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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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 22nd Mar 16 of 115

Sector 4

My fourth sector choice for this HYP is mining with Aussie company BHP Group (BHP). At 1,779p and a div forecast for the year to 30 June 2019 of US 208¢ worth 158.8p at the current FX rate it has a forward yield of  8.9%.  Note that for 2020 the div forecast falls substantially to 137¢, 104.6p, but if that proves accurate it will still leave the share on a high yield of 5.9%.

They paid a special of 102¢ earlier this year but I'm not assuming that will recur.

Mining profits, and consequently the divs, are probably more volatile than many other businesses as they depend on the market prices of the minerals which are largely outside their control.  I'm not convinced therefore that the '20 forecast is at all realistic as I have somewhat less faith in  the longer term forecast for this business than most.

Has tobacco got a fatal disease? Have mobiles got a wrong number? Has mining dug itself into a hole? I don't got a clue because longer term I know nothing about anything and my policy of Strategic Ignorance takes over. The only defence against that ignorance, an ignorance in which I wallow with delight, is diversification and definitely not trying to guess the long term future.

So far I have:

                   business                              selection price p         forecast yield %

  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

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Graham Ford 22nd Mar 17 of 115

Hello Stephen

I can understand your point that you are buying and holding for a very long time scale and so, as it is not possible to predict with any reliability what the world will look like in 15 - 20 years time, you take a strategic ignorance (or zero bias/preference) for specific sectors approach.

However, what if there are very dark clouds on the horizon (i.e. near to medium term) that make the fortunes of the industry/sector suspect for the near term? Would there not be a clear and present danger of dividend cuts within 3 to 5 years?

E.g no matter how good the dividend I would be very wary of investing in a diesel engine manufacturer if there was one listed as environmental and regulatory issues are weighing very heavily on that market and I would anticipate a dividend cut sometime in the not too distant future.

So, on that principle I would be very wary of the tobacco sector. (Switch to vaping or other alternatives disrupting the tobacco market considerably). Isn’t there a substantial risk of a dividend cut within the next 5 years for tobacco companies? So, would it not be better to avoid that sector altogether?

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Carcosa 23rd Mar 18 of 115

I have advocated HYP to non-investors several times over the years (since the heyday of TMF) to friends and colleagues. I 'sell' the idea as a retirement portfolio. Something to be built up prior to retiring and enjoyed at retirement.

The HYP concept is relatively easy for non-investment types to grasp and provided they accept the central tennant that it is the income of importance rather than capital value then they tend to stick with HYP forever.

It's rather wonderful when some of those people have no idea how much their portfolio capital value has changed year to year. It's a refreshing experience!

Over many portfolios none have failed in a notable way in terms of income generation. The only time I suggested it a bad idea was when a friend wanted to invest in New Zealand listed shares only. The universe of shares to choose from is much too small and so many compromises have to be made.

Although a HYP should be a buy and forget it turns out there are always decisions that have to be made mostly through corporate actions.

The question of if, how and when re-balancing should be undertaken has been discussed at ad nauseum over the years. 'True' Retirement HYP investors (perhaps investors is the wrong word, maybe just plain 'users') often don't give a damn about rebalancing and that seems to work too.

Despite being an active retail investor myself I know that if I had just stuck with a HPY18 years or so ago I would be much richer than I am now! However, I like being an active investor. Better do as I say rather than what I do. :-)

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Stephen Bland 23rd Mar 19 of 115

In reply to post #460913

Hello Graham

No it would not be better in my view to avoid tobacco. I wouldn't have chosen IMB if I thought that.

I'm old enough to recall that when the first major smoking related health evidence was published, many commentators offered similar views to yours that tobaccos were finished. That was several decades ago now and perhaps you know what happened? Tobaccos went on to be outstanding performers, both for high divs over time which is what HYPs are all about, and also for impressive capital gains which is not what HYPs are all about but which are nevertheless welcome, naturally.

