Stephen Bland outlines his tactics for his fourth high-yield portfolio. It starts next week.
Due to popular demand I will shortly be commencing my fourth high yield portfolio on the main Motley Fool site which people may be surprised to learn I'm going to call HYP4. As with HYP3, I intend to construct it by adding one new share each month. Thus both HYPs 3 and 4 differ from 1 and 2 in that the latter two, being my earliest attempts, were constructed by acquiring all the shares at once whereas 3 and 4 were and will be built up monthly.
Does it matter whether the shares of an HYP are bought in one go or at periodic intervals? I dunno really. It's hard to establish any kind of proof either way. People shouldn't think that because I built HYPs 3 and 4 monthly this means I necessarily believe instalments must be the right way to do it. Similarly 1 and 2 being invested outright at the start doesn't mean that I believe that is the right way to go either.
In any event the question arises only for those with sufficient cash to have the luxury of choice. Many HYPers don't have that luxury, so the question is of little more than academic importance to them, this group being those accumulating their shares for future income.
But for those that do have a substantial amount of cash available now to invest in an HYP, should they buy one share a month say or just go in fully at the start? I guess on balance I'm an "all at once" guy though I don't see a massive difference really. I can't give any serious investment reasoning for my view, it's primarily an emotional decision. I see no massive difference because ultimately I'm not sure that it matters too much in the very long term for which I designed the HYP strategy. After say 20 years, will it have mattered to the income or capital performance whether you bought your shares in one go at the start or spread the purchases over 15 months all that time ago? I doubt it.
From many of the messages on the HYP board, I deduce that some investors, probably beginners in the main, devote too much time to agonising over when to buy a share and its recent price history etc. Some even resort to technical analysis which I see as wholly inappropriate for this strategy. My view is that the same signal which prompts a HYPer to consider a share in the first place, its yield, is perfectly adequate for timing its purchase too. If the yield is high enough to warrant its inclusion in the portfolio and the other usual requirements fit, then go for it. I see no need to torture yourself over how the price compares with its history especially because you very likely won't win with this approach.
Worrying about recent price action or a few pence here or there, or setting some absolute target purchase price for a share which is already sufficiently attractive at its current price is, I think, futile for a very long term approach. I don't believe it will improve returns even marginally because the investor will get it wrong as often as they get it right, likely more so. HYPers just don't possess the trading skills necessary to call share prices. The trouble is that many think they do.
One of the attractions of the HYP strategy is that you eschew deliberately all that stuff which beguiles so many small investors and which loses money for so many of them too. By recognising that you haven't got what it takes to make good short term profits from share trading -- and almost nobody does -- you make long term returns which will beat nearly every trader out there.
As far as the detailed strategy for HYP4 is concerned, its selection rules will simply be more of the same. I see no need to attempt a gilding of the lily. The great success of HYPs 1 and 2 in beating the market whilst at the same time delivering a much higher and increasing income, thus effectively beating it even more, leads me to confirm that the approach is correct. HYP3 is too recently completed to establish any kind of meaningful performance record but it is already headed in the right direction.
Briefly, those rules are to pick a portfolio of the largest caps with a history and very near term forecast of increasing dividends, diversifying the selections across the sectors. Other factors, essentially security based, may be taken into account such as debt levels, cover and so on. However note that these characteristics of an ideal HYPershare are not invariable, so in a few cases I may overlook some of them in return for what I perceive as a suitable trade off. Typically that would be a very high yield share whose dividend hasn't increased recently, provided there is a large margin over the next yield down for a share in the same sector which has been increasing dividends. In such a case it would take many years for the total incomes received to equalise during which time the highest yielder itself may well resume dividend increases.
Also in line with my previous rules, for HYP4 what I will not do is try and guess the future. Strategic ignorance is my guide, I believe it works.
We go next week.
> Learn more about the high yield portfolio.