Introducing The High-Yield Portfolio

21st Oct '13 by Stephen Bland

27 comments 32468 reads

This is part 1 of a new series about High Yield Portfolio (HYP) investing by legendary investment writer Stephen Bland written exclusively for Stockopedia. Stephen Bland has been writing about systematic investing in the value and dividend income space for over a decade (we model one of his screens here). He has been using Stockopedia for some time to help with High Yield stock selection and we have invited him to write a series exclusively for Stockopedia readers, we hope you enjoy it….

Stephen will be presenting on the Stockopedia stand at the London Investor Show at 3pm this Friday at Olympia. If you still haven’t signed up - you can claim a free ticket with the code STOCKOPEDIA at this link.

Let’s get one question out of the way that may be bothering some readers. I promote the High Yield Portfolio strategy and I am also heavily invested in it myself, utilising the great majority of my investment capital. So this is a money and mouth job for me.

Consider also the fact that I am well old enough to be retired but I disregard the advice from some that people of my age with cash for investment should be moving away from equities. As with many aspects of my life, I’m doing the exact opposite of the standard counsel in this situation and have no hesitation in advocating a similar attitude to others. The older I’ve become, the more I’ve embraced equities but the key to this is that it is done in a structured way that minimises the risks.

That way is what I called the High Yield Portfolio (HYP) and so versatile did it prove it that I think it suits not only old farts like me desiring income but everyone from birth onwards who wishes to provide for their future.

So what is the HYP?

The simple answer is that it’s an equity income strategy. If you don’t need the dividends immediately, reinvest them until you do. But that’s a very old idea. My contribution to it is the set of rules which govern construction and maintenance, at least one of which is highly controversial. Why choose equities for income rather than, say, bank deposits or bonds? Because of the potential, though not the guarantee, of shares to deliver an…

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emptyend

22nd Oct '13

Hello Stephen,

Good to see you posting here.......I promise not to reprise old debates ;-)

I presume you mean SOCO. It's true I wasn't keen on it because it just didn't fit my rules. I would reject it now again as far too risky a value play if coming to it fresh on the same conditions as it stood then, despite the hindsight that it has been a great share. But congratulations to those who did score from it.

Thanks. ;-)

However, there is a very relevant point to be made about SOCO International (LON:SIA) in the context of using yield screens, to which I draw your attention (whilst being indifferent as to whether my comments change your views in relation to SOCO International (LON:SIA) )....because IMO this may have very much wider ramifications for investors relying on screening processes.

As you may be aware, SOCO International (LON:SIA) recently paid a dividend to shareholders totalling 40p per share (which is a yield of ~10%). This dividend was announced (unusually for a maiden dividend) with the interim results and furthermore the company offered investors the option to take the 40p payout in the form of a capital repayment instead of a dividend, if they so preferred.

As a result of these two unconventional aspects to the payout, very many databases seem to have completely missed the existence of the ~10% payment - and they continue to misreport the yield as 0%. Plainly that is an error, because investors have already banked the dividend (or capital gain, in the case of the 30% of investors who elected to take the 40p payment that way)......and the company have also explicitly indicated that they intend to pay out ~50% of free cash flow annually in future (which is, I would argue, a much more concrete commitment to shareholder returns than conventional dividend-paying companies offer).

I would be interested to know how the various databases that investors rely on for their screening data have dealt with the ~10% yield in their databases, especially where investors are reliant on them for screening purposes. For example, I know for certain that the yield of ~10% is now being correctly reported by The Daily Telegraph, and by their data supplier interactivedata.com . I also know that , in recent days (and after due investigation directly with the company) Morningstar.com have corrected their treatment of the payment and so now also report a ~10% yield in their database products made available to institutional investors (though perhaps not yet for retail products).

But I am less sure how the informaton is being treated by databases that offer their services to retail investors in conjunction with screening products. For example, has Stockopedia now revised its treatment of the 10% payout and moved to report the yield on SOCO International (LON:SIA) ? I know Dave was initially unconvinced - but, as the market slowly takes a fresh look and reputable professional data sources move to correct their data, then it is surely incumbent on those who offer data screening services to also update - otherwise they are completely missing a 10% historic yield on a FTSE350 stock....which surely makes a nonsense of the whole screening process?

