High Yield Portfolios

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4th Oct '16 by Stephen Bland

67 comments 23151 reads

Anyone interested in discussing this investment approach?

I wrote a series of articles on Stockopedia a while back introducing here my particular version of HYP investing which follows the strategy that I launched originally on The Motley Fool back in 2000. You can read the original HYP series here.

Since March 2008 I have featured the HYP approach in my subscription newsletter dedicated to the strategy, The Dividend Letter, but would be happy to discuss the subject here.

I would add that Stockopedia is a valuable resource for me in locating suitable shares for my HYP system.

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About the Author

Stephen Bland

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67 comments

Stephen Bland

12th Oct '16

...If you hardly trade your portfolio, then why is your newsletter sent out once a month?...

TDL is published monthly in print form and each week in between in email form. In each monthly edition I choose one new sector until a portfolio is complete, taking around 15-20 months, and then commence a new one. I am currently building my sixth HYP there.

I continually keep all past selections since I launched TDL in 2008 under review and the weekly email editions are for updates carrying relevant news on any of them, status changes between Buy and Hold, general strategy comments by me etc. The monthly print edition will also contain any such items occurring in the week of publication.

All editions are also available to view for subscribers on the TDL website along with a dividend payments schedule for all past selections and a table showing details of the latest portfolio under construction.

...I have taken a look at your HYP Stephen which seems to give a yield of between 4% to 5%...

Yes this would be the current start yield available from an HYP constructed at present. The portfolios consist almost wholly of FTSE100 shares, with a very occasional choice from the upper caps of the 250 if I run out of suitable 100 index selections.

The idea behind sticking to big caps and diversification is to ameliorate risk. HYPs are an income strategy and consequently, because people will depend upon that income either immediately or in future, it is vital to seek the lowest possible risk commensurate with an equity income approach.

fazm

12th Oct '16

id rather get back to discussing your pyad approach.. its kind of been vindicated by factor investing and all the research from AQR. (Apart from the concentrated aspect of it) -- should add thanks for introducing me to it some 15 yrs ago :-).

Stephen Bland

12th Oct '16

I'm in no doubt that value investing works on balance as a trading style, including my pyad method. Glad it seems to have worked for you. Stockopedia are value fans too.

However value suits only a small minority because of the personality traits involved such as extreme patience and contrarianism etc. which are in short supply amongst small investors seeking to profit from trading.

I think value is the market's free lunch but it's free only to those able to handle it, who have got what it takes. In my quite wide experience with a lot of investors, most don't. And most lose.

I developed the HYP income approach from my pyad value ideas originally with HY as the key value factor, when seeking to create an equity income strategy that required very little monitoring and carried modest risk by equity standards. HY is one of the pyad factors.

So in one way they are connected, but in another they couldn't be more separate with one being an income approach having no trading, the other a gains approach based on trading.

The interesting fact about HYPs is that although they are wholly about income, the gains have been pretty good over time too, even though that is not the aim at all. The reason is the value element present in my HYP selection method.

Stephen Bland

18th Oct '16

One difficulty with promoting equity income investing is that it is not sexy. Eternity holding with no voluntary trading and very little need to spend any time monitoring, I am the first to admit, does not score too highly where excitement is concerned.

But in the stock market, for the great majority of private investors, excitement and decent returns are negatively correlated. And the opposite is also true, hebetudinous and decent returns are positively correlated.

I'm not sure why it is that so many small investors seek "action" from their investments rather than LTBH including the HYP style. Possibly because they believe, in the face of all the contrary evidence, that action makes money. But then why would anyone rationally think that an approach proven to do poorly or lose for most over time is likely to work for them in particular?

The answer I think is that humans are not wholly rational, being only partially evolved from animals. We are not, not yet anyway, robots able to think unemotionally. Thus if you show someone the attractive results of a 15 year and other periods of HYPs, real time results and not worthless backtesting, whether the dividends were drawn or reinvested, it's difficult to interest them.

And these people will often be seduced by headline returns from crap tipsheets, bulletin boards etc. showing how someone made 150% in nine months from a trade, without telling you of all the losses they've made over time or failing to include costs and spreads etc. in their adverts.

