Jon277 wrote:When HYP started there were at least 3 criteria of
Size - this share meets it
Dividend cover - this share meets it
5 year rising dividends - this share has it
Not quite - dividend cover was not among the criteria, high yield and gearing were. See the two original articles
https://web.archive.org/web/20140219210 ... 01106c.htm and
https://web.archive.org/web/20140528041 ... 01113c.htm, especially the following from the latter, in which I've emboldened the bits that point out those criteria:
"
My article generated some interest on the retirement investing board, such that I agreed to draw up a suggested list of higher-yielding shares. Note that this is not an official Motley Fool portfolio, merely some ideas I have generated with a little research. I would advise that nobody takes this at face value but rather does some investigation of their own, because the required criteria may well differ from one individual to another.
To obtain a little more choice, I went marginally outside the FTSE 100 index and set £1.5b as my minimum capitalisation filter. This brings in a few shares that are just below the index. The other filters were an increasing dividend over the last five years and net gearing of under 50%. However I did relax the gearing filter because I wanted to bring in a utility. They have high yields but often high borrowings as well. I therefore went outside a purely mechanical approach on occasion and exercised a little personal judgement of my own. However, all the shares satisfy the increasing dividend and minimum cap rule."
The following passage from the first of those original articles is also relevant, again with my bold:
"
Whatever the money available, even very large sums, no more than about 15 shares are necessary to take strip out the excessive risk of too few shares. Stick to FTSE 100 companies and spread the holdings around sectors. I would do it by ranking the shares in the index by descending yield, then work down the list choosing one from each sector, but doing a bit of research on each potential candidate. You don't want excessive debt, for example. Another useful clue is to pick only those companies that have increased dividends regularly over the last few years."
That points out another criterion, though it's one on the portfolio as a whole rather than on individual shares, namely diversification. And it also points out that while diversification is necessary, but it doesn't need to be over the full range of market sectors, as most sector classifications have considerably more than 15 of them. For instance, the
official ICB classification (which some HYPers use, though I do not recommend that, at least not without modifications) has 41 sectors.
So if you can't find a high yield candidate in a sector, skip that sector - you can do without it if you're constructing your HYP all at once, or there's a good chance a high yield candidate will turn up in it later if you're constructing your HYP over an extended period, or indeed as a takeover replacement in an 'all at once' HYP. For instance, when HYP1 was constructed in 2000 in the second of those original articles, the tech bubble had been deflating for about 6 months, but still had quite a way to go. Telecoms shares were still too highly priced to have high yields and so none of them was selected. But BT and Vodafone have both been decent HYP candidates in the years since then, and BT was selected as HYP1's replacement for Associated British Ports when that was taken over in 2006.
The other thing to say is that the original criteria were
not set in stone. The first of my quotes above says explicitly that they might differ from individual to individual, and comparing the two quotes says that they even varied a bit from week to week for the same individual - one says "Stick to FTSE 100 companies" and the other that it "went marginally outside the FTSE 100 index". Right from the start, people have been using variations on the theme, and occasionally they go so far that it's no longer the same theme. So board guidance has appeared to help users know when they are straying too far from the theme, and (just as important) to help moderators who may not be that interested in HYPs know when to rein it back. So
TMF's guidance (in the answer to its question 6 in particular) had high yield, "safety factors" to suggest that the dividend was safe and hopefully growable, and diversification as its main criteria for choosing shares, which relaxed the criteria by allowing size, dividend cover, increasing dividend history, gearing and others as "safety factors" while not requiring any particular one of them - just that one did use some. And
TLF's guidance has tightened it up by requiring yield above the FTSE 100 yield and FTSE 350 membership.
And it is of course TLF's guidance that affects where you can post things on TLF - the original criteria and TMF's guidance are of historical interest to those who are interested in the history (not all are!) but they're no longer of current relevance. TLF's guidance doesn't prevent you from using the original criteria for your own portfolio, or indeed your own slightly-changed version of them - but it does affect where you can post about it!
Gengulphus
. Before someone picks me up on my comment, I do have Reckitt Benckiser and Unilever in my HYP, both of whom are not the highest of yielders, I know.