they might head that way - Computacenter and Vianet.

None of them is common as HYP shares. I have very stringent self imposed rules on what I WON'T buy. Forces me to hunt off the beaten track to gain diversity.

[Dod101]

Even run of the mill usual suspects such as I hold in my HYP has given me Unilever and Imps as at least five baggers but of course we need to define the holding period as well to give any real meaning to it but at my stage of life as long as the capital values at least keep pace with inflation I am quite happy with that on top of a half decent yield.

My growth portfolio has done what it says on the tin, for the most part and there I have had two ten baggers and one fourteen bagger (Tullow Oil) but that is off topic.

Dod

[tjh290633]

Dod, you have gone for a major bet on the insurers, haven't you. Even stretching sub-sectors a bit,

L & G 6.34%
Chesnara 4.02%
Phoenix 3.89%
Admiral 1.83&

in a 17-share portfolio does look a little concentrated. It makes my 3 in 37 (AV. 3.3%, ADM 2.9% and LGEN 3.1%) look a litttle dilute. I have mentally argued the case with myself about life companies and general insurers, but surely Phoenix as a caretaker for the living dead falls into the life category.

Anyway, it's your choice.

TJH

[Dod101]

TJH Yes I have and I do not much like Admiral even although it is somewhat different. Chesnara and Phoenix are much the same as each other and I think low risk, subject to regulatory issues. L & G is really quite different again so I acknowledge that whilst I have a lot in the financial sector, they are all coming at it from different angles.

Thanks for your comments though, always useful to have someone else's view.

Dod

[OhNoNotimAgain]

What suits each investor depends very much upon individual circumstances, so what briefly follows may not have a very wide relevance

We are now semi-retired, so beginning to live off investments. I'm also much iller than I was, and decided to move some investments to managed funds for the ease of a widow who isn't interested in the mechanics of investing

So, we are now about 1/3rd pensions, 1/3rd rent from investment properties, and 1/3rd equities

Of the equities, we are about 60% in a global managed fund targeting total return, with sale of units as needed for income. The other 40% is a high yield portfolio as recognised here.

To have more than our current circa 13% income from a HYP would worry me because:

(i) I know I know less than the fund managers I use
(ii) I am strongly of the view that Global is more likely to be better and less risky than only UK
(iii) I cannot understand the idea that selling units of a total return fund is in any way inferior to restricting income to dividends

Oh, and capital protection for inheritance purposes is important for us, so

(iv) My energies are better spent investigating IHT mitigation than fundamental ratios of individual UK stocks

Uncle

It is true that most fund managers know more than you about individual stocks. But their knowledge is noise and does not help them perform better than index funds so it is useless knowledge.

A bit like the knowledge gap between a fox and a hedgehog. The fox knows many things, but the hedgehog only needs to know one thing to survive; avoid the fox. So it is with investing because an investor only needs to know a few things.

Dividends are far more important for long term investing than most professional money managers care to acknowledge
Costs are just as important as returns so minimising transactions helps returns, but does not look good on a CV
Knowing about compound interest is far more use than guessing interest rates or company business plans.
Maximum diversification is so cheap it is not daft not to utilise it.

[Gengulphus]

A bit like the knowledge gap between a fox and a hedgehog. The fox knows many things, but the hedgehog only needs to know one thing to survive; avoid the fox. ...

Pretty dreadful analogy, because hedgehogs need to know an awful lot more than that to survive - four off the top of my head are avoid badgers (more so than foxes), avoid busy roads, what's good to eat and where to find it.

Gengulphus