Saturday, 3 January 2015

The High Yield Portfolio (HYP) – Year 3

We've just completed the 3rd calendar year for my real life, warts and all, High Yield Portfolio (HYP) that’s still in the accrual stage.  While at the moment it only forms a small portion of my total wealth I keep a close eye on it for 2 reasons:
  • Ideally at the point I reach Early Financial Independence I can have enough dividends being spun off that should I choose to Retire Early I can be in a situation where living expenses can be covered by dividends and interest only plus a bit.  I think psychologically this would be easier than having to sell down assets to live from.  With me targeting a withdrawal rate of 2.5% of wealth I'm targeting dividends and interest after I net off the cash I’ll need for a home of 3%.  Today I'm at 2.4% so have a way to go yet and the HYP is key to increasing that value.
  • With the majority of my wealth being tied up in index trackers this is one of the few areas where I'm stock picking and trying to beat the market.  It’s fine to have a high dividend yield but if my total return (dividends + capital gains) can’t beat a simple FTSE tracker over the medium term then I might as well pack it in, buy that tracker and accept I may have to sell down some assets in retirement.

The HYP today now has 12 stocks.  These are:
  • Sainsbury’s.  Bought on the 28 November 2011 and currently sitting on an annualised capital loss of -5.7% and a forecast dividend yield of 5.4%.
  • Astra Zeneca.  Also bought on the 28 November 2011 and currently sitting on an annualised capital gain of 17.2% and a forecast dividend yield of 3.9%.
  • Scottish and Southern.  Again bought on the 28 November 2011 and currently sitting on an annualised capital gain of 7.7% and a forecast dividend yield of 5.5%.
  • Vodafone.  First bought on the 21 December 2012 and then sold on the 21 January 2014 to avoid the Verizon Wireless sale palaver.  Then re-bought on the 30 April 2014 for an annualised capital loss of -1.9% since re-purchase and a forecast dividend yield of 5.1%.
  • Royal Mail Group which is not strictly speaking HYP but I lump it here as I have no other holding like it within my portfolio.  I saw it as a government bribe and it’s turned out to be exactly that with an annualised capital gain of 22.4% and a forecast dividend yield of 5.0%.
  • HSBC.   Bought on the 30 March 2014 and currently sitting on an annualised capital loss of -2.6% and a forecast dividend yield of 5.3%.
  • Royal Dutch Shell.  Bought on the 30 June 2014 and currently sitting on an annualised capital loss of -22.4% and a forecast dividend yield of 5.3%.
  • Pearson.  Also bought on the 30 June 2014 and currently sitting on an annualised capital gain of 2.1% and a forecast dividend yield of 4.3%.
  • GlaxoSmithKline.  Bought on the 01 August 2014 and currently sitting on an annualised capital loss of -8.1% and a forecast dividend yield of 5.8%.
  • Amlin.  Bought on the 29 August 2014 and currently sitting on an annualised capital gain of 14.8% and a forecast dividend yield of 6.3%.
  • BHP Billiton.  Bought on the 29 September 2014 and currently sitting on an annualised capital loss of -54.7% and a forecast dividend yield of 5.1%.
  • Tate & Lyle.  Bought on the 31 October 2014 and currently sitting on an annualised capital loss of -13.4% and a forecast dividend yield of 4.8%.

Before I analyse the performance of the HYP as a whole it’s interesting to take a step back and look at an interesting phenomena that is taking shape after only 3 short years.  This is shown in the chart below.  The method I use to add a new stock is to always buy at the value of the median holding.  Ignoring RMG which was the government allocation there is already a large divergence forming between stock valuations considering they were all bought at median.  Already there is a factor of 2 between SBRY and AZN for example.  This is quite sobering for me as I feel it demonstrates just how easy it could be to under perform the market as a whole with this HYP game if I get it wrong.
Retirement Investing Today High Yield Portfolio
Click to enlarge

So enough faffing.  Just how is the HYP performing?

Firstly dividends.  All purchases so far have been made at a dividend yield above that of the FTSE100 and over the year to the 31 December 2014 the trailing dividend yield of the portfolio has remained so at 4.9% versus 3.5% for the FTSE100.

