How I build an HYP

Tuesday, Mar 19 2019 by
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Over the next few weeks I intend to construct a High Yield Portfolio here to show how I do it. I'll choose a new sector quite frequently, every day or few days, based on my personal construction rules for the strategy and using Stockopedia's excellent database as a starting point for each share selection.  

To faciliate this I use the Stockopedia FTSE100 (UKX) ranking it by descending yield and work my way down, rejecting any share from a sector already chosen previously. However no database is adequate alone so I always accompany this by a brief review of the company's original accounts and latest news to establish accuracy and consider other fundamentals that can influence my selection. Thus it's not entirely a mechanical process because I apply some judgement to each share.

For some sectors I may choose more than one share from the same industry where I feel this is apposite.

The main characteristics of my HYP strategy are to choose high yielding UK big caps, widely  diversified with equal investment in each industry and totalling 15-20 sectors. Then just do nothing and enjoy the income, reinvesting as much as possible or withdrawing it according to need. For investors prepared to take the risks of equity income investing, HYPs suit both those building a portfolio for future income and those seeking immediate income, with seamless switching between the two modes.

My first selection is fund manager Standard Life Aberdeen (SLA) which at 271p and a 2019 forecast div of 21.6p has a forward yield of 8.0%.

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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105 Comments on this Article show/hide all

herbie47 5th Apr 86 of 105

In reply to post #466211

Plus500 (LON:PLUS) is an Israeli company, so there are tax issues to deal with on dividends, that is one reason, how secure is the dividend there? I would exclude all overseas companies from this type of portfolio.

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Stephen Bland 5th Apr 87 of 105
5

In reply to post #466236

Plus500 (LON:PLUS) is an Israeli company, so there are tax issues to deal with on dividends, that is one reason, how secure is the dividend there? ...

As herbie said. Also, IGG has been around much longer and has a much bigger cap, more than twice PLUS, and size matters in this strategy. So PLUS was a MINUS for me.

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Stephen Bland 9th Apr 88 of 105
2

Sector 15

My fifteenth sector choice for this HYP, and seventeenth share, is drinking as represented by FTSE250 member, brewing and pub group Greene King (GNK). This share marks my second step outside the FTSE100 in the portfolio for the same reason as before, namely that I have exhausted for the moment all the high yielders there which I consider sufficiently attractive. Although it's in the 250, GNK is capitalised at about £2bn so it's not a small company and is at the upper end of this index by cap.

As I said earlier, this does not mean I won't return to the 100 in order to pick an average or lower yielder from it or consider a new sector should one appear on the big board due to price fluctuations.

GNK is an ancient company, over 200 years old, with nearly 3,000 UK based pub, restaurant and hotel outlets. Not that this is especially an HYP buy signal, just a couple of facts about the business for anyone interested.

Unlike their beer, divs have been flat for the last couple of years at 33.2p though a marginal rise to 33.5p is forecast for their year (52w) ending 28 April. So at 658p the forward yield is 5.1% which is decently above the median forecast yields on both the 250 and 100 indices at 3.7% and 4.0%.

So far I have:

                    business                              selection price p         forecast yield at selection %

  1. SLA         fund manager                                 271                                    8.0
  2. VOD        telecom                                           148                                     8.7
  3. IMB         tobacco                                        2,624                                     7.9
  4. BHP        mining                                          1,779                                     8.9
  5. AV.          insurance                                        410                                     8.0
  6. ITV          television                                         128                                     6.3
  7. HSBA      bank                                                 615                                     6.3
  8. BP. *       oil                                                      553                                     5.7
  9. RDSB *   oil                                                   2,406                                     6.0
  10. BLND *  property                                           585                                     5.4
  11. LAND *  property                                           911                                     5.4
  12. WPP      advertising                                        842                                     7.1
  13. SMDS    packaging                                          346                                     5.1
  14. BA.        weapons                                            490                                     4.7
  15. GSK       pharma                                           1,585                                     5.0
  16. IGG       gambling                                            540                                     8.0
  17. GNK      brewing & pubs                                658                                     5.1


* These shares are multiple choice in the same sectors.


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Stephen Bland 10th Apr 89 of 105
4

Sector 16

My sixteenth sector choice for this HYP, and eighteenth share, is FTSE100 cruise ships business Carnival (CCL). This share marks my return to the big board after a couple of dalliances with the 250 and, as always with a new selection during construction, introduces a new sector.

The company accounts in US dollars and the div forecast for their year to 30 November 2019 is 208¢ which at the latest FX rate is worth 159.2p so with the shares at 3,879p the forward yield is 4.1%. This is only about equal to the median index level so just an average yielder on that measure.

