Stephen Bland gives up an update on the recent progress of his three completed High Yield Portfolios.
This is the quarterly review of my three completed high yield portfolios (HYP) as at 30/09/06. All were started with £5,000 into each of fifteen shares making a total of £75,000 in each case including costs.
HYP1 - start date 13/11/2000
| Company | Cost
£ | Value
£ | Gain/
(loss) % |
|---|
| United Utilities
(LSE: UU)
| 5,000 | 5,685 | 13.7 |
| Gallaher
(LSE: GLH)
| 5,000 | 10,371 | 107.4 |
| Scottish & New.
(LSE: SCTN)
| 5,000 | 5,742 | 17.8 |
| Royal & Sun
(LSE: RSA)
| 5,000 | 1,894 | (62.2) |
| Alliance & Leic
(LSE: AL)
| 5,000 | 8,340 | 66.8 |
| Resolution
(LSE: RSL)
| 5,000 | 3,323 | (33.5) |
| Lloyds TSB
(LSE: LLOY)
| 5,000 | 3,791 | (24.2) |
| Intercon. Hotels
(LSE: IHG)
| 2,500 | 5,894 | 135.8 |
| Mitchells & But
(LSE: MAB)
| 2,500 | 4,060 | 62.4 |
| Alliance Boots
(LSE: AB)
| 5,000 | 6,343 | 26.9 |
| Land Secs.
(LSE: LAND)
| 5,000 | 12,766 | 155.3 |
| BT
(LSE: BT-A.L)
| 5,000 | 15,214 | 204.3 |
| Ladbrokes
(LSE: LAD)
| 5,000 | 8,624 | 72.5 |
| Rio Tinto
(LSE: RIO)
| 5,000 | 11,152 | 123.0 |
| Anglo American
(LSE: AAL)
| 5,000 | 11,704 | 134.1 |
| RD Shell
(LSE: RDSB)
| 5,000 | 4,489 | (10.2) |
| Total | 75,000 | 119,392 | 59.2 |
| FTSE100 | 6274.8 | 5960.8 | (5.0) |
Income
Year to
13 Nov | £ |
|---|
| 2001 | 3,451 |
| 2002 | 3,474 |
| 2003 | 3,197 |
| 2004 | 3,205 |
| 2005 | 3,546 |
For an income investor withdrawing dividends the capital gain of 59.2% in 5.88 years is equivalent to a compound annual return of 8.2%. When compared with the index loss of 5.0%, the portfolio capital is about 68% ahead of it, a decisive outperformance whilst in addition delivering a higher income too.
For a saver reinvesting dividends I estimate the value now to be £145,281, an increase of 94% on the original investment and equivalent to a compound annual return of 11.9%. This performance is well ahead of cash, inflation and the market.
HYP1 completes its sixth year in November and I will be doing a full review in due course. This portfolio for several reasons is the most meaningful of the three.
Firstly it's the oldest and therefore has had the most time to develop. Secondly it was launched at a very high point in the market and had to go through a major bear phase. In fact, the market still remains below its level at the start of HYP1. Thirdly, it went through a period of serious dividend cutting by many major companies though its income dropped only slightly. All of which is about as good a test as one could have.
Almost any strategy will work in a rising market, but will it survive a savage bear attack? HYP1 has come though with flying colours.
HYP2 start date 02/04/03
Company | Cost
£ | Value
£ | Gain/
(loss)% |
|---|
Lloyds TSB
(LSE: LLOY)
| 5,000 | 7,987 | 59.7 |
Scottish & Newc.
(LSE: SCTN)
| 5,000 | 8,164 | 63.3 |
DSGI
(LSE: DSGI)
| 5,000 | 12,561 | 151.2 |
United Utilities
(LSE: UU.)
| 5,000 | 7,792 | 55.8 |
Hays
(LSE: HAS)
| 5,000 | 9,282 | 85.6 |
Legal & General
(LSE: LGEN)
| 5,000 | 9,542 | 90.8 |
BAT
(LSE: BATS)
| 5,000 | 12,456 | 149.1 |
Bradford & Bingley
(LSE: BB.)
| 5,000 | 7,970 | 59.4 |
Hanson
(LSE: HNS)
| 5,000 | 12,074 | 141.4 |
Land Securities
(LSE: LAND)
| 5,000 | 13,335 | 166.6 |
| BT
(LSE: BT-A.L)
| 5,000 | 11,189 | 123.8 |
| Pearson
(LSE: PSON)
| 5,000 | 10,284 | 105.7 |
RD Shell
(LSE: RDSB)
| 5,000 | 6,606 | 32.1 |
AMVESCAP
(LSE: AVZ)
| 5,000 | 9,332 | 86.6 |
Anglo American
(LSE: AAL)
| 5,000 | 11,481 | 129.6 |
Total invested | 75,000 | 150,055 | 100.1 |
| FTSE 100 | 3,753.4 | 5960.8 | 58.8 |
Year to
02 Apr | £ |
|---|
| 2004 | 4,564 |
| 2005 | 4,347 |
| 2006 | 5,008 |
For an income investor withdrawing dividends, the capital gain of 100.1% in 3.5 years is equivalent to a compound annual return of 21.9%. When compared with the index gain of 58.8% the portfolio capital is about 26% ahead of it, a strong outperformance whilst in addition delivering a higher income too.