Secondly capital gains.  Over the year I've suffered a loss of -2.1% and since inception I’m sitting on gains of 33.3%.  This compares very favourably to the FTSE which is seeing a loss of -2.7% and a gain of 23.6% respectively.

So 3 years in and my HYP strategy seems to be working.  I'm achieving dividend yields above that of the FTSE100 while also getting higher capital gains.  I'm therefore going to continue building the HYP into 2015.

As always DYOR.


  1. What's the strategy if a dividend yield on a share drops below a threshold, say the FTSE 100 yield. Will you sell all your holding in that share? e.g. if Sainsbury halves its payout?

    1. Hi Keith

      I'm still very much in the HYP building stage so at the moment I'm tempted not to tinker. Once I have a full stamp collection I will implement some mechanical rules. Having done a little reading on the topic, particularly over at Motley Fool, I'm starting to settle on a few ideas:
      - If a share value gets over 1.5 of median value then I'll trim back by say 25%. Won't trim back to median as might still get a bit of out performance through momentum.
      - If the yield falls to half (or is stopped) of the FTSE100 then I'll sell the whole holding after a preset time of say 3 months.

      Do you have a strategy here that you would be willing to share?


  2. Hi RIT, I've run a HYP as my core core retirement strategy for the last 3 years. It does take time to construct a HYP because you have to wait for the right valuation entry point. I have very little capital in my FTSE tracker. I have 27 shares now, just waiting for Reckitt, Compass, Prudential to fall in price and my UK HYP will be complete. Its not strictly a HYP because I also have dividend growth shares like Rolls Royce, Diageo, SAB Miller etc. Currently generating 4.8% yield.
    I also have a separate individual USA dividend shares fund. The USA just has some of the best companies in the world: Coke, Pepsi, Johnson-Johnson, Proctor Gamble, GE, Colgate Palmolive, Kellog etc etc
    Noticed you don't have an sin stocks (Tobacca, Defence, Alcohol) - is this a ethical choice ? Also your missing REITs, probably best to waiti for interest rate rises, British Land, Hammerson are yielding about 3.5% currently.

    All the Best.

    1. Hi Jon

      Thanks for sharing. RB, CPG and PRU are certainly on my watch list. So are RR, DGE and SAB for that matter.

      Good point about overseas HYP shares. Something I've been thinking about and I've made some comments on in the past (just not sure if it was here or on some of the other PF blogs I read). I'm tempted to grab exposure though Vanguard's FTSE Al-World High Dividend Yield UCITS ETF (VHYL). Are you buying direct or through a fund?

      Re: sin stocks. I'm still on the fence and haven't bought for that reason. That said I'm a hypocrite here as I own plenty of trackers that are full of these types of companies. I'll probably roll over and buy soon though.

      Re: REIT's. This is actually deliberate. Elsewhere in my full portfolio I target a 10% allocation to 'property'. 50% of it is a UK commercial property fund within my pension and 50% is European based via the ETF IPRP.

      Would you be prepared to share your collection of 27?


  3. What is so great about outperforming the FTSE 100 index ? As an index to track or to compare performance to , FTSE 100 is an odd choice - as is the FTSE All Share Index because this is dominated 80% approx by the FTSE 100 stocks .OK - the yield may be a useful benchmark . Long term - the FTSE 250 index performance compares reasonably well to the S & P 500 and these 2 indices are structured in the same way - unlike the DJ Industrial average which has it's own quirky structure.

    Indices are not all the same .If you are going to choose a tracker - may sure the index it is going to track cuts the mustard. And if using an index as a benchmark or to compare portfolio performance to- choose carefully.

    1. Good point stringvest.

      I originally chose the FTSE100 as one of the early pillars for company choices was "Large and in non-cyclical industries". I've relaxed a little on the Large in recent times (TATE and AML both being FTSE250 for example) as I think this was overly constraining me.

      What would you suggest as a suitable index to benchmark against? Going forwards I'll still be adding FTSE100 (as mentioned above I'm sure I'll end up with BA, BP, IMT and BATS plus a few more utilities) so the FTSE250 is probably not a fair comparison even though I'll also add some FTSE250 companies.


