Saturday, 13 June 2015

Adding Legal & General to my High Dividend Yield Portfolio (HYP)

On the 29 May 2015 I added Legal & General (LGEN) to my High Yield Portfolio (HYP) at a price of £2.6766 a share.  Since purchase they've fallen a little in Price closing at £2.639 on Friday.  LGEN represents my 13th formal HYP purchase and brings my total HYP portfolio to 15 shares if I include the government gift that was Royal Mail Group (RMG) and the demerger of South32 from BHP Billiton (BLT).

Having unitised my HYP I can accurately tell you that since inception in November 2011 my HYP has seen capital gains of 34.2% compared to the FTSE 100 at 27.7%.  Year to date capital gains performance switches with the HYP up only 0.6% compared with the FTSE 100 at 3.3%.  Dividend yields however, which is why I have the HYP in the first place, are 5.1% (trailing yields) for the HYP vs only 3.6% for the FTSE 100.

So why did I buy Legal & General?  Within my HYP I’m looking to buy solid companies that currently have high yields but which I hope to be able to hold for the very long term, ideally the rest of my life.  Some of the key criteria for me were:
  • The Legal & General business model is easy to understand.  They are a large insurance and investment management group with their fingers in defined benefit pensions, annuities, fund management, life insurance and fund wrapper (cofunds for example) pies.
  • I prefer large and non-cyclical industries.  Its company number 35 in the FTSE 100 with a market capitalisation of £15.8 billion and generates £1.3 billion in revenues.  It is however not a non-cyclical company.  To demonstrate in 2007 they had an adjusted earnings per share of £0.1188 which by 2008 had turned into -£0.1788.  This then also forced a dividend cut in 2008 and a further cut in 2009 which didn’t recover to 2007 levels until 2011.  So as a retiree living off LGEN dividends your ‘salary’ would have fallen by 1/3 which is not insignificant.
  • To minimise risk I'm looking for my HYP shares to be spread over a number of sectors.  LGEN adds a new sector for me – Life Insurance.
  • I’m looking for shares with dividend yields somewhere between the current FTSE 100 yield of 3.6% and 1.5 times the FTSE 100 yield or 5.4%.  On a trailing yield of 4.3% LGEN is right in the sweet spot.  Forecast dividend yield is near the top end at 5.0%.
  • The company should have an unbroken history of continually increasing dividends plus dividends that increase at a rate equal to or greater than inflation.  As already mentioned they’ve had their transgression but in the 5 years to 2014 LGEN have raised their dividends from £0.0384 per share to £0.1125 or 193% which is a country mile above inflation over the same 5 years at 18%.  Taking away the flattery that the transgression provides and dividends are also up 88% since 2007.  This nicely demonstrates why it might be prudent to carry a couple of years of cash buffer in retirement as the last thing you want to be doing is selling capital to eat when prices are severely depressed.
  • A dividend cover of greater than 1.5 for all HYP type shares except utilities where I think that greater than 1.25 is ok.  Here LGEN is right on the limit at 1.5.
  • ‘Creative accounting’ can make earnings and hence dividend cover look good.  I therefore also set a greater than or equal to 2 criteria on Operating Cash Flows compared to Dividends.  At 8.3 this is very high but for LGEN this metric moves around a lot.  In 2013 it was 2.4.
  • Valuations don’t look cheap with a P/E ratio of 15.8 and a Price/Book ratio of 2.5.
  • As I write this post today I have 83.2% of the investment wealth that I believe I need to bring me financial independence.  What I find interesting is that I don’t have a single £ anywhere near a LGEN product.  I'm not sure if this is a good thing or a bad thing though...

While on the topic of HYP’s let me do some quick spring cleaning.

Firstly, as I've already mentioned Billiton conducted a demerger in May with the spinoff of South32 (S32).  The way I'm going to handle this going forward from a portfolio performance perspective (not a tax perspective) is to reduce the purchase price of each BLT share by £1.1671044 and assume I bought S32 at £1.1671044 per share on the 22 May 2015.

Secondly, it’s interesting to look at the annualised performance of each of my HYP shares in the chart below.  The chart moves from my first purchases (SBRY, AZN, SSE) in November 2011 on the left to my last purchase (LGEN) on the right.  The variability is quite incredible.

HYP Annualised Gains ex Dividends
Click to enlarge, HYP Annualised Gains ex Dividends   

As always DYOR.


