How deep a pool to fish in for high yield shares

[Wizard]

This exchange caught my eye on the Practical Board...

Just sticking to Ftse 100 is a dubious choice. The Ftse 250 has outperformed the 100 for quite a while so why limit your chances of success?

I do get where you're coming from ap8889, but bearing in mind that this thread is about Carillion specifically, I think it highlights the danger of looking to the lower index to much, if at all. Safety is paramount, and peace of mind too. I do hold Tate & Lyle, Royal Mail and Pennon Group from the FTSE250 currently though.

It set me wondering how much benefit fishing in the deeper pool of the FTSE250 would provide. I set up a hypothetical situation of a lump sum new investment in a 15 share portfolio. I used minimal safety factors for this exercise, basically only size and any recent cuts in dividend. I know debt, cover, dividend growth rate, etc, can be applied, but the actual hurdles applied can differ between people so I wanted to avoid making too many subjective decisions.

I started by simply ranking the FTSE100 by yield (using DividendData today) and then eliminated only shares that had cut the dividend recently. It gave me the following list:


Assuming equal weighting I make that an average yield of 5.4%.

However, the 15 share portfolio does not give 15 sectors as there is some duplication, so I worked down the ordered list and took out duplicates until I had 15 shares in 15 different sectors, this gave me a portfolio consisting of:


The resulting average yield on an equal weight portfolio has only fallen to 5.3%. I guess this is logical as it is always the second share in a sector that is replaced and there are only a couple of them.

I then looked to add in shares from the top 100 of the FTSE250, in other words I enlarged the pool to the top 200 shares. This resulted in a number of 'new entries' toward the top of the table, meaning some shares in the previous list had to go as they became duplicates, e.g. Inmarsat came in above Vodafone so the latter had to be dropped. The resulting list is:



The average yield for this selection, equal weighted, goes up to 6.1% that is a 0.8%pt increase in yield (or put another way a 15% increase in income).

I know there are shares that people will question in each list, due to other safety factors and / or gut feel. But I thought it would be an interesting exercise to see what increase in return might be achieved from dipping in to the upper part of the FTSE250.

I'd welcome any thoughts others have.

Terry.

[tjh290633]

My thoughts at such a stage were to look at the FTSE100 first, and only look at the lower capitalisations if I couldn't find enough sectors in the main index.

I recall looking for a replacement for ICI in the Chemicals sector when they were taken over and, finding none, looked lower down the valuations, to find Yule Catto (now Synthomer) yielding over 6%. This was early in 2008 and I bought at 153p, then again later in the year at 82p. Then they decided to stop paying dividends (it being that time) and the price fell to about 40p before rebounding. I sold my usual 25% when they went overweight in October 2009 at 147p, and then in September 2010 I got rid of the rest at 240p. That gave me an IRR of almost 30%, so not unsatisfactory. The dividend had been reinstated, but the yield was about 1.8%, so it was time to bid farewell.

Because there is quite a bit of overlap at the boundary, I think it is quite legitimate to look at the top 50 or so FTSE250 shares, particularly those which are likely to move up to the main index in the relatively near future.

TJH

[moorfield]

I set up a hypothetical situation of a lump sum new investment in a 15 share portfolio.

Good effort Terry - it's an interesting exercise to do which I also run through from time to time, and you've come up with a good looking set of 15 there.

I started by simply ranking the FTSE100 by yield (using DividendData today)

Fair enough, however I don't agree with DividendData and would place RDSB at 5.6% yield today (147.06p dividend / 2603p close) above BP. from Oil & Gas in your final selection (and a better dividend history too).

I then looked to add in shares from the top 100 of the FTSE250, in other words I enlarged the pool to the top 200 shares.

Good shout. I don't like filtering on arbitrary market cap numbers like £1bn, £750m, £500m etc. but also want to avoid drifting too low. I've mentioned here a few times before that I periodically use the "Top 200 Companies" table from The Sunday Times as my selection pool, if anything just to try and apply some consistency.

e.g. Inmarsat came in above Vodafone so the latter had to be dropped.

Iffy.

Here I'd suggest a slight tweak, which I've recently adopted into my own selection rules last year - select from the FTSE100 first, and then replace in the same sector only with a higher yield AND higher market cap, ie. in practice - find another sector in the lower echelons before you discount the likes of VOD. That can work in reverse too - eg. last year I replaced INF with WPP, and SVT with UU. , both higher yielding and higher market cap companies than their predecessors.

