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5 Years a HYPer!

Practical discussions about equity High-Yield Portfolios (HYP) for income
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funduffer
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5 Years a HYPer!

#200179

Postby funduffer » February 9th, 2019, 6:06 pm

This is an update of my HYP, on the 5th anniversary of the 1st purchase on 7th Feb 2014.

I thought after 5 years, I ought to share my views on HYP, the lessons I have learnt, as well as report on progress to date. It has been an interesting journey so far, and before I start, I would like to pay tribute to pyad, and those (too many to mention) on TMF and TLF for educating me in this method of investment. Also to IAAG and kiloran for their HYPTUSS spreadsheet.

HYP Context

I retired in December 2013 at age 58, and I am very fortunate in that my DB pension meets all my basic living needs, so any income from my HYP can be spent on luxuries, or re-invested back into the HYP.

At the start, I had a number of old cash ISA’s languishing in low interest accounts, a lump sum from my pension scheme, and an inherited holding in GlaxoSmithKline, so from this, I decided to start a HYP. I am not a long-term HYP builder, and purchased the first 15 shares in the first month (Feb/Mar 2014), and this initial investment constitutes 66% of the HYP income units held today, the other 34% being from re-invested dividends and a small amount of additional capital added over the subsequent 5 years.

I have found my spending needs have been lower than expected, so most dividends have been re-invested, but some have been withdrawn for holidays and house renovation. I don’t expect to invest any significant new capital from now on, and I also expect to withdraw a higher proportion of dividends, at least until my state pension kicks in at 66 (4 years to go).

Not all my initial purchases could be ISA wrapped, so I have utilised the ‘Bed and ISA’ approach to gradually transfer all my HYP into an ISA, utilising each year’s allowance. I finally achieved 100% ISA cover last year. This was an important goal, as the new dividend tax has come in, and my tax situation may also change when the state pension kicks in.

HYP is by no means my only investment – I also have a high income-generating IT portfolio, and index trackers. The HYP forms about 20% of my investments, the IT’s another 20% and the rest is trackers. I will be comparing HYP v IT’s on another day, on another board!

HYP Current Status

My HYP currently looks like this:



Yield, is current, not forecast (i.e. based on last 12 months dividends received, including specials, and today's share price). Current yield for the HYP is 5.8% overall. 20 shares in total, in 16 sectors – more or less a classic pyadic HYP. Capita is my most recent, and only real problem!

HYP Performance

As I withdraw some dividends, I track performance by unitisation of the HYP, using income units. Thus, income per unit, and unit price give an indication of income and capital performance.

For income, the 5-year performance is as follows:



It all looks OK. The 8.5% increase in Year 2 is a bit flattering, as there is a lot of dividend drag in Year 1, but since then income per unit has matched CPI inflation. (I use CPI rather than RPI as it seems to better model my actual spending). I have included specials, as I seem to get one each year on average – long may they continue!

I have had 8 dividend cutters along the way – Centrica, Sainsbury’s, BHP, Amec, Pearson, Galliford Try, StageCoach and Capita (100%!). Not sure if I am unlucky, a serial yield chaser or something else, but I am re-assured the income per unit continues to flow and grow.

For capital, the 5-year performance is as follows:



Overall, over 5 years, HYP unit price has fallen nearly 10% (mostly in Year 4), whereas the FTSE AS has risen 7%. Not great, but given this is an income strategy, capital should be secondary. I try not to worry about this too much!

HYP Activity

I am not a tinkerer by nature (i.e. confident purchaser, timid seller), so activity has been mainly top-ups, but I have also sold shares during Bed and ISA transactions, where I see a better alternative. Activity is summarised as follows:



There have been several corporate actions over the 5 years, affecting Amlin, Amec, National Grid, BHP and ICAP, rights issues from Galliford Try and Capita, and of course Carillion went bust! They are a fact of life in running a HYP.