  1. I also hold this one in my income portfolio - it has done well over the past few years and I am sure it will be a sound addition to your HYP.

    Just going back to your warts n all post last week, I see that the other portion of your UK equity allocation is the Vanguard UK Index fund and I was just wondering how the total return for this compares with your HYP - have you done any analysis yet?

    1. Interesting question John. Have just quickly run some numbers to get a feel:
      - The Vanguard fund tracks the FTSE All Share so I'll use that as a proxy. The Vanguard fund will of course drag a little because of it's 0.08% OCF and could have some tracking area but I'll ignore that for simplicity sakes. It also my HYP analysis is worst case because of the OCF.
      - Performance since inception FTSE100 27.7%, FTSE All Share 35.3%, HYP 34.2%
      - Performance YTD FTSE100 3.3%, FTSE All Share 4.8%, HYP 0.6%
      - Current trailing divi yield FTSE100 3.6%, FTSE All Share 3.4%, HYP 5.1%

      Given that I'm pulling in circa 1.7% more annual divi yield than the FTSE All Share I'd say on a total return basis the HYP is also slightly ahead of the All Share since inception. As long as I match I'll be happy as my HYP is all about generating dividends and not out performing the market.


  2. Hi RIT, L&G's probably a solid pick. I don't own it myself, but that could easily change if its price drops just a little more.

    As for who uses L&G products, it's me. I have had a few over the years, and still do. So, assuming all its other customers are like me (a somewhat egotistical assumption) I would say they're all after a solid product at a reasonable price. They can't be bothered looking for the "best" deal, so they just look at a few providers that they can think of off the top of their heads, and L&G is usually "good enough".

    "Satisficing" I think it's called.

    1. Hi John
      Interesting comment about picking from the top of your head. Demonstrates how a Brand and brand awareness really can be strong moat for companies.

  3. Hi RIT. Re your graph. Interesting that you have annualised gain for BP up 25% and you bought Jan 2015. If you had bought 2 months prior it could have been 0%. If you had bought 6-7months before that, it could be -15%. Having a HYP is certainly a long term game. Also, I think until you have at least about 30 companies in a HYP, even if one holds them for a very long time, the performance of the HYP has a high luck element. A few years down the line I will be interested to see what your thoughts are about your HYP compared to a cheap FTSE100 tracker.

    With only 15 stocks in a HYP, a profits warning on one of those that knocks that stock back 30% lowers overall HYP performance by 2%. Do you have a feel for how many HYP eligible (as per your criteria) companies over the last 20yrs have had that kind of thing happen and never recovered? Any? It is probably extremely time consuming and difficult to do research like that.

    Although interesting, is it worth the time looking at HYP performance without including dividends? Royal Dutch Shell has a lower price now than 15yrs ago (even before inflation adjustment). The 10yr annualised trailing return on it is 4.4%. There are a few others in your HYP with a similar flat trendline for capital. Of course, oil has taken a beating recently, but the volatility on essentially a flat trendline has been huge. Maybe these kind of HYP-eligible volatile but overall flat stocks are for an active trading game (even if long term)?

    Regarding your HYP, have you rebalanced on any stock yet? Will you? What factors affecting a company might make you do a bit of 'active trading', I wonder, or would you rebalance purely based on value? If so, with what thresholds? You have described in detail your criteria for picking the stocks but what would make you drop one? Just wondering if you have had any thoughts in that direction.

    Thanks for your posts, as always.

    1. Hi Jim F. Thanks for the thought provoking comment (as always). Let me try and respond from where I sit today, including digesting John’s comment yesterday, rather than from where I've come from.

      Let me start from what I'm trying to achieve with the HYP as I think that will help frame my thoughts:
      1. I am looking for an above average (read above that available from a FTSE100/All Share tracker) dividend yield where absolute dividends also increase at a rate equal to or above inflation. The aim here is to build a total portfolio that will mean I don’t have to sell down capital in early retirement; however
      2. This is of no value if the total return from the portfolio doesn’t match that of a simple tracker as I then might as well suck up the psychological element and accept that selling down capital is just what I have to do.

