This is part #6 of Stephen Bland's High Yield Portfolio Series on Stockopedia. Last week I looked at whether selection methods and filters might be able to exclude shares that go on later to prove troublesome by suspending or cutting dividends, perhaps even going bust, though I’ve never picked one of the latter so far. I employ selection filters to omit what appear to be obviously weak candidates but it is just about inevitable over the eternal holding period intended for the HYP strategy that some problems will occur at various stages. I concluded that this has to be accepted by HYPers as a known potential risk which cannot be wholly eradicated by any amount of initial filtering.
This week I’ll consider whether an HYP is all an investor needs or whether it might carry too much risk on its own so really should be just part of a much wider spread of investments. Eggs and baskets.
Note that I am addressing this to those who have already decided to utilise the HYP idea in some proportion, whether they are reinvesting dividends for future income or are at the stage of requiring immediate income. I’m not discussing here whether HYPs should be used at all because my underlying presumption is that investors are convinced in principle about it.
There is no easy answer to the question because it depends on the specific circumstances of the individual but two main factors influence consideration of the matter. First the investor’s attitude to risk and second how much cash they have available for investment. There are some minor factors too like the degree of work and aggro required to manage their investments that people are prepared to accept.
I’ll take an example. You have a lump sum of £100,000 in the bank, the source of which is not important for this purpose. You have no immediate need of the money, nor the income from it, so have decided to put it into risk investments for your future. Should it all go into an HYP or should part of it be invested that way and part in some other areas? I’d say raise all in on your HYP, reinvesting dividends until you need them.
I don’t consider this too risky for the whole of your available investment capital. Equities in general can be very risky, just gambling the…