[moorfield]

Ok, I'm wrong on the BP. yield. Not being a holder and only having RDSB numbers to hand, I realized I'd obviously have to cross check after writing that ...

BP. = (30.9798p / 534.8p close) = 5.8%

RDSB = (147.06p / 2603p close) = 5.6%

[jackdaww]

other shares to consider -- yielding 5% or more , and around 500m market cap are --

games workshop
redde
card factory

and around 1b market cap --

galliford try

stobart .

[monabri]

What we are really doing is buying into a slightly higher yield "PROMISE" at a potentially greater risk. From bitter experience, as a new HYPER (Jan 17) "if I had my time again" during the initial build phase of a HYP, I wouldn't buy anything with a MCap of less than 5 billion (and I'd like to say higher!). Promises get broken.

(caveat - perhaps for an established HYP then the odd punt in the lower echelons is acceptable).

Even in the last year I've seen quite a few of the smaller (~1 Billion MCap) companies suffer on the first sign of (any) bad news. The shorters come out of the woodwork, the price falls and then there is the danger of a divi cut as well. These small companies, unless well managed, are problematic! If we are going to go "bottom fishing" then we need the financial acumen to read the balance sheets and see if the storyline for the company is good. I lack that acumen!! Coupled with this, the smaller (£1b MCap) don't seem very resilient.

I would propose a new strategy - sitting on ones money until the opportunity to buy a Premiership company materialises. (examples from the last year alone).

example:
BATS - on FDA news - share price fall (recovered)
AZN - 16% + share price fall in a day (now recovered) on "Mystic" drug trial results.
VOD - at 195p (share price recovered)
IMB - based on yield (current share price)

and from 'way back' - RDSB when the share price was ~1550p in 2016.

Because institutions can dump shares with the click of a button, the share price tends to overshoot...this potentially presents a buying opportunity and one gets the effective higher yield.

If HYP is a long game, then perhaps the investment should be dripped in over the next few years when such events happen?

[Wizard]

You make a number of interesting points Monabri. But one thought does occur, if you are sitting on the cash to invest then what to do with it whilst waiting for the next Premier League opportunity to arrive?

Terry.

[monabri]

Hi Terry
Well these opportunities do seem to come across fairly frequently. Perhaps I'll modify the approach a little and say "have a reasonable chunk of money available" after investing in the usual suspects. The buses do seem to come along often or maybe this is an unusual year?

monabri

[Wizard]

Well Monabri the question I have is with a market cap of more than £13b and a yield around 7% is SSE one of those opportunities? If not, how should we sort the good from the bad? When Shell was yielding that sort of number there was a lot of talk of oil prices and the risk of a dividend cut. My point is, these opportunities are easy to spot in the rear view mirror, but less easy at the time.

Don't get me wrong, I think you make a very valid point and I would like to adopt a similar approach as I am under no pressure to invest now but will usually have cash available.

Terry.

[monabri]

Tough question and I certainly don't have a definitive answer. No one can give a definite "yes" ( is it a bargain, shall I buy?) but sometimes is it not easier to do some basic research to try to determine whether it's a definite "no"?

After Carillion I think most of the board members are more likely to carry out checks that they previously wouldn't... example, checking on shorttracker.

In short, one does the best one can research wise and then make the buy/ no buy decision. Then again, it might be easier to simply plump for an IT and accept a lower return but less hassle/sweat?

[Dod101]

other shares to consider -- yielding 5% or more , and around 500m market cap are --

games workshop
redde
card factory

and around 1b market cap --

galliford try

stobart .

Nothing to do with Carillion, but I would not touch any of these. Nothing directly to do with size although the first three a relatively small. They are basically one product companies. As for Galliford, don't like construction and Stobart has got a patchy record. You can of course do well out of those sorts but not for me.

I would imagine we might see at least a short term flight to so called 'safety' today.

Dod

[Gengulphus]

I would propose a new strategy - sitting on ones money until the opportunity to buy a Premiership company materialises. ...

The words "jumping out of the frying pan into the fire" spring to mind - a portfolio of football clubs strikes me as an even worse investment proposition than one of airlines! ;-)

Gengulphus

[BrummieDave]

I would propose a new strategy - sitting on ones money until the opportunity to buy a Premiership company materialises. ...