      At the moment the HYP is working as I'm meeting the objectives above. You’re possibly right that it’s just luck but the chart does show that I've picked a fairly even number of winners and losers which ‘might’ mean my criteria is average which I'm ok with. I do want to continue to build the number and would certainly like to get to 25/30 holdings as I've mentioned in previous posts. I'm not sure if I’ll make it though as Early Retirement may beckon prior to that. How do I feel about the HYP even now compared to just holding a tracker? Even now I know I'm carrying risk, buying a tracker is probably a more sensible option but I'm also conscious of how difficult it could be in a severe bear market to sell down capital so I think the experiment is worth it. What makes it easier to experiment is that the HYP even today only actually represents 7.7% of portfolio value but this year could bring in 18.6% of dividends.

      Why do I focus so much on capital? This is because I'm very conscious of at least matching the total return of a simple tracker. I know my dividends are well above that of possible trackers so I need to keep a close eye on the capital side to make sure I'm not falling behind. Since inception capital is ahead of the FTSE100 and about on par with the All Share. YTD I'm well behind capital wise. It will be interesting to see how this plays out.

      Regarding rebalancing. I haven’t done any yet and while building the HYP it’s unlikely I will actively rebalance as new money should keep things in enough of a check. As always I'm trying to build mechanical criteria which haven’t made it much further than some of the Motley Fool HYP experts. I'm currently at:
      - If a shares value increases to 1.5 times median value I’d sell 25%
      - If the dividend yield falls to half that (inc a full dividend cut) of the FTSE100 I’d sell it completely


    2. Thank you very much for your response, RIT. It makes sense and, like you say, your HYP is less than 10% of your overall portfolio. Just one last question re your preliminary sell criteria: what do you mean (no pun intended) by median value? Over a historic range of how long? (Apologies if you have already mentioned this in another HYP post.)

    3. When I first started my HYP I bought the same amount in £ terms of SBRY, AZN and SSE. Let's say it was £900 in each. So the median (the middle value) is £900.

      Every week subsequently I calculate how much in £ terms each of those investments is worth. Let's say 6 months has passed and valuations have gone to £900 SBRY, £1,000 SSE and £1,100 AZN. So the median is now £1,000. Therefore AZN is 1.1 times median so no action needed.

      Let's say another 6 months passes and valuations have gone to £900 SBRY, £1,000 SSE and £1,500 AZN. So the median is still £1,000 however AZN is now 1.5 times median so I'd be selling £375 worth.

      It's an attempt to sell high but I don't go back to median just in case the winners keep running.

      I should also note:
      - to make this work whenever I buy a new HYP share I always buy median value.
      - I'd never sell £375 as trading costs wouldn't make it worthwhile but my HYP share values are higher than the demonstration case.

      Hope that makes sense?

  4. A good long-term investment, I think, ERT.

    I picked up a few shares in L&G last month after watching them for ages (see my write-up here if you're interested). Whether or not their looking beyond the shores of the UK will see the same success as the Pru will remain to be seen. But it seems a solid decision to make to me.

    Your HYP looks very healthy indeed! Recently it has been a hard time for several of the mega cap, high yielders. I expect that to change in time (though how much time is not clear!).

    Have you looked at a similar life insurer, Old Mutual? They look in some regards even more appealing than L&G. Lower debt, higher dividend coverage, similar growth etc. I picked up some shares in them back in January ( and have looked at topping up recently. May be of interest. Though with a life insurer already in your HYP maybe not!

    Keep up the good work! I look forward to reading another update soon!

    1. Thanks for the Old Mutual tip off DD. My HYP watchlist was 143 shares and for some reason Old Mutual wasn't on the list. It's now 144 shares and they're not far from the top so will certainly soon be getting some further analysis.

    2. My pleasure, RIT.

      It is an interesting company which continues to look really good value compared to its fellow life insurers. For some reason, Old Mutual is often missed despite being on the FTSE 100!

      Be interesting to see what your analysis throws up. I find nothing that I don't find attractive except the fact that it did--like many of its peers--cut its dividend during the financial crisis. However, other than that it is very impressive.

  5. Hi RIT
    This stock is on my watch list, as is Old Mutual mentioned by DD above - I fully expect to buy these at some point.

    I invest in three L&G trackers and had my S&S ISA with them (dealing with them direct) until I consolidated that small portfolio into my HL account.

    144 shares is a big old watch list - I struggle when I have to look at around a dozen!

  6. I am planning on buying these tomorrow whenever Halifax are offering the cheap commission charge.