Wot? you've made only (eg) 11% a year compound total return? That's rubbish.

But it's a whole better than the negative total return that most traders will achieve in time. Almost none of the latter will even be here after 15 years, having long since failed and given up. Probably the only traders that can make it long term are value players, a style which suits only a minuscule number of investors who have what it takes.

fazm

18th Oct '16

The reason imho is most people want the dream of giving up the day job. 11% p/a is a great result. But to compete with the dream of giving up the day job you would need a minimum of > 500k and then risk it to meet the objective... Most people wont have that, at least not straight away, hence the search for high risk, lower probability, higher returns.. I call it inverted investing.

The issue you have is promoting an "only interested int the income" vehicle is that it is simply "out there" as an idea and in all my research Ive not really seen much on this except via you.. -- I see things like Yield is the weaker value factor (from academia not logic ) & sector diversification does have much evidence behind it but these are looking/measuring it from a total returns POV and NOT an income point of view. where the former is irrelevant. -- i like the strategy because it is different.

1. do you think HYP is correlated with interest rates. Is it possible the strategy is doing well due to it being run in an era of dropping and rock bottom rates. Do you have any idea how it will perform in the reverse environment istr you are from the stagflation generation?

2. I do like this strategy but have to wonder about exploiting another factor via selling options IF there is vol premium in the selected candidate or even as complementary. That could make this interesting for the action seekers? --- HYP+ ? but admittedly its the opposite of your do nothing that might not be suitable to your investors in the first place. -- you probably should make a HYP ETF.

Stephen Bland

18th Oct '16

1. do you think HYP is correlated with interest rates. Is it possible the strategy is doing well due to it being run in an era of dropping and rock bottom rates. Do you have any idea how it will perform in the reverse environment istr you are from the stagflation generation?

It's probably correct to assume that ultra low bank interest will have driven some investors, desperate for income, into HY shares. Some of those probably underestimate the volatility of equities and may well panic in a serious bear market, one reason for my eternity minimum holding period advice.

But no I don't think the success of HYPs is based on low interest rates. It is based on the increasing portfolio dividend income over time, something you can't get from bank interest, and I guess to some extent it must be based too on very good capital gains long term due to the value element of HY shares, though I don't promote HYPs as a gains strategy.

My belief and experience is that HYPs will do well throughout all economic cycles. There have already been two serious bear markets since I launched the first portfolio back in 2000.

2. I do like this strategy but have to wonder about exploiting another factor via selling options IF there is vol premium in the selected candidate or even as complementary. That could make this interesting for the action seekers? --- HYP+ ? but admittedly its the opposite of your do nothing that might not be suitable to your investors in the first place. -- you probably should make a HYP ETF.

Options are way too complicated and undesirable for the typical HYPer. In any event for me to suggest such action would be antiHYPing because as you realise, one of the key features is for HYPers to be able to do almost nothing once invested. Keep it Simple is the byword of HYPing and anything that complexifies it, ruins the approach.

It's been suggested before that I should run an HYP fund of some sort for those who don't wish to run their own portfolios. I know something about this business and it would need to take in at least £100m because a virtually passive fund like this could charge only a very low management fee, and thus could not make a profit unless such a sizeable sum was involved.

Actually the HYP style would be far better constituted as a closed end fund, an investment trust, because they are not affected by investors buying and selling, unlike open ended funds like ETFs or OEICs which have to cope with uneven investor inflows and outflows.

I doubt the possibility of taking in £100m minimum and thus never took the idea any further.

Stephen Bland

4th Nov '16

The big non-financial news today regarding HYPs is that the Motley Fool UK is closing all its discussion boards. This is nostalgic for me because I launched the whole HYP strategy and started the HYP board there many years ago, as well as the Value Shares board even earlier, not long after the Fool started up in the UK back in the late nineties.

Since starting my own HYP tipsheet in 2008, I ceased contributing much to the Fool boards but nevertheless as the originator of the HYP and Value boards there I can't help feeling a little sad about their termination.