I might also say that there seem to be some sites that purport to offer screening services to assist investors in identifying high-yield situations that have simply stuck their heads in the sand and refused to correct their data, even when presented with cast-iron evidence of the dividend nature of the payment (dividendinvestor.com being one such). Such religious box-ticking and studied igoring of economic realities is both amazing and worrying.

My point here is that, when it comes to screening products, it is very much a case of garbage in, garbage out - and some data sources seem to have an alarmingly-lackadaisical approach to core parts of their data offering around dividends....so IMO I wouldn't trust any of them to present yield of dividend data in a way that reflects the underlying economics or even the way that cash has demonstrably been distributed. In that regard, I'd suggest that SOCO International (LON:SIA) appearing on a dividend/yield screen is actually a good indicator of a sensible data source - though of course doubtless many HYP investors (including yourself I'm sure) will ignore the high yield anyway on the ground that the shares have only just started to become dividend paying.

For my part, I note with some satisfaction that the recent dividend payment per share was more than quintuple the amount I actually paid for my first shares in 1999.....

kind regards

Stephen Bland

Hello ee

My usual advice on using database filtering is that although this is undoubtedly very useful, investors cannot rely on it completely because the data will sometimes contain errors and also the owners' method of capturing and analysing information may not suit exactly what the investor is seeking with the filter.

So any shares revealed in such trawls must have their figures checked back to the source, usually the latest company accounts, to check on the figures and also any relevant company news since the latest accounts must be examined too because this may have information not taken into account by the database.

A much more difficult problem is that of shares omitted by the filter for some reason but which should have been selected, as in the situation you mention. I can't see any easy way round that one. Comparing the results of the same filter on two separate databases is one possibility but it is still not foolproof.

This is where online forums can sometimes be useful when readers put up ideas which databases have not revealed.

Hi Stephen,

A much more difficult problem is that of shares omitted by the filter for some reason but which should have been selected, as in the situation you mention. I can't see any easy way round that one.

Neither can I - which is why I specifically wanted to highlight it, as it refers to a situation that should (one would think!) be captured by every single yield-focused database on the planet (especially since people seem to be falling over themselves to buy Royal Mail (LON:RMG) and many other shares on grounds of recently-established yield histories that offer less than half the payout!)

Of course, after due investigation, one may wish to dismiss particular shares (identified by the screens) from further consideration, if they don't measure up to whatever criteria one applies after further scrutiny, but I must frankly say that I have found the databases' sluggardly and box-ticking responses to this particular situation to be extremely worrisome - not least because I expect to be changing my own investment approach in the foreseeable future to one which relies much more on HYP principles!

In fact I would say that I am so worried about the extent of inaccuracies in yield data as a result of my investigations in recent weeks, that I am inclined to omit yield entirely at the screening stage - and to rely on P/E ratios and perhaps other metrics instead. Among the comments I have had from different databases in relation to yield data are the following points - many of which I frankly find to be shocking and indefensible in the modern era:

Some will only publish data relating to the last financial year when there has been an audited anual report filed in relation to it. In the case of the SOCO International (LON:SIA) payment, therefore, they are looking right back to the situation for calandar year 2012 (as reported in the AR) and ignoring everything else that has been announced subsequently. By the time the next AR is published, they will have been publishing data for about 8 months that has been clearly wrong by 10%.
Others will follow various sorts of (usually ill-disclosed) attempts to smooth yield data - averaging over periods of time which might be a "rolling 12 months" (as Stockopedia does, I believe) but which also might be longer periods.
Others (such as DividendInvestor.com, judging by their response to this particular issue) will ignore payments altogether unless they are appear in a pre-determined box. They seem entirely content to ignore economic substance.
Some will look only at historical yield information, others will rely on forecast yields (and therefore will be completely reliant on brokers for the accuracy of their reported numbers - which IMO is unwise, considering that the FT still includes at least one analyst in its forecast universe for SOCO International (LON:SIA) that seems to be "forecasting" a 2013 dividend that is lower than the amount already banked by shareholders!).

The final point that I should mention is that this sort of payment isn't a unique circumstance. In some market sectors there are often distributions of capital (for example) and the B/C share scheme form of distribution seems to be increasingly common - for example, IMI (LON:IMI) last week.