Lessons Learned

So over 5 years of investing in a HYP, what have I learnt? Here are a few lessons:

• Don’t invest in the Support sector! I have had my fingers badly burnt in Capita and Carillion.
• Stick to High market cap companies (Eg >£5000m). Most of my failures have been in FTSE 250 companies.
• Add additional checks before purchasing – especially free cash flow, and excessive shorting to reduce the risk of dividend cutters.
• Monitor the HYP, but don’t obsess over it. Check capital value, but not too often. Log dividends received. Update unitisation regularly (I do it monthly, and at the point of a sale or purchase)

Overall, I intend to stick with HYP, at least until I draw my state pension in 4 years’ time. At that point, I may switch entirely to IT’s - but the jury is still out.

On the other hand, HYP is fun! I do enjoy reading the blogs and researching my next top-up, so I may continue just for this!

Thanks for reading if you got this far, and I would be interested in any comments.

Itsallaguess
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Re: 5 Years a HYPer!

#200181

Postby Itsallaguess » February 9th, 2019, 6:18 pm

funduffer wrote:
Thanks for reading if you got this far, and I would be interested in any comments.


A quite simply superb 'State of the Nation' HYP review, funduffer.

A blueprint in focussing on the important details, whilst also providing some great context-setting information.

Cheers,

Itsallaguess

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Re: 5 Years a HYPer!

#200191

Postby Hypster » February 9th, 2019, 6:48 pm

Good summary, much appreciated, thank you.

idpickering
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Re: 5 Years a HYPer!

#200236

Postby idpickering » February 10th, 2019, 6:14 am

A great summary funduffer, thank you. You're an inspiration.

Ian.

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Re: 5 Years a HYPer!

#200244

Postby pyad » February 10th, 2019, 8:49 am

Glad the HYP approach has worked for you.

More importantly, what is a funduffer? Is it akin to a party pooper?

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Re: 5 Years a HYPer!

#200245

Postby TUK020 » February 10th, 2019, 8:50 am

Nice one, Funduffer.

Good post and good portfolio.

If it were mine, I would have the following worry list of temptations to tinker:
- I would be nervous over having nearly 3x median by capital in one share GSK, and would top slice, possibly reinvesting in WPP & NG.
- Wary of SBRY, level of shorting. Would be wondering at what price I would bail.
- Nervous of SSE, but suspect that the market has already priced in a likelihood of divi cut/capital call. Would probably sit tight
- Capita - I also have burnt fingers from this sector. Possibly not worth doing anything here, ride it out.
- BLAND - I shuffled out of this into LAND and SEGRO to reduce exposure to retail. SEGRO is at a lower yield though. This was when I was doing a major reshuffle & re-balance though. In this portfolio, probably wouldn't do anything.
However, please note that I keep a constant list of things to picker over, and wouldn't necessarily do anything.

Other shares that I have/like the look of that don't figure in your list:
BATS - seems oversold at the moment if you wanted to double up in Tobacco.
SDRC - asset management

I also hold ITs and treat them as part of my portfolio, though I note that you account for them separately. I explicitly have some (HFEL, MYI) for geographic diversification. I will be very interested in your upcoming comparison of HYP to ITs.

tuk020

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Re: 5 Years a HYPer!

#200297

Postby funduffer » February 10th, 2019, 12:12 pm

pyad wrote:Glad the HYP approach has worked for you.

More importantly, what is a funduffer? Is it akin to a party pooper?


I chose my TLF moniker “funduffer”, because when I started investing, I chose some pretty duff funds! As I recall, some had a 5% initial charge and ongoing charges of around 2%. Ouch!

I have learned a lot since those days.

FD

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Re: 5 Years a HYPer!

#200298

Postby funduffer » February 10th, 2019, 12:20 pm

TUK020 wrote:Nice one, Funduffer.

Good post and good portfolio.

If it were mine, I would have the following worry list of temptations to tinker:
- I would be nervous over having nearly 3x median by capital in one share GSK, and would top slice, possibly reinvesting in WPP & NG.
- Wary of SBRY, level of shorting. Would be wondering at what price I would bail.
- Nervous of SSE, but suspect that the market has already priced in a likelihood of divi cut/capital call. Would probably sit tight
- Capita - I also have burnt fingers from this sector. Possibly not worth doing anything here, ride it out.
- BLAND - I shuffled out of this into LAND and SEGRO to reduce exposure to retail. SEGRO is at a lower yield though. This was when I was doing a major reshuffle & re-balance though. In this portfolio, probably wouldn't do anything.
However, please note that I keep a constant list of things to picker over, and wouldn't necessarily do anything.