One possible and welcome effect of this is that the Stockopedia income boards, such as this HYP thread, which don't seem to attract much traffic, may benefit from Fool fallout.

pgjeh

5th Feb '17

Thanks for all your articles over the years. I always enjoy reading (and re-reading) them both for their humour and very sensible advice. Your Dividend Newsletter is as good as ever.

Andrew niven

5th Feb '17

I would be very interested

Stephen Bland

6th Feb '17

Thanks.

I've always thought that a bit of humour lightens the style of what otherwise can be rather a dry subject at times, but without detracting from the technical content.

gus 1065

6th Feb '17

Hi Stephen - interesting thread, thanks for posting.

Quick question, if I may, which you may have already addressed elsewhere. Do you have a view on the Stockopedia PYAD screen that is attributed to your investing style both in terms of its accuracy reflecting your views and also its ongoing performance?

http://www.stockopedia.com/screens/pyad-screen-17/

Having read the above thread, it doesn't seem to be an especially close match and, for example, seems to include a lot of non-blue chip, smaller caps.

Best,

Gus.

Stephen Bland

6th Feb '17

The Stocko PYAD screen differs in several very important aspects from my original pyad value share trading strategy. Note though that it appears you may possibly have confused my High Yield Portfolio approach, which is a very long term buy and hold approach aimed at income and concentrating on big caps, with the pyad method which in direct contrast is a trading approach aimed at capital gains and does not have a very big caps filter.

What Stocko have done with pyad is to make it mechanical though I never did that, preferring to sell when I felt that the value had been sufficiently outed by constantly re-evaluating each share as time progressed, but not purely mechanically.

Also, selection was never purely mechanical in pyad. Sure the mech filters were applied at first to obtain a list of potential plays, and sometimes none were produced because this is ultra deep value, but then I would research the companies further by looking at accounts, latest news etc. to pick up on possible additional clues. For example property revaluations or a sale of part of the business since the last accounts which are not included in the balance sheet used by the database here and so would not be picked up in a filter trawl. So pyad is largely mech but not exclusively so and that non-quant element doesn't figure in the Stocko version and cannot easily be introduced. It needs the human touch.

Another major difference is that I think they select using Price/Book <1 as the asset filter but I always used Price/Tangible Book, a far tougher measure which excludes intangible assets such as goodwill etc. This substantial divergence from my strict pyad method makes a serious difference to the quality of shares selected, because a lot of them have large intangibles which are inherently way less dependable to a value player than tangible assets. In my opinion this factor is the principal reason why Stocko's version of pyad will probably underperform my original method over time.

gus 1065

6th Feb '17

Hi Stephen - thanks for the detailed response.

Yes, there was some confusion on my part between the PYAD and HYP approaches possibly compounded by the fact that the PYAD is in the "Income" section of the stock screens. I was struggling to see how the PYAD filters would identify the potential for a high quality, long term yield portfolio. No surprise really since they weren't supposed to!

Best,

Gus.

Ken Lowes

6th Feb '17

I'm afraid a degree of ignorance is starting to show Stephen-- an annuity represented a return on capital and interest and over a long period this was around 12% / 14% fixed for life--the starting yield on stock never came close but would build over time. When you also take into consideration the tax deduction on invested capital then this yield looks very attractive at around a fixed 17% for life. Obviously annuities are exceptionally low at the moment and would indeed be a poor purchase, hence the need for alternatives, but it is also fair to mention that dividends reinvested are being enhanced by not taking into account the annual tax that has to be paid. Horses for courses I think the expression goes.
I must say that I am surprised that the site-master hasn't terminated this thread a long time ago, especially when you haven't mentioned the detailed constituent parts to your winning formulae, but it sounds like you have a number of satisfied users so perhaps it isn't alchemy after all.

Stephen Bland

6th Feb '17

Indeed, I don't know either why the PYAD approach is under "income" when it is wholly a value shares trading strategy.