The 208¢ forecast payout compares well with the 195¢ actual paid for 2018 though there has been some div patchiness in the past, so not a smooth long term progression but recent years have shown decent rises.

I've always said I'm willing to include a very few average or even lower yielders where I feel it necessary as these do not dilute the portfolio yield by much and it is the overall yield that matters, much more than that of the individual holdings.

A self-imposed restriction on this particular HYP build, at the present time, is my decision to exclude utes for the reason I gave earlier. That cuts out two whole sectors, being energy and water, and thus limits the number of suitable shares and sectors available to me. Most, if not all, of the many HYPs I constructed previously would have included shares from at least one or probably both of these sectors. I suggest that anyone following this keeps an eye on the political scene regarding such shares and should circumstances change to become more propitious for utes, then add them later if they pass the tests for admission to the strategy.

So far I have:

                   business                              selection price p         forecast yield at selection %

  1. SLA         fund manager                                 271                                    8.0
  2. VOD        telecom                                           148                                     8.7
  3. IMB         tobacco                                        2,624                                     7.9
  4. BHP        mining                                          1,779                                     8.9
  5. AV.          insurance                                        410                                     8.0
  6. ITV          television                                         128                                     6.3
  7. HSBA      bank                                                 615                                     6.3
  8. BP. *       oil                                                      553                                     5.7
  9. RDSB *   oil                                                   2,406                                     6.0
  10. BLND *  property                                           585                                     5.4
  11. LAND *  property                                           911                                     5.4
  12. WPP      advertising                                        842                                     7.1
  13. SMDS    packaging                                          346                                     5.1
  14. BA.        weapons                                            490                                     4.7
  15. GSK       pharma                                           1,585                                     5.0
  16. IGG       gambling                                            540                                     8.0
  17. GNK      brewing & pubs                                658                                     5.1
  18. CCL       cruise ships                                    3,879                                     4.1


* These shares are multiple choice in the same sectors.

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HollandSmith 10th Apr 90 of 105

Hi Stephen,

As i say alot.... why dont you use a Fantasy Fund for this? Makes its hard for readers to work out if its successful.

Cheers

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Stephen Bland 10th Apr 91 of 105
6

Hi Stephen,

As i say alot.... why dont you use a Fantasy Fund for this? Makes its hard for readers to work out if its successful.

Cheers

HYPs are about generating an initally good and, over a long time, a growing income, not capital gains. The latter should never be the reason to embark upon the strategy. Drawing attention to share prices in some fantasy fund would be against the whole strategy which requires that capital fluctuations be ignored.

The measure of success in the strategy is not how the capital has performed but how the income stream has done over a large number of years, because HYPing is an eternity strategy.

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Merlotman 10th Apr 92 of 105

Stephen
Presumably you are avoiding Royal Mail (LON:RMG) as well due to political risk?

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Stephen Bland 10th Apr 93 of 105
4

Stephen
Presumably you are avoiding Royal Mail (LON:RMG) as well due to political risk?

Nope. Is there a pol risk? Dunno but there is quite a business risk and I just don't like the numbers etc. enough. So I played Pass The Parcel.

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vaticinator 10th Apr 94 of 105

In reply to post #467856

Hi Stephen

Does the section below taken from the 2018 annual report for CCL page 63 cause you any problems?

"Our dividends were and will be based on a number of factors, including our earnings, liquidity position, financial condition, tone of business, capital requirements, credit ratings and the availability and cost of obtaining new debt. We cannot be certain that Carnival Corporation and Carnival plc will continue their dividend in the future, and if so, the amount and timing of such future dividends are not determinable and may be different than prior declarations."

It is not exactly a confident commitment to a future dividend payment policy.

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NanaKatz 10th Apr 95 of 105
4

I have followed S B on another platform for several years. My family's portfolios have all done well on his advice. The aim is to hold for eternity, so little ups and downs of various stocks cause no worry in the long term. I have seen some of my stocks drop quite considerably but bounce back later, all the while still generating dividend income. We could be in for a bumpy ride soon, but hold your nerve and keep reinvesting the dividends. Regarding political risk, I note that there are no utes in this current portfolio. SB knows what he is doing.

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Stephen Bland 11th Apr 96 of 105
2

In reply to post #468101

Hi Stephen

Does the section below taken from the 2018 annual report for CCL page 63 cause you any problems?

"Our dividends were and will be based on a number of factors, including our earnings, liquidity position, financial condition, tone of business, capital requirements, credit ratings and the availability and cost of obtaining new debt. We cannot be certain that Carnival Corporation and Carnival plc will continue their dividend in the future, and if so, the amount and timing of such future dividends are not determinable and may be different than prior declarations."