I am of the view that databases that completely ignore such complexities should be named and shamed. But, until they get their act together, perhaps it is more reliable to screen for low PER rather than high yield per se?

All the best

flyinghorse

23rd Oct '13

EE,
Am I correct in thinking that the key benefit to the SOCO return of capital being included in yield calculations which only currently seem to handle traditional dividend payment is increased exposure of SOCO to the investment community and hence share price rise. Those already "in" (And thats why its not bothered me to much) have more of an issue in protecting these returns from tax,or busting the Lifetime allowance if a large share price jump happens.

One refreshing aspect of SOCO for me in seeking tax efficient yield is the capital mechanism where I can use it against previous carried forward losses in an open portfolio (ie not ISA/SIPP)

FH

hypster

Hi Stephen,

Great to see you here on stockopedia and I hope from my "handle" you can see where I am coming from!

I came relatively late to the HYP strategy in 2007 but did enjoy reading all your back articles on TMF. I also look forward to more of the same on here and hope you will be a regular contributor.

I suspect I'm not unique in this aspect but it's interesting to see you bring up SOCO here as I am someone who has benefited from the recent cash return into my portfolio although that's not the reason why I bought them!

Regards,

Hypster

zoolook

Hi Stephen,

Been missing your Value pick articles. Hope you write about them too (not just HYP).... it is your first love after all...

Best, Simon

24th Oct '13

Am I correct in thinking that the key benefit to the SOCO return of capital being included in yield calculations which only currently seem to handle traditional dividend payment is increased exposure of SOCO to the investment community and hence share price rise. Those already "in" (And thats why its not bothered me to much) have more of an issue in protecting these returns from tax,or busting the Lifetime allowance if a large share price jump happens.

It is true that I would expect a marginal support to the share price if the databases correctly reflected the yield on the shares. But I'm not really bothered about that because I'm not reliant on market prices as I'm intending to hold until managment engineer their own exits (and there can't be too long to wait on that now, given their ages and the development status of the key assets) - and that is a decision I took several years ago now. But....if they continue to pay out 30-40p per share for the next decade, I shall be equally happy - given that this would be a very handy tax-free boost to my own retirement income.

I'm very much more concerned about the principle, in fact, because I regard it as completely ridiculous that databases that purport to be helping investors to identify income-producing stocks are in fact showing one of the highest-yielding of those stocks as producing no income at all. That is plainly wrong! And if databases are unable to correctly reflect a 10% dividend from a FTSE350 stock, then why on earth should anyone trust them to be correct on less prominent stocks or on whether a share is yielding 2% or 4%...let alone 4% or 4.2%?

lightningtiger

I would be interested to know your view on bank preference shares. The banks seem to be paying above 7% at the moment and I think Nat West is going XD about Nov5th for example. I have got some but not with them. I am aware that dividends are not guaranteed, but at least if the banks go down we should get paid out first as far as I am aware. Is this right?
Emptyend , I love the sunglasses!
Cheers from Lightningtiger

Thanks for the further messages of support.

To zoolook
I'm not intending to write about value here, just HYP.

To lightningtiger
I'm not sure if you are addressing me with the question on bank prefs but the good returns available on those you mention are of course due to the risk being carried. If the bank goes under, contrary to what you say the prefs will not be paid "first" because there are large numbers of creditors ahead of them. Prefs are merely ahead of ordinary shares in a liquidation but that still leaves them way down the list.

Yes Stephen, it was my assumption, but I should have clarified it thanks for that.
I had better check the banks out. Mind you nothing is safe these days with no guarantees of any further dividends are going to be paid in the future I just thought there was a better chance of continued dividends being paid out rather than those coming from companies themselves.
Regarding your point 6 you never sell & ignore share price fluctuations. Surely because the share price is worth roughly about 95% of it's current value, assuming say a 5% dividend is being paid, it can have a dramatic effect if the share price falls. I have always taken dividends as an extra bit of icing on the cake if you can get it, or if they still continue to be paid. To illustrate this point my niece in Sydney Australia bought some shares giving her a 10% dividend and now 2 years later , the share price has gone up but the dividend is still paying the same constant amount which works out at about 5 65%.I can appreciate that she has the choice of re investing the dividends back and buying more shares as my friend does in Melbourne, mainly with bank stocks,but, she has no longer got that 10% return on the current share price have obviously got a lot to learn with dividends. Thank you Stephen for your help.
Lightningtiger

25th Oct '13

Pref dividends are safer than equity dividends because they have priority but against that they are normally at a fixed level so cannot increase whereas the latter are unlimited.