This doesn't mean that we'll see a repeat of that in future, nobody knows, but I mention the past as an example of the popular view being wrong. I know that one example doesn't prove a trend but in my view generally, short term trend following doesn't work with eternity hold approaches like HYPs. It's likely I think to be injurious to your financial health on balance.

The defence as I've said is wide diversification and note that HYP shares are often chosen precisely because they are unfashionable, because that's when prices are depressed and yields are higher. Short term scares create opportunity for HYPers.

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Steve Eagles 23rd Mar 20 of 115

I started out on the HYP route many years ago (thanks TMF), making many mistakes along the way and learning from them. I have started my daughter on the path recently and we have just made the 15 shares using close to the original remit. sort by FTSE100, highest yield with a good divdend history. Income looks good so far for her. Where I stopped following was when I got to the point of needing to sell shares to raise capital for other projects. I had the opportunity to "correct" past errors and to offload some shares that I was not comfortable with (CLLN was one). For a "novice" I believe that this model is a perfect start as long as they realise that they have to feel comfortable with their decisions. Look forward to seeing the rest of the portfolio. To be honest though I have moved away from HYP shares into income generating IT's, purely as long term program of reducing or eliminating any problems in my "declining years".

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Silver Moon 23rd Mar 21 of 115

My portfolios have always been slanted towards High Yield but I am of advanced years now. The losing of the Bull Run, the Brexit Referendum, and the last General Election has certainly put the cat among the pigeons. Now it is the Parliamentary chaos of Brexit and the circling of the shorting and take-over vultures every now and then feasting on what was for me a high-yielding dividend payer. My monthly acceptance of dividends are impressive but entirely outweighed by the cheap and nasty take-overs and bankruptcies. If I were 20 or 30 years younger I might concentrate on the work career and let the HYP roll with the waves. So much for a Buy and Forget HYP for me then, a regularly-adjusted Stop Loss has become essential.

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Stephen Bland 23rd Mar 22 of 115

In reply to post #461193

...a regularly-adjusted Stop Loss has become essential.

Something I'm very much against in the HYP strategy.

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Stephen Bland 25th Mar 23 of 115

Sector 5

My fifth sector choice for this HYP is insurance, represented by composite business Aviva (AV.). At 410p and a div forecast for the year to 31 December 2019 of 32.7p it has a forward yield of 8.0%. 

Whilst it had rather a patchy record some time ago, recent years have seen a turn round in profits accompanied by growing dividends as illustrated by the 2018 payout which rose 9.54% to 30.0p.

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
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herbie47 25th Mar 24 of 115

In reply to post #461478

Aviva (LON:AV.) has been on my watchlist for a while now, I bought some today, I note the next dividend of 20.75p is due to paid on 30/05/2019 and ex-dividend date is 11/04/2019. Quite a few insurance companies such as Direct Line Insurance (LON:DLG) and Legal & General (LON:LGEN) pay out high dividends but it can be a bit patchy as you say.

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Andrew Cooklin 25th Mar 25 of 115

Stephen, any thoughts on IGG at c.8.5% yield - an old favourite of yours?

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Stephen Bland 25th Mar 26 of 115

In reply to post #461623

We'll see. IGG is not in the FTSE100 but the 250 and I like to exhaust the 100 first before looking in the 250.

Note too that I don't have favourites in the sense that I have an emotional attachment to any HYP share. I have selected certain shares several times in past portfolios elsewhere but that's not because I've fallen in love with them, it's because they continued to be qualify on subsequent occasions by passing my selection criteria in competition with all other shares at the time. The fact that I chose a share earlier does not enter into this process or improve its chances of later reselection.

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Andrew Cooklin 25th Mar 27 of 115

In reply to post #461633

Yes I'm conscious of these points having been an ardent fan of your very helpful Dividend Letter. I'm at the end of my portfolio which is why I'm looking at FTSE 250. I meant 'favourite' in the sense that in the last schedule of yours I saw IGG was a 'BUY'. I was just wondering whether you had any up to date thoughts given the potential relevance to this exercise and if you had time. If you don't - no worries.