Stephen Bland

6th Feb '17

I'm not sure why you call me ignorant when you omit to mention the overwhelming disadvantage of voluntary annuities - that the capital is all lost. Talk about a hostage to fortune which for most investors is unacceptable because of the loss of flexibility involved in surrendering the capital to some insurance company.

Sure the returns are higher than HYPs, provided you are old enough and then live long enough, though you fail also to mention the dependence of returns upon age. Here's a link to some current voluntary annuity rates:

http://www.sharingpensions.co.uk/annuity_rates_purchased.htm

You have to be at least 65 on the 3% escalator version in order to merely match the 4.5% approx. return currently available on an HYP. And then you've lost all the capital immediately whilst the HYPer retains it.

Against that HYPs are suitable for any age from zero upwards, those not needing the dividends reinvest them to boost the final return when they do. And it suits those too who are building up their fund as well as those with a lump sum to invest. Thus totally unlike annuities, HYPs are not just some old folks' investment scheme but can fit almost anyone.

So I see little advantage of voluntary annuities against HYPs or other income investments, except maybe for a tiny minority of very elderly people who have no qualms about losing all the capital. I can tell you from wide experience with investors that very few are happy to do that, even for the perceived safe returns of annuities. So there's just no competition in the main.

Finally why should this thread be terminated? There's nothing secretive about my HYP results, I've been publicising full details ever since I launched the strategy on the Motley Fool back in 2000 and since 2008 on my own newsletter site, it's all available for inspection and these are real time results, not worthless backtesting. It seems to me you have jumped to negative conclusions without having bothered first to take the trouble to discover what I'm about.

Ken Lowes

8th Feb '17

Apologies Stephen please see here http://www.stockopedia.com/content/stephen-blands-high-yield-portfolio-170509/?submitted=12#12

Antimidas

9th Feb '17

Hi Stephen,
I subscribed to your newsletter for a while, and it helped to wean me away from trading towards the idea of patient, long term income investing. So a big thanks! But I was always concerned by the principle of never selling. It seemed the main flaw in your strategy, even though I totally agree most investors make bad traders.

My question is whether you have ever looked into the idea of periodic re-balancing of your HYP portfolios, when the facts change (e.g. the gearing increases significantly, dividend cover reduces to dangerous levels, the share drops out of the FTSE100, the P/E gets too high, etc.)? Stockopedia's research on this seems to support the view that such re-balancing works, and it would fit with the selection criteria you use.

Stephen Bland

9th Feb '17

Yes, the eternity holding rule is perhaps the most controversial aspect of my HYP approach.

Of course I considered carefully my no-trading advice rule when I launched the strategy but concluded that for most HYPers, holding forever will prove more advantageous long term than trading, including rebalancing. It's my experience that a far greater number of investors think they have the skill to trade, then actually do. It's necessarily very general advice because I am addressing large numbers of people so I have to go with what I believe suits the great majority.

There are two principal reasons for not trading, and bear in mind that my advice applies on balance to the whole portfolio. One, as you say, is that famously, far too many people make poor trading decisions, probably because they react to short term events which are of no consequence over time and cannot bear to simply do nothing.

The second is what I term Market Trading, by which I mean that even eternity portfolios will almost certainly experience some mandatory changes due to corporate action in the market such as bids, divestments, cash returns etc. This Market Trading effect will be far more beneficial to an HYP than any voluntary trading by the investor, yet voluntary trading will prevent the effect of Market Trading on those shares.

Antimidas

9th Feb '17

Thanks for your response Stephen. But whilst I appreciate what you say about Market Trading and voluntary trading, the point was more about adapting to changes in fundamentals.

Say, we focus on gearing. If this jumps up considerably one year on an existing HYP stock, to a level at which you'd normally avoid selecting it as a new stock, and where the dividend is at risk of being cut or held in order to service increasing debt costs/pension contributions, why not replace it with a safer stock? If it was held to an annual or bi-annual re-assessment, there'd be no risk of overtrading or reacting to news events/other sentiment based decision making.

It seems to me you may improve your results, and perhaps avoid some future dividend cuts, by re-balancing to swop stocks with worsening fundamentals by those with improving or stable fundamentals.

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Stephen Bland

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