High Yield Portfolios

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4th Oct '16 by Stephen Bland

67 comments 23152 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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Stephen Bland

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67 comments

Stephen Bland

8th Oct '16

Tournesol:

Unfortunately you chose to phrase your post deliberately in particularly objectionable language such as suggesting my ideas are akin to quack medicine etc., as well as being completely inaccurate as regards the success of my HYP approach, so I'm not going to bother much with it. If you don't like my ideas don't read the thread. Had you wanted to discuss politely the areas with which you differ, I would have been happy to do so.

I'm sure there are other threads here on HY investing in general that are more to your taste or if not, start your own. In particular you are wholly out of order to say that my HYP approach has no place here just because you don't like it.

Stephen Bland

8th Oct '16

...I understand the idea is capitalising on returns from reinvested high dividends and that this has beaten the index recently (last 15 years or so when the index hasn't risen much). However to me it's not clear that it would do better in the long run than a tracker...

This is wrong. It is not a condition at all that dividends are reinvested. That is at the option of the HYPer. Either draw dividends if immediate income is needed or reinvest for future income. Thus it suits all investors from age zero upwards.

The HYP I launched on the Fool back in 2000 has soundly beaten the FTSE100 without reinvesting dividends. Consequently, had dividends been reinvested, it would have done much better on total return because the yield was much higher.

The actual figures as of right now are, FTSE100 up 12.3%, HYP up 113.1%, an outperformance of about 90% without reinvesting dividends. You can see the actual annual dividend income from this on the website I linked earlier and also I have updated the results each year on the Motley Fool in November. It's not worthless backtesting, these are real time results.

I hope this is clear now.

I stress though that capital gain is not the aim, capital is very much secondary to the strategy whose principal aim is long term increasing income, whether reinvested or drawn.

Miserly Investor

8th Oct '16

I'm glad Stephen Bland is here to remind people of this strategy from time to time. In my view a high yield style of investing similar to that favoured by Stephen is underappreciated.

Why? I'm not entirely sure, but I would hazard a guess that it's not exciting enough for many, particularly the young and inexperienced 'traders' who dream of getting rich quickly on AIM. Or those preferring to not to read balance sheets but finding random patterns on charts, hopping on and off a share every other day because they feel doing something must be better than doing nothing at all.

So it's not surprising that many are 'refugees' (as Stephen said) from other styles after they've realised they are spending a huge amount of time not even matching the index, or worse, losing money. They eventually realise that when they are looking for excitement they're generally better off looking for it outside of the stockmarket. Try bungee jumping for example.

I've known a lot of investors over the years that have followed a high yield approach. Almost all of them have managed to do better than the FTSE over the long term, and have done so with little effort. Even if that outperformance is only a couple of percent a year, over an investing lifetime that adds up to a very significant advantage when compounded. In my view that small advantage is due to the strategy leaning towards value shares, minimising trading costs and eliminating a few of the behavioural errors which investors make. This tends to give a high probability of outperformance, even for relatively new investors or those who don't consider themselves particularly knowledgeable in the field.

I don't agree with everything Stephen has to say on the subject, such as *never* selling voluntarily, but it is not a religion and people are free to modify the approach!

I'm certainly not here to advertise on Stephen's behalf, but the reality is, many investors and traders would be far better off stopping what they are doing and following a similar approach.

But they won't. Whilever they see those parabolic charts of Boohoo.Com and the like, they will continue to look for excitement and chase the next big, sexy story whilst ignoring the number of losses and expense it takes to find it.

Finally, there's another advantage to this style. When you're an old fogey and no longer receive earned income you can stop reinvesting the dividends and use them to pay bills, buy things, or go on holiday. That may be far preferable to relinquishing your capital to an insurance company to pay you a meagre annuity! Indeed, I believe this was the original purpose for which Stephen came up with 'HYP', but it is equally effective as a 'total return' strategy for the young.

Stephen Bland

8th Oct '16

...That may be far preferable to relinquishing your capital to an insurance company to pay you a meagre annuity! Indeed, I believe this was the original purpose for which Stephen came up with 'HYP', but it is equally effective as a 'total return' strategy for the young.

Quite correct. At first I designed the HYP originally to be an equity income substitute for annuities which as you say require you to leave your money irrevocably to an insurance company. A less deserving beneficiary would be hard to find.

But I very quickly realised that it could suit investors of any age simply by reinvesting dividends for future income by those not requiring immediate income.