For a saver reinvesting dividends I estimate the value now to be £174,698, an increase of 133% on the original investment and equivalent to a compound annual return of 27.3%. This performance is way ahead of cash, inflation and the market.
HYP3 start date 31/07/06
Company | Cost
£ | Value
£ | Gain/
(loss)% |
|---|
Lloyds TSB
(LSE: LLOY)
| 5,000 | 5,735 | 14.7 |
United Utilities
(LSE: UU)
| 5,000 | 5,404 | 8.1 |
Alliance & Leicester
(LSE: AL)
| 5,000 | 6,038 | 20.8 |
DSGI
(LSE: DSGI)
| 5,000 | 6,825 | 36.5 |
L&G
(LSE: LGEN)
| 5,000 | 6,371 | 27.4 |
BT
(LSE: BT.A)
| 5,000 | 6,297 | 25.9 |
William Hill
(LSE: WMH)
| 5,000 | 3,623 | (27.5) |
F&C AM
(LSE: FCAM)
| 5,000 | 5,648 | 13.0 |
Rentokil
(LSE: RTO)
| 5,000 | 4,487 | (10.3) |
Scottish & New.
(LSE: SCTN)
| 5,000 | 5,514 | 10.3 |
| Gallaher
(LSE: GLH)
| 5,000 | 4,976 | (0.5) |
| RD Shell
(LSE: RDSB)
| 5,000 | 4,652 | (7.0) |
Unilever
(LSE: ULVR)
| 5,000 | 5,470 | 9.4 |
Pearson
(LSE: PSON)
| 5,000 | 5,187 | 3.7 |
ITV
(LSE: ITV)
| 5,000 | 4,924 | 1.5 |
Total invested | 75,000 | 81,151 | 8.2 |
| FTSE 100 | 5572.9 | 5960.8 | 7.0 |
Completed only a couple of months ago, it is far too early to draw any conclusions regarding HYP3. Encouragingly though it is already moving well in the right direction with a gain just above the index and as usual with HYPs, delivering a higher yield too.
Note that the start FTSE100 figure of 5,572.9 is the weighted index value as at the pick date of each share. Unlike HYPs 1 and 2 which I launched by purchasing all the shares at the same time, 3 was constructed by adding one new share per month.
There has been one voluntary trade to date, Rank was sold at a loss following a dividend cut and replaced by William Hill. The loss on Hill shown in the table is primarily attributable to Rank, Hill itself is showing a profit but it appears as it does because I wanted to maintain the original cost at £5,000.
General Observations
The success of the strategy continues unabated. Index tracker butt has been well and truly kicked along with I suspect most other strategies out there, especially considering the low risk of the HYP approach.
Although my regular reviews focus on the capital situation, because that is the principal thing that changes short term and thus creates something about which to write, readers should not forget that the HYP story is primarily about income. That is my view for both income investors and dividend reinvesting savers.
It is clear from some of the discussions on the HYP board that a number of investors overlook this point. I can see why of course. With the highly successful capital performances to date of my HYPs and those of many readers too, it is perhaps natural that long term savers are drawn in and see the whole thing as way of making good gains. Which it probably is. But what many fail to appreciate though is that the gains are secondary to the income.
Long discussions are held on why the HYP idea works as a capital gain scheme when that was never the primary point of it all. For those that do agonise over why it works on capital, the answer is simply that it is at root a value based approach using yield as the timer. And value works. Buy a good investment that is under rated and something good might happen to you if you sit on it long enough.
In general a share should be bought for an HYP not because the investor thinks it may deliver a gain long term but because it delivers a good start yield and it is hoped a long term growing income. If it does so, then it is highly likely that the capital will follow. But it is that way round, income first, capital follows, not the reverse.
> Read more about the High Yield Portfolio strategy
Of the shares mentioned above Stephen owns Alliance & Leicester, BT, DSGI, F&C Asset Management, Gallaher, Legal & General, Lloyds TSB, Pearson, Rentokil Initial and United Utilities.