Other shares that I have/like the look of that don't figure in your list:
BATS - seems oversold at the moment if you wanted to double up in Tobacco.
SDRC - asset management

I also hold ITs and treat them as part of my portfolio, though I note that you account for them separately. I explicitly have some (HFEL, MYI) for geographic diversification. I will be very interested in your upcoming comparison of HYP to ITs.

tuk020


Thanks for the comments, tuk.

A good worry list you have produced, but I am not good a selling.

Of your suggestions, I will probably top slice GSK again as you suggest. I know it is wrong, but I have an emotional attachment to these shares,as I inherited them from my grandfather.

My next top up will probably be tobacco - IMB or BATS, so I am on the same page as you on this one.

I am so far down with Capita, I will leave it a bit longer and see if they can stage a recovery. I took up the rights issue for good or for bad.

FD

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Re: 5 Years a HYPer!

#200362

Postby Gengulphus » February 10th, 2019, 5:27 pm

funduffer wrote:Lessons Learned

So over 5 years of investing in a HYP, what have I learnt? Here are a few lessons:

• Don’t invest in the Support sector! I have had my fingers badly burnt in Capita and Carillion.
• Stick to High market cap companies (Eg >£5000m). Most of my failures have been in FTSE 250 companies.
• Add additional checks before purchasing – especially free cash flow, and excessive shorting to reduce the risk of dividend cutters.
• Monitor the HYP, but don’t obsess over it. Check capital value, but not too often. Log dividends received. Update unitisation regularly (I do it monthly, and at the point of a sale or purchase)
...
... I would be interested in any comments.

The main thing I would say is that I would regard all of those lessons as merely tentative, because 5 years is still not all that long-term in terms of major stockmarket and business trends, and so your lessons may still quite easily be about things that happen to have worked in the past, but might not continue. That's always a risk, of course, no matter how long a period you look at, but the longer that period, the lower that risk, and the fact that stockmarket trends and fashions can quite easily last for 5 years or more (*) implies that the risk still has quite a long way to fall. So keep the lessons under review rather than regarding them as definite lessons...

That's based on my rather longer experience of HYP investing - I started dipping my toe in the water about 17.5 years ago and it's been the core component of my investment strategy for about 16 years. I'm not certain I've really reached the point of regarding many of the lessons I've learnt as definite lessons even now (**).

One type of lesson I'd be particularly wary about is firm conclusions about not investing in particular sectors. Over the years, I've seen people make statements swearing off (or giving pretty strong advice against) investing in at least the following sectors:

* Construction, Engineering, Telecoms, IT, Airlines (back in 2001);

* All types of financials, Property (after the 2008-2009 financial crisis);

* Supermarkets (starting a few years later, on worries about price wars and competition);

* Miners (about 2015, on concerns that the "commodity supercycle" had turned and would head down for many years to come);

* Support Services (fairly recently and quite possibly rather longer ago as well - and as I'm sure you know, the post of yours I'm replying to is by no means the first!);

* Electricity, Gas and to a slightly lesser extent Water (fairly recently, due to political concerns);

* Pharmaceuticals (due to "patent cliff" concerns that people felt would be lasting - sorry, can't remember the dates even roughly, I suspect because it's happened more than once).

Swearing off investing in all of those sectors for good would make holding a decently-diversified HYP rather difficult!

Note I'm not saying that there weren't good reasons for avoiding those sectors - there were, but most of them (not all) were the result of short-termism, aka 'recent events syndrome', rather than of real long-term problems with them, and so were only a reason to avoid the sectors temporarily - typically for a few years. And in many cases, I have a strong suspicion that they were largely a matter of learning to keep the stable door bolted after most of the horses had gone... E.g. I'm fairly certain I saw a particularly large number of people on TMF swearing off the Mining sector permanently in the second half of 2015 - and the start of 2016 turned out to be an absolutely brilliant time to invest in miners! (I have sometimes idly wondered about using people swearing off sectors on the boards as a contrarian indicator. I doubt that it would be a good HYP purchase indicator, since shares in sectors that have got to that stage are fairly unlikely to have sustainable high yields, but it might be a decent "you've left your thoughts about tinkering this holding away too late" indicator!)