My lengthy experience with the stock market and my value approach to shares led me to believe it would work well as a long term investment strategy, something like a pension scheme but without the onerous conditions and often outrageous costs attached to the latter. Subsequent results since have borne out this belief well.

deucetoace

8th Oct '16

The idea that buying an annuity means the insurance company is a "beneficiary" is presumably an attempt at a bad joke as no doubt Mr Bland knows the correct situation well.

Annuities are indeed very poor value at the moment and a HYP for those able to run one is a very sensible option. There are many who do not have the ability so to do.

Stephen Bland

8th Oct '16

Annuities are indeed very poor value at the moment...

They always have been in my quite lengthy experience, even when interest rates were much higher as they were when I launched HYPs back in 2000. The whole idea of leaving your money to an insurer in return for some sort of income stinks. It is the irrevocable nature of the deal which stinks most.

deucetoace

8th Oct '16

You are financially astute and capable of investing large sums of money for income without problem. There are very many people who are not.

There have been significant periods not so long ago when life expectancy has increase far faster than expected and annuities were good value for many.

Stephen Bland

8th Oct '16

You are financially astute and capable of investing large sums of money for income without problem. There are very many people who are not...

Thanks for the compliment but this isn't about my personal investments, though for information I do run a substantial HYP myself. As for those not able or willing to do so for whatever reason, then naturally I am not addressing them. But it isn't black and white, there are investors considering an annuity but also looking at alternatives.

...There have been significant periods not so long ago when life expectancy has increase far faster than expected and annuities were good value for many.

I guess we'll just have to differ then. I have never found them to be good value compared with the alternatives, with as I said the irrevocable nature being the very worst aspect but also the income offered is in my view always too low for the onerous conditions applicable.

StandardModel

9th Oct '16

Stephen

I am a 'fan' of both your HYP & PYAD approaches.

Whereas there appears to be ample opportunity to follow the HYP approach (TDL, ongoing discussions such as this one), there is little or none on the PYAD approach.

Is there somewhere where you publicly discuss the PYAD approach, a similar newsletter to TDL or what you did for a time after TDL launch on the Fool?

It is certainly something I would be eager to see and I would encourage you to consider it.

Keep it up

Mick

Stephen Bland

9th Oct '16

Thanks Mick.

I am not aware of any public discussions of my pyad approach to trading value shares, certainly none with which I am involved. There may be value share tipsheets in publication but again I am not connected with any and have no view on their quality.

There is a value shares board on the Fool, which I started not long after Fool UK started back in the late nineties when I began publicising my method and value in general as a successful trading strategy, but I haven't contributed to it for a long time and it doesn't have much traffic.

Also, Stockopedia is keen on value so there are very likely threads here on the subject but I am not involved.

StandardModel

9th Oct '16

I would encourage you consider starting something again on Value Trading.

I understand that activity is probably too limited for a monthly - TDL type - newsletter but I reckon there would be a market for something along the lines of the series of articles you have done at the Fool.

Perhaps here on Stockopedia.

Stephen Bland

10th Oct '16

Thanks again for your support. I certainly wouldn't start another value newsletter, though I've been asked more than once. From experience with having run one at the Fool years ago, I don't think that value fits well into a tipsheet for several reasons. I might consider articles though.

Anyway this thread is really about HYPs, which I'm more than happy to discuss with readers here.

Rusty2

10th Oct '16

Hello Stephen,
Yes I would like to discuss this HYP some more. I have the FT100 list by yield. The top share is Royal Dutch Shell (LON:RDSA) which is 7.21% would this be ok to add or should I be looking at other factors, such as 5 year yield, which is does not have?

Stephen Bland

10th Oct '16

I'm not permitted to give you specific personal investment advice like this so it has to be entirely your call whether to choose it or not.

I'm not sure what you mean by not having a five year yield. Shell has certainly paid dividends for the last five years and for very much longer before that.

I can say that I chose RDSB about a year ago at 1,637p for my latest portfolio under construction in The Dividend Letter and I continue to show it as a Buy in TDL despite the good price rise since.

This share accounts in US dollars so the fall in sterling has boosted the value of the dividends in pounds, though that of course can go either way over time.

Rusty2

10th Oct '16

Sorry the average yield is not shown on Stockopedia stats, maybe it was suspended one year? Not sure why some are not shown? I already hold Royal Dutch Shell (LON:RDSA) but if I was starting a HYP today, would you select 15 shares now or would you add them over a longer period. How many shares are a buy today?