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Stephen Bland 26th Mar 28 of 115

Andrew, for legal and other reasons it is not appropriate for me to update or comment on anything that I stated in my former publication, The Dividend Letter, which my publisher, not I, decided to close.

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Stephen Bland 26th Mar 29 of 115

Sector 6

My sixth sector choice for this HYP is commercial television, represented by ITV (ITV). At 128p and my div forecast for the year to 31 December 2019 of 8.0p it has a forward yield of 6.3%. This is my own forecast rather than the slightly higher 8.12p shown by Stockopedia because reading the latest accounts for the year to 31/12/18 shows that they mention paying "at least" 8.0p for 19. So to be conservative I've taken that "at least" to mean the likely actual payout. If in the event they do pay a bit more, well so much the better for HYP income investors.

As I've mentioned a few times I think, it is vital to read accounts and latest news from companies and not to rely solely on databases for share selection, even the excellent Stockopedia. It is not at all unusual to discover that database figures, whilst indispensable as a first stab at selection, need modifying in the light of information gleaned direct from the company.

You can see from the yield on his share that as I work my way down the Stockopedia FTSE100 ranked by descending rolling I year yield, I'm now looking at lower yields than the 8%-ish of my first five shares. Nevertheless ITV at 6.3% forecast is still on a substantial yield premium to the median forecast index yield that Stockopedia shows of 4.1%.

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

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theandyb 26th Mar 30 of 115

Hi Stephen

I like the idea of a sort of set and forget high yield portfolio so am following with interest.
Can i ask how many stocks are going to be in this portfolio your building now ?
Also, earlier you mentioned that you don't use stop losses with this strategy, so what would be the trigger for you to sell a stock ?

Thanks Andy

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Stephen Bland 26th Mar 31 of 115

Hello Andy

I don't have a predetermined number of sectors in an HYP but the minimum is 15. The final number depends upon market conditions but as a guide, past portfolios have held 15-20 sectors. Some sectors may contain more than one share.

The idea is to hold forever so that selling is not part of the strategy, other than in very rare technical circumstances. Thus the only changes that are likely occur to the portfolio over time are those mandated by corporate action such as a bid, demerger, cash returns, lapsed rights etc. A process I've termed Market Trading and which is normally highly beneficial.

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herbie47 26th Mar 32 of 115

In reply to post #462053

Hello Stephen,
Are there any sectors you will exclude? I'm thinking about the Homebuilding sector in particular, as some years no dividends are paid, Persimmon (LON:PSN) is forecast to pay 10.9% (Stockopedia figure).

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theandyb 27th Mar 33 of 115

In reply to post #462053

Hi Stephen
Thank you for taking time to reply
of course 1 question/answer generally leads to another, if that's ok ?
Do you equally weight the stocks in the portfolio ?
And i assume dividends are taken out rather than re-invested ?

Thanks again

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OldSchool05 27th Mar 34 of 115

Hi Stephen, thanks for the work going into this, it's interesting to see where you are heading.

You say that "the idea is to hold forever so that selling is not part of the strategy, other than in very rare technical circumstances."

Given that this is a high yield portfolio, are you saying that you would not even sell on a profit warning leading to a dividend cut? Even if you re-ran the screen and a new company now qualified as a HYP from the same sector / industry?

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Stephen Bland 27th Mar 35 of 115

In reply to post #462233

All sectors are equally weighted at cost so as avoid the HYPer preferring or dispreferring any of them. For sectors having more than one share, the amount is divided between those shares so that the sector as a whole remains at the same weight. When adding new sectors later, the amount to be invested is the then latest average sector value, again so as not to over or under invest in it.

Dividends are withdrawn or reinvested according to the investor's needs. That's why this is a whole of life approach from age zero upwards, whereby people reinvest dividends until such time as they need all or part of the income, thus permitting seamless switching between the reinvesting and withdrawing states.

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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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