  4. Hi RIT, my 27 are:

    Also, unless there is a corporate action I intend never to tinker with the HYP. Plan is to get all the stocks into the ISA wrapper and let the winners run forever and the losers, if any, to crash and burn. Bankruptcies will be replaced by another share to maintain 30 stocks. Stocks are equally weighted on purchase.

    The USA stocks I buy directly through a US Charles Schwab $ account. One great advantage of US stocks is that they pay dividends quarterly which accelerates the compounding effect and many companies have been increasing dividends non-stop for 25 years + . I can achieve a blended yield of 4% easily with a dividend growth rate of 7% pa. With ETFs like VHYL I'm not sure if the dividend will increase each year. My experience of ETFs is that its difficult to predict how the dividend will behave year to year.


  5. Thanks for sharing and a nice collection of usual suspects there. Most of those regularly come up on the Motley Fool HYP board and I have all of them on watch (if I don't own them). I don't see any non-life (AML, CGL, ADM etc) in there. Any reason for that?

    I like your non-tinkering approach but it does make me a little nervous. The original PYAD HYP that I mentioned in my November post - 14 Years of HYP - shows that this approach could lead to a dependency on a very small number of shares which IMHO adds risk. Are you planning on adding new money forever (by spending less than the total divi's) to help with that or do you have another idea?

    Good point re increasing of ETF divi's every year.

  6. Hi RIT, I thought Aviva and Pru provide some non life services as well, I maybe wrong. If the HYP gets too lopsided after 10 years +, I may reset it. Any additional funds will be squirreled away into trackers, I don't plan to add any more funds to the HYP. I would like to see how a non-tinkered HYP performs after 10 years + just out of curiosity.

    1. The Motley Fool link within my 14 Years of HYP post shows exactly that. It tracks PYAD's 15 share non-tinker HYP that was built 14 years ago.

      Look back a few posts to November 2014 and you'll find the link in the 5th paragraph.

  7. Which Indices to Track ?

    RIT - I don't have an answer to your question about which UK index to use for portfolio performance comparisons.

    The main point that I was trying to make is to encourage investors to understand what they are buying whether it is an index tracker, i-share , etf etc etc.
    The Nikkei 225 and DJIA are both price weighted indices , and the DJIA is made up of 30 blue chip stocks all capitalised above $ 5 bn.
    Japan has TOPIX as a capitation based index that is composed of about 1670 stocks ( total stocks listed on JSE - Japanese Stock Exchange - was 2300 in 2011 )
    S&P 500,all the US Russell indexes, FTSE 100,250 ,All Share and Small Cap indices are ALL capitation weighted.

    Do your own research on etf's, i-shares - are they replication funds or derivative based,do they pay dividends ? or are they effectively accumulation funds ? do charges come out of income or capital ?

    As far as US exposure - my stockbroker ( are these allowed on RIT blog ? )in August 2014, reduced by half my single largest investment which is in HSBC etf S & P 500 and invested the proceeds into Heptagon US Equity Yacktman 1 which has a high exposure to consumer goods and still has 17% in cash . It has outperformed the S&P over the last year - and should be a more defensive fund than the index as it is a " deep value" fund. PS - I am a private investor - so will not benefit in any way from this recommendation . BUT as RIT keeps reminding us - do your own research.

  8. Sorry - that should be Heptagon Yacktman US Equity 1 - denominated in dollars and does appear on trustnet and morningstar and on bloomberg as HEPYACA

  9. Hi RIT,

    On the benchmark issue there are three ways of thinking about it:

    1. A broad appropriate and relevant comparable index, the aforementioned FTSE 100 would seem appropriate.

    2. Alternatively you could go for an index that focuses on high yield and may give an indication as to how your stocks compare to other high yield stocks. Examples could be the FTSE Equity Income index (constructed for a Vanguard tracker to high yield UK stocks) or FTSE UK Dividend+ index (there is an Amundi tracker to this index, 50 highest yielding FTSE stocks).

    3. Or, you could benchmark your HYP to the rest of your portfolio. This is based on the assumption that if you didn't invest in the HYP you would invest it the same way as the rest of your money.

    Each gives you different bits of information.

    All the best,