Stephen Bland

10th Oct '16

Shell has not suspended dividends in recent years. Generally, for full details and to be certain of your facts on any share before investing you should not rely totally on databases, even Stockopedia which is probably the best, because they all have errors of some kind. You need to go back to the original source in company reports etc.

15 diversified sectors is the absolute minimum I advocate for an HYP, with no particular upper limit.

As to whether you should invest one lump sum or spread it, my personal preference is for all at once. But again, that has to be your call as the question requires personal financial advice which I am not permitted to give here. Similarly on your question of how many shares are a buy today. There are always HY shares because I define them as those yielding over the market at selection though not all of them will always be suitable.

Rusty2

10th Oct '16

OK thanks for that. Dividend tax is now a problem if you can't hold within an ISA.

pka

10th Oct '16

Stephen, In one of your posts above, you wrote:

"When I said I use Stockopedia as a valuable resource, I meant that I use it to filter for selections for the HYP strategy I feature in TDL. The principal filters are yield and big caps, bearing in mind that each additional selection for a portfolio must be in a new sector. I seek a yield in most cases which is above the market at that time, drawn from the FTSE100 though I may very occasionally consider the upper caps of the 250 index if I run out of suitable 100 candidates for a particular HYP.
Having found suitable potential selections from filters, I then always go back to the latest accounts and any subsequent relevant news to calculate ratios like gearing, examine directorspeak for clues about likely dividend progression etc. and any other points that may influence my judgement. I never rely exclusively on any database for the numbers when choosing shares, because they can have errors. Always best to go back to the source data. But Stockopedia is great for the initial filtering.
HYP share selection is not a wholly mechanical process."

You obviously go to a lot of trouble in selecting the stocks you recommend for initial investment in a HYP. What I don't understand is why you recommend 'no voluntary tinkering' after the initial investment, because after a number of years the portfolio is likely to be unbalanced with a disproportionate amount in a few stocks with a corresponding increase in the riskiness of the portfolio, and the stocks that were selected a number of years ago might no longer qualify for a HYP selected today (for example some stocks might have cut or reduced their dividends).

Stephen Bland

10th Oct '16

Not tinkering is probably the most controversial aspect of my approach to HYP investing.

There are several reasons why I advocate this:

1 The great majority of investors in my experience and also from research by academics, comments from brokers etc. shows that they are extremely bad at trading. Consequently I decided that the most desirable route for most was simply not to trade at all.

2 In practice even a no-tinker HYP changes over time due to corporate activity, a process I have termed "Market Trading". That is, the market will enforce a certain amount of changes to the portfolio due to bids, divestments and so on and these will nearly always benefit an HYP and furthermore, benefit it to a greater extent than the HYPer will be able to achieve by voluntary tinkering, because of the widespread lack of trading skill that small investors possess.

3 Included in the Market Trading process is the capacity for those shares going through a bad patch and slashing dividends, which is an inevitability in an HYP held long term, to recover payouts. That is one reason I stick to big caps which in my belief have greater potential for such recovery. Selling in such circumstances may well prove the worst time to do so and yet that is what a lot of people would probably do, in the absence of my advice.

All the evidence I've seen points to Long Term Buy and Hold being the most advantageous approach for most small investors and this applies equally to HYPs.

It's a question of which route will deliver the most beneficial overall outcome for income long term, for most people, and I believe that no voluntary trading delivers this.

Now of course I accept that there will be a small minority who can benefit their portfolio income by careful trades but I have found that far more people think they have such skill than really do. Because I have to address my comments to the great majority, I concluded long ago that HYPers should not trade voluntarily and instead allow Market Trading to work over time.

lightningtiger

11th Oct '16

Just topped up another double digit US share , Yield 22.89% which beats anything on the UK market currently. How long it will keep paying out like this I have no idea but I will take it while it is still paying out.
I have to compare some shares that have gone up 40%,50% 60% or more, some which have been top sliced on the other side of the coin and add up say 10% or more ( I like double digits ) top slicing & bank it.
I have taken a look at your HYP Stephen which seems to give a yield of between 4% to 5% .
If you hardly trade your portfolio, then why is your newsletter sent out once a month? I can only assume it is to recommend a share paying a dividend out on a specific day in the future..
I can see the compound interest effect of dividend payments and am trying to improve to paying a double digit yield which is currently working OK but with room for improvement.
I still think market timing is important.

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Stephen Bland

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