(*) E.g. as indicated by a long-term chart of the FTSE 100, the 10-year trend for the stockmarket as a whole is nicely upward since early 2009 - with some quite short-term (about a year or less) setbacks along the way, of course, but roughly 100% up overall. But the previous 10 years between early 1999 and early 2009 showed a significant fall of around 40% overall, caused by two quite major bear markets during them. The chart I'm using only goes back to early 1992, so I can't do another 10-year period before that, but the 7-year period I can do between early 1992 and early 1999 shows an rise of roughly 130% over those 7 years and while that rise isn't totally smooth, I think it's noticeably smoother than the overall rise over the last 10 years.

Those very different outcomes from different 10-year periods would make me regard even lessons based of 10 years of HYP experience as decidedly tentative, let alone those based on 5 years...

(**) E.g. any discussion of the question of whether HYP investing is a good idea belongs on another board, since discussing it well really requires the alternatives to be on-topic as well, but I will say that I still haven't managed to find a lesson about that question that I consider anything other than extremely tentative. To see why, take a look at the relative performances of the total-return versions of the FTSE 350 Higher Yield and FTSE 350 Lower Yield indices over the last 15 years: you'll find the FTSE 350 Higher Yield index has underperformed by about 30%, which is about 2.5% per year compounded. Quite a convincing exercise, you might think, apart from the caveat that the FTSE 350 Higher Yield's selection criteria are basically just high yield and high market cap, which any HYPer ought (at least IMHO) to regard as a pretty badly inadequate set of dividend safety checks. But... Repeat the exercise over the last 20 years rather than the last 15, and you'll find the FTSE 350 Higher Yield index has outperformed by about 100% over those 20 years, or about 3.5% per year compounded, which suggests the opposite lesson. Which of those two lessons should I draw???

Personally, I'd say the only answer is neither - I should instead draw the lesson that I've read elsewhere that predictions are hard, especially if they're about the future. ;-) And add a refinement of my own: and particularly especially if they're about the long-term future!

Gengulphus

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Re: 5 Years a HYPer!

#200376

Postby funduffer » February 10th, 2019, 6:17 pm

Of course you are right, Gengulphus, 5 years is too short to draw any firm lessons.

The support sector has been a poor one to be invested in for the last 5 years, if you broaden the sector definition to include those companies involved in construction as well as services.

Balfour Beatty, Carillion, Capita, Interserve, Keir and G4S have all run into trouble in one way or another. It’s quite a list.

It has been a bad 5 years to hold any of these in a HYP, I suspect, although they have all featured on this board, and it’s predecessor on TMF, as strong HYP candidates.

Not sure how this sector will turn around, but you are right that 5 years is too short to draw firm conclusions.

I have no plans to re-enter this sector after I have decided what to do with Capita.

Thanks for your, as ever, useful and insightful comments.

FD

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Re: 5 Years a HYPer!

#200452

Postby Arborbridge » February 11th, 2019, 7:47 am

Funduffer wrote: "Overall, I intend to stick with HYP, at least until I draw my state pension in 4 years’ time. At that point, I may switch entirely to IT’s - but the jury is still out."

May I suggest you might keep a small unitised basket of ITs as a benchmarking exercise - otherwise on what basis will your jury make a decision? If capital is short, I guess it could even be a dummy basket.

Arb.

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Re: 5 Years a HYPer!

#200466

Postby funduffer » February 11th, 2019, 9:42 am

Arborbridge wrote:Funduffer wrote: "Overall, I intend to stick with HYP, at least until I draw my state pension in 4 years’ time. At that point, I may switch entirely to IT’s - but the jury is still out."

May I suggest you might keep a small unitised basket of ITs as a benchmarking exercise - otherwise on what basis will your jury make a decision? If capital is short, I guess it could even be a dummy basket.

Arb.