It is not exactly a confident commitment to a future dividend payment policy.

As I mentioned when selecting CCL, I appreciate that it has had a somewhat patchy div record in the past but more recently this has improved. It ought to go without saying that they can't be certain of future divs but that applies to every share.

No div is ever guaranteed so that div income is always risk income.

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herbie47 11th Apr 97 of 105

I notice that the top 3 fallers on the FTSE100 today are Aviva (LON:AV.) Standard Life Aberdeen (LON:SLA) and ITV (LON:ITV) all down over 4%, if anyone is thinking of buying them this could be an opportunity.

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Stephen Bland 11th Apr 98 of 105
17

Sector 17 and the end

For my seventeenth and final sector choice for this HYP, and nineteenth and final share, I'm returning to the FTSE250 for brickmaker Ibstock (IBST). The largest brick production capacity in the UK they claim.

Some readers may have noticed that I've avoided housbebuilders like Persimmon etc. despite their ostensibly monster yields. But bricks are, at present, in my view likely to be less volatile and less risky than the actual construction business itself and they are used for many buildings other than merely residential housing. Longer term neither I nor anyone else knows anything so SI rules as usual.

I don't normally sing the praises of shares but there's something very reassuring, even romantic, about a brick. Solid, basic, tangible, desirable, useful are adjectives which spring to mind. None of which means that brickmakers are automatically good long term dividend investments, I just felt like being a little whimsical.

And don't fall for that old naive small investor's fallacy that because something is essential, eg. food, suppliers of it must be a good investment. The reason it's a fallacy is competition between the suppliers.

IBST is capitalised at around £1bn, which is about the lowest size I'm prepared to consider for this portfolio.  Divs have been increasing steadily and the normal payout for the year to 31 December 2018 was 9.5p. I say normal because in addition they paid a special of 6.5p with the interim, though by definition investors must not expect this to be repeated.

If I assume a 10.0p div for 19, that makes a forward yield of 3.9% with the shares at 255p. Not that good but it is slightly above the 250 index median forecast yield of 3.7% though it is marginally below the 100 median.

IBST has the dual distinction of being both the lowest forecast yielder I've selected for this HYP and the smallest cap  - well someone had to be. To pre-empt any objections I repeat yet again that I'm always prepared to consider a very few average or lower yielders.

The final HYP looks like this:

                    business                              selection price p         forecast yield at selection %

  1. SLA         fund manager                                 271                                    8.0
  2. VOD        telecom                                           148                                     8.7
  3. IMB         tobacco                                        2,624                                     7.9
  4. BHP        mining                                          1,779                                     8.9
  5. AV.          insurance                                        410                                     8.0
  6. ITV          television                                         128                                     6.3
  7. HSBA      bank                                                 615                                     6.3
  8. BP. *       oil                                                      553                                     5.7
  9. RDSB *   oil                                                   2,406                                     6.0
  10. BLND *  property                                           585                                     5.4
  11. LAND *  property                                           911                                     5.4
  12. WPP      advertising                                        842                                     7.1
  13. SMDS    packaging                                          346                                     5.1
  14. BA.        weapons                                            490                                     4.7
  15. GSK       pharma                                           1,585                                     5.0
  16. IGG       gambling                                            540                                     8.0
  17. GNK      brewing & pubs                                658                                     5.1
  18. CCL       cruise ships                                    3,879                                     4.1
  19. IBST      bricks                                                  255                                     3.9


* These shares are multiple choice in the same sectors.

Final comments

The overall forecast yield from this HYP, assuming equal investment in each sector which is how it must be constructed, is 6.4% being 60% above the current 100 index forecast yield of 4.0%, thus easily delivering its initial aim of a relatively high start yield. Whether it proceeds to deliver on the aim of a growing income can be known only after many years.

And don't expect the progression to be smooth, it will even fall in some years. Unsmoothing occurs for a variety of reasons such as the payment of distorting large special divs in a year, held or cut payouts by some companies, (described often as "rebasing" in the craven euphemism of directorspeak) especially in a recession where cuts tend to be more common across the sectors.

My advice for the future is no voluntary trading of the shares. Instead allow Market Trading to do this for you because over very long periods, I believe it to be superior on balance as a method of the portfolio changing gradually.

More sectors could be added by HYPers if the cash is available, because market circumstances and other factors do alter over time. For example as I mention above, some utes may become attractive if the pol risk disappears. Other sectors may become attractive too if their prices fall to push up the yields.