In the HYP approach I advocate eternity holding as a minimum. Reinvest dividends until you need them. Fluctuating prices then become of little concern and managing the portfolio becomes a whole lot easier. You'll find this is a fairly radical approach because the great majority of investors concentrate on trying to score gains. Most will lose or do poorly.

Stephen,
I like some of your ideas,for example not checking stock all the time and being chained to the computer /internet are attractive. Also the concept of how we use our time remaining effectively , is key as its a diminishing comodity for many and theres so much to do.
What level of yield are we talking about here,as at the moment savings are delivering so little,that HYP could just be a few percent.

Your thread is very relevant to me as I am lining myself up for the last stretch as I know it unless someone finds a way of extending life as we know it.

For example £1,000,000 in shares yielding at 5% returns £50,000 equity based income.
Are you talking about a higher figure or lower on average when we talk HYP portfolio?

For someone whos; spent all my life in the oil business, I would break one of your rules in that this is the only sector I invest in. I understand it. I am diversified within the sector,but I assume you mean diversification across sectors.
If my stock (ie SOCO) looks to pay dividends/return cash for the forseable future whats the problem with being heavy in that stock?
regards
FH

26th Oct '13

What level of yield are we talking about here,as at the moment savings are delivering so little,that HYP could just be a few percent...

In my HYP strategy I define a high yield share as one yielding above the FTSE100 at the time of selection. At present, and it has been the case for some years, my definition will also be very much above the interest rates available on bank deposits but that is not always so.

...I assume you mean diversification across sectors. If my stock ...looks to pay dividends/return cash for the forseable future whats the problem with being heavy in that stock?...

I do indeed mean sector diversification and it is an unbreakable rule of the HYP approach. The reason is to spread risk so as to minimise the effect on portfolio income of problems in any sector. Remember this is a very long term equity income strategy and investors will be depending upon that income so it must be earned with the minimum of risks, in a situation where equities are unavoidably risk investments.

You ask what is wrong with being heavy in one stock or sector. It is massively too risky for an income player, someone who depends upon that income, that's what's wrong with it.

You talk of the foreseeable future but there is no long term foreseeable future in the HYPs approach. There is only an unforeseeable future and to cope it with I developed the concept of what I've termed Strategic Ignorance. This is my view that the long term future of the economy, a sector or an individual share is unknown and I have no faith in anyone's ability, including my own, to predict how it will pan out. Long term predictions are worthless in my opinion.

Thus I accept that I'm ignorant of that future and the way to deal with it if you want as secure an income as possible commensurate with investing in equities is to build that ignorance into the strategy. That's done by diversifying into at least 15 sectors, usually nearer 20, and investing the same amount in each. No view is therefore taken by investors on any share or sector by overweighting it.

jeavom

8th Nov '13

Hi Stephen,

Thanks for the interesting articles on HYP.

The stated income is to maximise income and not worry about the capital. However, doesn't the no sell rule hamper this aim?

If you invest in the FTSE 100 only, some companies will make sizable capital gains. If you can sell the shares with a 20% gain plus and reinvest in another FTSE 100 company with a higher dividend yield you will benefit from the higher yield and the larger capital amount invested, which increases your income. In addition you can rotate the portfolio back to better value.

I recognise that people are poor traders. So a mechanical rule could be put in place. It could be as simple as take profits when a 20% gain has been made. However, I like to run profits, so I normally put in place a simple trailing stop rule to lock in a proportion of the profits. If dividends on current price drop below 2% I also sell.

I am also a little wary that there is no rule to sell shares that cut their dividends by more than half. If you are older, you could get more income per annum by shifting money into better dividend paying stocks. If you are younger, it might be wise to wait and see if there is some recovery in capital (as price falls tend to come just before or after a dividend cut).

I would be interested in hearing your views on this.

Best wishes,

Mark

9th Nov '13

Hello Mark

Similar suggestions of using mechanical sell rules have been made to me repeatedly over the years but I have no intention of varying my controversial eternity hold criterion. Non trading is one of the features that sets my HYP strategy apart from most others out there though I don't do it merely for the sake of being different.

