Here's One I Started Earlier

Stephen Bland writes about his personal high yield portfolio.

Continuing my High Yield Portfolio theme of the last couple of weeks, I recorded recently a podcast about HYPs (High Yield Portfolio) I was subjected to a good cop/bad cop interrogation for the show and ended up revealing that I had started my own HYP a few years ago.

Still, I had written about this a while back so they didn't really manage to get anything new out of me. Anyway it's been a while since I wrote about my personal HYP, so here's an update.

It's a small portfolio because I hold it in an ISA which limits me to a maximum input of £7,000 annually. I pay all of this in as one lump early in each tax year and buy one new share with each contribution plus any cash from accumulated dividends, all of which are retained in the account. The idea is to purchase an amount of the new share equal to the average value per holding at the time -- assuming there is enough money to do so. If not, the new share goes short.

Sometimes I have not waited for my next annual contribution to use accumulated dividend money. Instead I have made additions to existing holdings during the year or purchased a bit of a new holding where I saw it as advantageous to do so. Cash in my ISA earns virtually no interest, so when it adds up to a worthwhile amount it can be better off reinvested for dividends as soon as possible.

If I do invest accumulated income in this way during the year into an existing holding, it normally goes into the share which at that point represents the ratio of highest yielder to lowest proportion of the portfolio. That's assuming that the share remains otherwise attractive. Alternatively, if I see a new share I want which happens to be at what I perceive to be an advantageous yield at that point, perhaps because I think its price has been driven down by temporary poor sentiment, I may go into that instead of adding to an existing holding.

My HYP currently looks like this:

Taking the total invested of £35,000 against the current value of £45,809 gives a total return of £10,809, around 31%.

The explanation for the small holding in Gallaher is that I bought it last week by utilising the accumulated cash. The price had fallen back, driving this share up the FTSE 100 yield table. I'd want a tobacco share at some stage anyway, so with the cash lying around I thought I'd might as well start now and take advantage of what I saw as a temporarily attractive situation with Gallaher, rather than add to an existing holding this time. The intention is to build Gallaher up to a full holding with my next annual contribution, assuming it still remains attractive to me.

Before anyone jumps in here and accuses me of trying to time a purchase, which I have always advocated to HYPers is a losing idea, I point out that this is not the case. Attempted timing would mean hanging around waiting for Gallaher to fall to some attractive price/yield but I was not doing that at all. I happened to have some cash available that had built up in the preceding few weeks and at the same time, Gallaher happened to be hit by adverse sentiment. So instead of adding to existing holdings with the cash I went for the tobacco share.

All the shares, except the very recent and presently very small holding in Gallaher, are showing decent gains. Gallaher apart, my last full purchase was DSGI in May this year at 193p. The reasoning was simply that at the time it was the next diversified share on the descending FTSE100 yield ranking whose sector I didn't yet hold in the HYP, and which was acceptable on the usual HYP tests of historically increasing dividends etc.

More important than ephemeral price movements, all the shares except Lloyds TSB have been increasing their dividends and are forecast to continue increases for the next year. With Lloyds, as I have written many times, the exceptionally high yield compared with other big banks is the acceptable trade off for failing to increase the dividend in recent years. That's the reason I prefer it as the big bank choice for HYPs.

Readers may be interested to note that one or two analysts are now forecasting that Lloyds will recommence dividend increases in 2007 though most still forecast no change to the 34.2p. I can't know when, but I am pretty sure that it will happen eventually. Which won't do my HYP any harm. I bought Lloyds for it at 415p when it was yielding a vast 8.2%. To get that kind of start yield plus, eventually, an increasing dividend on top of it, even if I have to wait for some time, is a major market anomaly for such a big company. An anomaly that sooner or later will be traded away by the market to give strong gains and great income potential to those who bought it cheap.

I'm satisfied with the performance of my HYP so far.

It will come as no surprise to readers to hear that Stephen owns of all the shares shown.