Hi Arb,

I already have a basket of IT's which is fully unitised, and I intend to compare this to my HYP on another day and another board. This will be the basis of my comparison and decision.

Regards FD

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Re: 5 Years a HYPer!

#200519

Postby Arborbridge » February 11th, 2019, 11:49 am

funduffer wrote:
Arborbridge wrote:Funduffer wrote: "Overall, I intend to stick with HYP, at least until I draw my state pension in 4 years’ time. At that point, I may switch entirely to IT’s - but the jury is still out."

May I suggest you might keep a small unitised basket of ITs as a benchmarking exercise - otherwise on what basis will your jury make a decision? If capital is short, I guess it could even be a dummy basket.

Arb.

Hi Arb,

I already have a basket of IT's which is fully unitised, and I intend to compare this to my HYP on another day and another board. This will be the basis of my comparison and decision.

Regards FD



I thought you may have done, but just couldn't remember. Well done.

Arb.

PS I've been something similar for ten years, and the answer still isn't entirely certain 8-) But trying has been fun.

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Re: 5 Years a HYPer!

#206473

Postby Dod101 » March 8th, 2019, 1:36 pm

Gengulphus wrote:[
One type of lesson I'd be particularly wary about is firm conclusions about not investing in particular sectors. Over the years, I've seen people make statements swearing off (or giving pretty strong advice against) investing in at least the following sectors:

* Construction, Engineering, Telecoms, IT, Airlines (back in 2001);

* All types of financials, Property (after the 2008-2009 financial crisis);

* Supermarkets (starting a few years later, on worries about price wars and competition);

* Miners (about 2015, on concerns that the "commodity supercycle" had turned and would head down for many years to come);

* Support Services (fairly recently and quite possibly rather longer ago as well - and as I'm sure you know, the post of yours I'm replying to is by no means the first!);

* Electricity, Gas and to a slightly lesser extent Water (fairly recently, due to political concerns);

* Pharmaceuticals (due to "patent cliff" concerns that people felt would be lasting - sorry, can't remember the dates even roughly, I suspect because it's happened more than once).

Swearing off investing in all of those sectors for good would make holding a decently-diversified HYP rather difficult!


I was away when this thread was current and in the light of my comments when I posted my income portfolio, I ought to say I agree with the main thrust of the comment made. It chimes with the comment I made about the universe of HYP shares reducing. Since I will not invest in retailers, support services or contractors and I am not very keen on utilities that does restrict my choice somewhat, but so be it. I could add that I am very wary of shares yielding more than around 150% of the FTSE100 as well. That way, so far I have avoided most of the disasters. I see no prospect of changing my views any time soon and I find that having guidelines means that \i can walk away with no problem or second thoughts. Inevitably it will mean that I miss some shares but too bad.

Dod

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Re: 5 Years a HYPer!

#206529

Postby Arborbridge » March 8th, 2019, 6:25 pm

Dod101 wrote:Since I will not invest in retailers, support services or contractors and I am not very keen on utilities that does restrict my choice somewhat, but so be it. I could add that I am very wary of shares yielding more than around 150% of the FTSE100 as well. That way, so far I have avoided most of the disasters. I see no prospect of changing my views any time soon and I find that having guidelines means that \i can walk away with no problem or second thoughts. Inevitably it will mean that I miss some shares but too bad.

Dod


Well, you don't entirely miss out: I'm sure some of your ITs hold them for you ;)


Arb.

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Re: 5 Years a HYPer!

#206735

Postby Gadgeisbackagain » March 9th, 2019, 7:08 pm

Nice post.

Most funds are not allowed to hold more than 10 per cent in one company for very good reasons.
You may wish to think about those reasons next time you review yours.

Bye

Gadge

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Re: 5 Years a HYPer!

#206736

Postby Gadgeisbackagain » March 9th, 2019, 7:14 pm

"Of course you are right, Gengulphus, 5 years is too short to draw any firm lessons"

Some people think it's too early yet to say whether the French Revolution was a success but the French still need to make plenty of decisions while they wait that outcome and so my friend will you.

:lol: :lol: :lol: :lol: :lol: ;)

Gadge


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