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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115 Comments on this Article show/hide all

Stephen Bland 11th Apr 96 of 115
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 115

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 115
19

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 115

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 115

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 115

...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 115

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 115
6

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 115

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 115

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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Silurian 11th May 106 of 115
1

I followed your advice in "The Dividend Letter" from 2008 to its recent closure. I am pleased to report that since I retired six months ago the portfolios held within a SIPP, an ISA and outside a tax wrapper are providing me with an income of around £70000, so thank you Stephen. I have every confidence that the portfolios will produce an inflation busting income in most years, but I do have one major concern - Jeremy Corbyn.

If Corbyn's communists gain power they are very likely to nationalize (steal) National Grid, United Utilities, Severn Trent, Centrica, SSE all of which go to providing my, and millions of others, retirement income. At the moment I am well up on what I paid for them but as we draw closer to a General Election, and it looks as if there is a possibility of a Labour/Communist Party government, the share prices of these companies will plummet. The question is should I sell these, so far, reliable income providers in favour of non UK companies, eg AT & T in the US and take the withholding tax hit? Or should one have faith in the British people as to not be so stupid as to vote for their own impoverishment?

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Stephen Bland 14th May 107 of 115
1

I regret that I am not permitted by financial services legislation to give that sort of personal financial advice so it has to be your call. For what it's worth, my final status review on utes in TDL before it closed a couple of months ago was Hold, which applies to those already owing them at that point.

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andrea34l 14th May 108 of 115
1

In reply to post #468201

I was surprised at your purchase of Ibstock (LON:IBST) considering that in the initial post you said you would use the Stockopedia FTSE100 index.

The only company I hold that is in your HYP portfolio is $SMDS which I consider is good value after the huge fall when the placing/offer took place; I think the disposal of the plastics division is great news.

There are many shares in your HYP that I wouldn't touch... though I appreciate that your investment objective is very different from mine. I note today that the final Vodafone (LON:VOD) dividend has been chopped quite a bit, and to me the results look very ropey. Recently ITV (LON:ITV) announced a trading update which I personally thought contained lots of negative news. I have considered buying GlaxoSmithKline (LON:GSK) but their recent update indicated that management forecast around 9-10% drop in earnings which I don't like the sound of. 

Do you NEVER sell any holdings? Or review them on, say, a six monthly basis? What if there was a profit warning? Or the dividend was slashed? Or the company is taken over for cash? I appreciate your principle, but from a general point of view then if trading goes from bad to worse then it is inevitable at some point that either (1) the dividend gets chopped or (2) the company goes down the toilet.

As other readers have pointed out, it would be much easier to review this HYP by creating a portfolio on here that others can look at.

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Stephen Bland 14th May 109 of 115
6

My suggested way of running an HYP is never to sell voluntarily. However what I've termed "market trading" will take place over the years to effect changes to the portfolio. This is the market trading for you by way of mandatory corporate activity such as bids, demergers, cash returns etc. and over time these events are likely to prove beneficial, on balance, far more so than most HYPers are likely to achieve by voluntary trading.

My view arose from lengthy experience with small investors which led me long ago to conclude that they mostly make poor trading decisions so that holding forever and allowing market trading to take its course may well prove superior to selling for most. I appreciate that some people may be shrewd enough to make such calls successfully over time and on balance but my advice was necessarily aimed at the bulk of HYPers who will lack any kind of trading skill.

I've found too that far more small investors think they possess the necessary skill to make such decisions successfully and repeatedly, than actually do. The HYP strategy is, amongst other things, the antidote to the compulsion to trade, a very common weakness amongst small investors I think.

Selling an HYP share that is going through a bad patch with a cut payout is, contrary to what you say, not automatically the right move. Many such shares go on to recover and sometimes spectacularly so. In fact "going down the toilet", ie. going bust, is extremely rare amongst big caps, which is one reason I stick to such shares.

As for creating a portfolio, I've already answered that one. HYPs are not about capital values, they are exclusively about income. I've repeated many times over the years that nobody should invest in an HYP with capital gains in mind. A portfolio would draw attention to capital values, away from income, which would divert attention away from the essential purpose of the strategy.