The amount to invest in any new sector in future is the then average value of the existing sectors in the portfolio, so as not to over or under weight it.

And that's it. Thanks for watching.

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Laughton 11th Apr 99 of 105

Many thanks for taking the time and trouble Stephen.

From someone who's constantly trying to learn it's a very interesting and easy to absorb thread.

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herbie47 11th Apr 100 of 105

Surprised by the inclusion of Carnival (LON:CCL). I have held this share for a while (sold most now) but not for the dividend. The last 5 years it has paid out on average about 2.7%. Cruise liners are similar to housebuilders, they are cyclical and yes the dividend could well be cut, I think the best time to buy them is after a recession not before one, at least with housebuilders you can be getting a high dividend of 10+%. Interesting comment about food, yes we need food but don't need to go on a cruise, I would have thought J Sainsbury (LON:SBRY) maybe a better selection, pays about 4.6%.

As for Royal Mail (LON:RMG) yes there is some political risk, Labour has plans to renationalise rail, water, energy and the Royal Mail. So it is not just UTEs.

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Stephen Bland 11th Apr 101 of 105

...As for Royal Mail (LON:RMG) yes there is some political risk, Labour has plans to renationalise rail, water, energy and the Royal Mail. So it is not just UTEs.

Just as well I avoided RMG then.

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herbie47 11th Apr 102 of 105

In reply to post #468191

Further to my post about Aviva (LON:AV.) Standard Life Aberdeen (LON:SLA) and ITV (LON:ITV) the reason why they are all down is because because they all went ex-dividend today. It is an interesting thought, as this is long term, is it better to buy on ex-dividend day when the price drops about 5% or to buy before. Yes you will miss this dividend but then you are locking higher dividends for the future as you will be able to buy more shares for the same amount of money, dividend yield will be higher in % terms.

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Stephen Bland 11th Apr 103 of 105
3

In reply to post #468191

I notice that the top 3 fallers on the FTSE100 today are Aviva (LON:AV.) Standard Life Aberdeen(LON:SLA) and ITV (LON:ITV) all down over 4%, if anyone is thinking of buying them this could be an opportunity.

Apart from any market movements the reason is that all these went xd today.

(and added later after your additional post on the subject)

Further to my post about Aviva (LON:AV.) Standard Life Aberdeen (LON:SLA) and ITV (LON:ITV) the reason why they are all down is because because they all went ex-dividend today. It is an interesting thought, as this is long term, is it better to buy on ex-dividend day when the price drops about 5% or to buy before. Yes you will miss this dividend but then you are locking higher dividends for the future as you will be able to buy more shares for the same amount of money, dividend yield will be higher in % terms.

I don't in general advise waiting deliberately for xd to buy an HYP share. Yes the price will likely fall but you lose that div. Also, because other market forces always act on a share, you can't be certain in advance that any price fall will be equal to the div foregone. The price could even rise if there was some good news at that point.

I've said many times that the time to buy is now. It was now yesterday, it will be now tomorrow and it's now, now.

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Aesurgenor 11th Apr 104 of 105

In reply to post #468261

Also, because other market forces always act on a share, you can't be certain in advance that any price fall will be equal to the div foregone. The price could even rise if there was some good news at that point.

Such as Barratt Developments (LON:BDEV) (a housebuilder with a decent yield) which has gone ex-div today. The sp opened down but it is currently in positive territory compared to yesterday’s close. 

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herbie47 12th Apr 105 of 105

In reply to post #468356

Yes could go up or drop even more than the dividend. The 3 I mentioned were all down over 4%, which seemed to match the dividend in early trading, when investors realised it was just xd then the prices have recovered somewhat. This is what I usually see. Barratt Developments (LON:BDEV) was a fairly modest div. of about 1.5%.

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About Stephen Bland

Stephen Bland

I’m Stephen Bland and have been investing in shares, following markets and advising others on this for around 50 years, with a particular interest in value and high yield approaches. My professional background is that I qualified in 1971 as a chartered accountant and after a short time set up my own practice, running it successfully for several decades and retiring from it in the early noughties. More recently I qualified as a Member of the Chartered Institute for Securities & Investment.For many years until 2013 I wrote about my value and high yield share investing methods for the Motley Fool UK website. In 2008 I decided to start my own equity income tipsheet, The Dividend Letter, which closed in early 2019 after my publisher, not me, decided that it was insufficiently profitable for them. The Dividend Letter followed my own high yield portfolio strategy that I had developed earlier, the novel attraction being the exclusive focus on dividend income and giving up on the whole idea of trading for gains.I continue to write about HYPs on Stockopedia and sometimes elsewhere. more »


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