As a side benefit, it liberates the HYPer from excessive monitoring, decision making and a lot of worry. The whole strategy is aimed at people who realise they will benefit by standing away from their investment, not those who wish to continually be involved and have always to be doing something. Excessive involvement will for most investors have a negative effect upon performance, income and capital. That's because small investors over rate their skills, in the face of the overwhelming evidence that they don't have any, as shown by the results where most lose money or make far too little.

A mechanical sell rule still leaves the HYPer with a buy decision to be made. My view is that on balance this will worsen the income stream where a good share is sold just because it has made a capital gain. You shouldn't even be following the capital value.

In practice what I call "market trading", ie. mandatory corporate actions such as bids etc., will occur over a long holding period and these are nearly always beneficial to an HYP, much more so than any voluntary trading.

I admit that a few HYPers may be able to improve the income stream long term by some trading. But I'm not advising the few, I'm advising the many who won't. The trouble is that too many think they belong to the few!

Cuthbert C

10th Nov '13

Stephen

",,,I'm not advising the few, I'm advising the many...."

are you actually advising or just discussing on an internet forum? there is a rather important distinction.......

PS - post posting the above I see that you are in fact qualified to give investment advice. I presume though that what you post here is NOT classified as investment advice.

11th Nov '13

I was thinking of my subscription tipsheet The Dividend Letter in the quote you mention, which has nothing to do with Stockopedia. In TDL I provide advice on the HYP strategy and am fully qualified to do so.

In total contrast the over riding purpose of Stockopedia is to provide a database for DIY investors to make their own decisions, not to give investment advice. They invite people to write articles and messages and a large range of ideas and opinions can be seen here as a result, but as you say that's not advice, just discussion and it is incidental to the essential purpose of this site.

Stephen,

I think for people who are only interested in income in perpetuum, HYP is a brilliant concept and probably the best financial solution for even inexperienced investors. The fact that you also provide an advice service through The Dividend Letter takes even that problem away from those who don't feel confident about putting a portfolio together is also very helpful.

I myself got into HYP several years ago through your articles on TMF. I started my HYP as a way of augmenting my income in retirement as I didn't think my prospective pensions would be enough. However, I have been lucky through inheritance to not really need the income my HYP provides but it's other advantage has now also kicked in.

As I now still have control over the capital element of the portfolio I can still choose what to do with my money. The alternative may have been to have it locked in via an annuity or other unsuitable financial product that a FA might have steered me towards (and no doubt paid for the privilege!)

Regards,

Hypster

Thanks for the positive comments. It is one of the benefits of my HYP strategy that whilst it is about investing for income, the investor retains absolute control over the capital. I advise holding forever as a minimum but nevertheless should the capital be required for some reason, it is available immediately at any time at the prevailing market price and also can be left to beneficiaries of the investor's estate.

Damian Cannon

12th Aug '15

It's been a while since this high-yield strategy had its turn in the spotlight here on Stockopedia and I think that's a bit of a shame. I've been running one of these portfolios for the best part of a decade now and it's done very well - where I've stuck to the rules rather than trying to be too clever that is!

In the spirit of doing my own research, which is the ethos here, I've recently taken the time to construct a brand-new, 25-share portfolio from scratch. This was done, partially, just to see what such a portfolio would look like if I stuck closely to the rules but also for my own education; it's surprising how much you learn if you put in the leg-work!

Anyway I have set up the demonstration portfolio here on Stockopedia to see how it performs: http://www.stockopedia.com/fantasy-funds/stockohyp-large-cap-5083/

Sadly I don't think that this fund will track dividends, which is the whole point of a HYP, but at least it keeps the portfolio in one place for easy reference.

The full details of how I selected these shares are laid out in a few articles on my blog. In order these cover:

Creating a 15-share HYP: http://www.damiancannon.com/blog/a-high-yield-portfolio-constructed/

Expanding it to 25 shares: http://www.damiancannon.com/blog/a-high-yield-portfolio-constructed-part-2/

Considering the case for smaller shares: http://www.damiancannon.com/blog/a-high-yield-portfolio-constructed-pt-3/

I would have posted these pieces here but the editor defeated me! Nevertheless I'd welcome any comments,

Damian

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