MDW1954 wrote:IanTHughes wrote:Luniversal wrote:PS: RBS was bought on a trailing 4.7% when the All-Share Index yielded c. 2.7%. Hence it was well into my 'danger zone' (ratio >=160) at ~175.
Which, apart from it being High Yield, tells us absolutely nothing, then and now, as to whether it was a suitable HYP candidate.
Ian
Well, it tells me loads. Ditto Dod, it appears (to no great surprise).
HYP, in terms of this board's guidelines, is a broad church.
Why you seek to narrow it is beyond me.
MDW1954
it depends whether you accept that for the large caps in which HYP deals the market efficiently absorbs information and accurately evaluates prospects.
Obviously analysts often err in price-movement predictions, which are highly random due to exaggerated mood swings among investors. But dividend rates are relatively non-stochastic. An income investor is only concerned about pinning down a rising future stream which is reasonably priced and will not go wrong.
Three-quarters of the time among HYP-able companies-- according to my research into about 200 dividend records between 2000 and 2016-- divis rose or were static from year to year in real terms. Freezes, cuts, passes and subinflationary increases were exceptional.
Even during the ravaging of income in 2009-12, at worst half of HYPable companies were raising dividends in real terms. The damage was heavily concentrated in banks, insurance, property and retail, so it was less of a threat to carefully diversified portfolios.
Most payout histories are not volatile over longer periods either, except in recognised cyclical trades; distributions are smoothed by board decisions on cover. Therefore yields represent an appraisal of income sustainability, embodying known information, which seems broadly reliable. From the end of the global financial crisis bear market in early 2009 until 2016, I identified fewer than thirty cases of companies making 'bombshell' announcements about the dividend which disappointed consensuses of analytical opinion.
A running yield markedly and persistently above the market average is a warning indicator. Not infallibly so, but my weekly plots of HYPables from 2013 to 2016 found that a yield at least half as high again as the market's posed a significant risk to future payouts, to be suffered within a year or two. Once impaired, the setback would probably take years, if ever, to make good in real terms.
Typically about one in ten companies would be yielding at this level. Not all would come to grief (conversely, a smaller fraction of safe-seeming yields would be hit too) but around seven in ten did. These are poor odds for a HYPer who seeks a steadily rising overall inflow. At best it conduces to bumpiness.
However, the market always offered a spread of shares yielding 90-150% of the average: my 'optimal zone'. Within it, enough carried a reasonably robust payout history. A 25-sector HYP could be compiled without betting that ultra-high-payers would defy pessimistic expectations.