On your other point, about my choice of Ibstock, the FTSE100 is always my source for HYP shares because the approach uses big caps only, but I've always said that I may pick a very few from the 250 if I do not find enough suitable shares in the 100 for any particular portfolio. Whether I find it necessary to do so depends on market conditions at the time of portfolio construction. That's why Ibstock is in there. It's still a big company, just not quite big enough for the 100.

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millen 17th May 110 of 115
3

Vodafone (LON:VOD) has this week made a major dividend cut - not clear if they intend to restore in the short term but the word 'rebasing' suggests to me not. It's a stock that's too complex for me . I'd assumed the big risk was capex on 5G rollout for limited incremental revenues but they're instead blaming spectrum costs as a major factor. Quite an easy read here https://www.fool.co.uk/investing/2019/05/15/vodafone-just-cut-its-dividend-by-40-heres-how-you-could-have-seen-that-coming/
Anyway, this all goes to confirm the importance of diversification under this strategy. There's a view that high-yield investing has some characteristics with credit/bond investment, where the upside is relatively limited but the downside risks are still there.

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Whitbourne 17th May 111 of 115
2

In reply to post #476346

This is an interesting point from Stephen about Stockopedia portfolios:

A portfolio would draw attention to capital values, away from income, which would divert attention away from the essential purpose of the strategy.

When reviewing my portfolio, I can easily get distracted by movements in capital values and forget that I have benefited from two or three years of a 5-6% yield which does not feature in the returns as shown by Stockopedia. Suddenly the comparison with another share that does not pay a dividend looks quite different.

The solution is a bespoke spreadsheet that correctly tracks total returns - but this takes time and skill to set up. Or you can trust the HYP approach and use your time for more enjoyable pursuits.


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Stephen Bland 18th May 112 of 115
1

In reply to post #477051

Dividend cuts, even suspensions, by some companies will occur inevitably in an HYP. I doubt there's ever been an HYP which has not not suffered from this on several occasions over time and HYPers have to able to live with it.

But as you suggest, that's why it has to be a diversified portfolio. In any event, what really matters is total portolio income over the years and the hope is that over a long period, this will rise because on balance dividend increases should more than make up for cuts. No guarantees of course, equity income is always risk income.

Looking at it year on year, it won't be a smooth progression and there may well be falls when div cuts are widespread as can happens in recessions or when distortions occur such as a share paying a large special in just one year etc.

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pka 19th May 113 of 115
1

In reply to post #477141

Stephen Bland wrote: "Dividend cuts, even suspensions, by some companies will occur inevitably in an HYP. I doubt there's ever been an HYP which has not not suffered from this on several occasions over time and HYPers have to able to live with it."

Which is why l'Universal, a poster on the old Motley Fool boards, created portfolios of investment trusts specialising in equity income, which produced good dividend yields and were less likely to suffer dividend cuts than conventional High Yield Portfolios, due to the ability of investment trusts to keep some of their income in reserve and thereby smooth dividend payments from year to year.

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Stephen Bland 20th May 114 of 115
7

What you fail to point out is that those IT portfolios delivered a lower income than HYPs, as the trade-off for the reduced income volatility. I stress that I'm not against ITs so it comes down to the level of income required and risk that the investor is prepared to take, which will vary amongst people.

As for the smoothing effect of ITs resulting from their holding back an income reserve, there is nothing to stop a HYPer doing the same thing within their portfolio.

There are several potential ways of deriving an income from a capital sum and HYPs are just one of them, about which I write in this thread. ITs are another but are not the only alternative. Bonds, property, bank deposits, various methods of creating an "income" from regular capital sales, are examples of other ideas.

Each has its own risks, potential rewards and work involved in monitoring requirements but I don't see what any of them, ITs included, have to do with this thread which I started to illustrate how I build an HYP. It was not intended to be a general discussion forum about the varying risks and merits of competing income strategies.

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SEClay 29th Jul 115 of 115

In reply to post #475681

Silurian, Found your post really interesting, as I too have been following The Dividend Letter until its closure and am keen to use the dividends generated for my retirement. Might be too personal a question but how much are your portfolios worth to get a return of £70,000 from dividends? 

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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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