The words "jumping out of the frying pan into the fire" spring to mind - a portfolio of football clubs strikes me as an even worse investment proposition than one of airlines! ;-)

Gengulphus

Don't laugh, isn't that exactly what Nick Train did a few of months ago with his first purchase for over two years?

http://citywire.co.uk/investment-trust- ... s/a1048735

[monabri]

I think you chaps realise I wasn't actually implying that we buy shares in the likes of Man U!

[baldchap]

If starting again my advice to myself would be to fish in a very deep pool, i.e. globally, and certainly nothing outside the FTSE 100.

As a rule of thumb anything I buy gets 30% or more of its profits outside of its home country and a has a market cap of at least £10 billion.

My dividend yield is barely 4% but it is a price I am happy to pay. Quality yield, not high yield.

[idpickering]

If starting again my advice to myself would be to fish in a very deep pool, i.e. globally, and certainly nothing outside the FTSE 100.

As a rule of thumb anything I buy gets 30% or more of its profits outside of its home country and a has a market cap of at least £10 billion.

My dividend yield is barely 4% but it is a price I am happy to pay. Quality yield, not high yield.

Well said baldchap. Chasing a obviously high yield, particularly from a lesser market cap company isn't worth the risk. Nothing is certain either way of course. Even the mighty fall some times.

Ian.

[baldchap]

Well said baldchap. Chasing a obviously high yield, particularly from a lesser market cap company isn't worth the risk. Nothing is certain either way of course. Even the mighty fall some times.

Ian.

All part of the learning process we are all going through I suppose IDP. There will still be failures, but a lot less than all the FTSE 250's that have stumbled over the past few years, and having deep pockets the mega companies do tend to recover.
I still have companies in my portfolio that don't meet the criteria, but it is a gradual progress.

To avoid extra tax I hold US companies in my SIPP and UK mainly in my ISA.
Of course, Instead of paying 0.5% stamp I am paying a 1% exchange rate fee which impacts the first years returns, but I find quarterly divs ease the pain.

Old hat to many, but maybe something for someone new to ponder.

[idpickering]

Well said baldchap. Chasing a obviously high yield, particularly from a lesser market cap company isn't worth the risk. Nothing is certain either way of course. Even the mighty fall some times.

Ian.

All part of the learning process we are all going through I suppose IDP. There will still be failures, but a lot less than all the FTSE 250's that have stumbled over the past few years, and having deep pockets the mega companies do tend to recover.
I still have companies in my portfolio that don't meet the criteria, but it is a gradual progress.

To avoid extra tax I hold US companies in my SIPP and UK mainly in my ISA.
Of course, Instead of paying 0.5% stamp I am paying a 1% exchange rate fee which impacts the first years returns, but I find quarterly divs ease the pain.

Old hat to many, but maybe something for someone new to ponder.

Well Said, have a rec sir! My HYP is in an ISA. One thing I have learnt over the years I’ve been HYPing, is that you never stop learning.

Ian.

[Wizard]

Well said baldchap. Chasing a obviously high yield, particularly from a lesser market cap company isn't worth the risk. Nothing is certain either way of course. Even the mighty fall some times.

Ian.

All part of the learning process we are all going through I suppose IDP. There will still be failures, but a lot less than all the FTSE 250's that have stumbled over the past few years, and having deep pockets the mega companies do tend to recover.
I still have companies in my portfolio that don't meet the criteria, but it is a gradual progress.

To avoid extra tax I hold US companies in my SIPP and UK mainly in my ISA.
Of course, Instead of paying 0.5% stamp I am paying a 1% exchange rate fee which impacts the first years returns, but I find quarterly divs ease the pain.

Old hat to many, but maybe something for someone new to ponder.

My bold.

I hold IBM in my SIPP. I'd be interested to hear which US Companies you, or indeed anyone else, hold.

Terry.

[flyer61]

Here you go Terry,

all in my SIPP, some high yield (LXP and AGNC) but most bought for life

JNJ - Johnson and Johnson
LXP - Lexington Realty
Coty - Coty
PEP - Pepsico
DPS - Dr Pepper Snapple
SJM - JS Smucker
HORM - Hormel
DIS - Walt Disney
EL - Estee Lauder

AGNC - don't ask but ultra hi yield.

On the watchlist are Walmart, Time Warner and Walgreen.

Like Consumer, Cosmetics and Content