Stephen Bland looks at the performance of his first high yield portfolio.
On 13 November my firstborn High Yield Portfolio (HYP) had its sixth anniversary. I wrote this time last year that it was the End of the Beginning. We now enter the Beginning of the Midterm.
Here is the data for the capital and income performance. I started with £5,000 including costs invested into each of 15 shares but there has been a lot of corporate activity since. The portfolio is for eternity which means no trading except where unavoidable.
| Company | Cost
£ | Value
£ | Gain
(Loss)% | Div
Year 6 £ |
|---|
| United Utilities
(LSE: UU.)
| 5,000 | 6,097 | 21.9 | 354 |
| Gallaher
(LSE: GLH)
| 5,000 | 10,936 | 118.7 | 406 |
| Scottish & New
(LSE: SCTN)
| 5,000 | 5,499 | 10.0 | 215 |
| Royal & Sun
(LSE: RSA)
| 5,000 | 1,903 | (61.9) | 61 |
| Alliance & Leic
(LSE: AL)
| 5,000 | 8,602 | 72.0 | 402 |
| Resolution
(LSE: RSL)
| 5,000 | 3,606 | (27.9) | 100 |
| Lloyds TSB
(LSE: LLOY)
| 5,000 | 3,942 | (21.2) | 240 |
| Intercon. Hotel
(LSE: IHG)
| 2,500 | 6,619 | 164.8 | 100 |
| Mitchells & Butlers
(LSE: MAB)
| 2,500 | 4,364 | 74.6 | 77 |
| Alliance Boots
(LSE: AB)
| 5,000 | 6,724 | 34.5 | 267 |
| Land Securities
(LSE: LAND)
| 5,000 | 14,081 | 181.6 | 304 |
| BT
(LSE: BT.A)
| 5,000 | 15,865 | 217.9 | - |
| Ladbrokes
(LSE: LAD)
| 5,000 | 9,306 | 86.1 | 252 |
| Rio Tinto
(LSE: RIO)
| 5,000 | 12,230 | 144.6 | 472 |
| Anglo American
(LSE: AAL)
| 5,000 | 12,777 | 155.5 | 566 |
| Royal Dutch Shell
(LSE: RDSB)
| 5,000 | 4,749 | (5.0) | 165 |
| AB Ports (taken over) | - | | | 150 |
| Total | 75,000 | 127,330 | 69.8 | 4131 |
| FTSE 100 | 6274.8 | 6194.2 | (1.3) | |
Annual Income
to 13/11 | £ |
|---|
| 2001 | 3,451 |
| 2002 | 3,474 |
| 2003 | 3,197 |
| 2004 | 3,205 |
| 2005 | 3,546 |
| 2006 | 4,131 |
Income
The primary purpose of the strategy being income, I'll look at this first and it is looking good, very good. 2006 income at £4,131 is 19.7% ahead of the first year's income. The increase in the RPI from the mid year of 2001 to mid year 2006 was 13.5%. Thus the portfolio has finally achieved one of its aims, a rising and inflation beating income, and is now well ahead of that inflation. This was assisted substantially by the strong rise in 2006 income over 2005 of £585 or 16.5%, though 2005 was itself quite well up on 04.
The £4,131 income for year six represents a yield of 4.2% on the £98,367 value of HYP1 at the end of last year.
A few points of interest on the 2006 dividends. The income includes specials from Rio and Anglo. Against this there were no dividends received from BT because it was purchased with the proceeds of the AB Ports takeover but after the latest xd date in the year, though there was one dividend from AB Ports. Thus next year, assuming the two miners pay only their normal dividends, the hit to the portfolio from the lack of their specials and AB Ports will likely be more than compensated by the income from BT dividends, especially considering that BT is a very large relative holding in HYP1 and has a high and very probably increasing yield.
There were a few other oddities with dividends due to changes of payment timing or various reorganisations but the above points are those having the main effect on the 2006 total.
Capital
The capital performance of the portfolio is excellent compared to the market, cash and inflation. That has been the case from the start but in fact it has become even better since last year. As shown, on capital alone it is now up 69.8%, an annualised gain of 9.2%. In contrast the FTSE100 is down 1.3%. This means that a sum of money in HYP1 has outperformed the index by a pretty substantial 72%.
Looking back to my 2005 annual review, I noted at the time that the portfolio was up 31.2% against an index loss of 12.9%. Thus an investment in HYP1 would then have beaten the index by 50.6%. In 2006 HYP1 has gained 29.4% and the index 13.3%. Thus 2006 has been a very successful year for the capital of HYP1. Not only does it remain well ahead of the FTSE100 but it has increased that lead dramatically in the last year as these figures show.
Here is the whole comparison picture for HYP1 capital against the FTSE100:
| Year | HYP1
Value | FTSE
100 | Index
Change% | HYP
Change % |
|---|
| 0 | 75,000 | 6274.8 | - | - |
| 1 | 75,414 | 5238.2 | (16.5) | 0.6 |
| 2 | 66,180 | 4029.4 | (23.1) | (12.2) |
| 3 | 72,177 | 4371.2 | 8.5 | 9.1 |
| 4 | 80,450 | 4793.9 | 9.7 | 11.5 |
| 5 | 98,367 | 5465.1 | 14.0 | 22.3 |
| 6 | 127,330 | 6194.2 | 13.3 | 29.4 |
In my view the remarkable thing for these figures is that HYP1 has beaten the index in every single year of its existence and in many of them by a wide margin. And given that the portfolio's yield is higher too, that makes the outperformance, the total return, even greater.
Note that I don't expect the capital to outperform in every single year forever. I expect there will be some years when it underperforms, perhaps during a period of very rapid market gains. It would be foolish, however, to try and predict when this might happen, it's something you know only with hindsight.
Turning to the total return situation which a saver reinvesting dividends would achieve, I estimate the current value of HYP1 on this basis to be £155,664 a gain of 107.6% which annualises to 12.9%. Not bad and very well up on last year's then total return of 9.5%pa.
Conclusions
HYP1 has done so well both on capital and income that I admit to feeling more than a little pleased with it. The capital has beaten the market, cash and inflation by a good margin. The income is rising and has now beaten inflation. So far, it has achieved everything I wanted and then some.
Six years of doing virtually nothing, with virtually no costs, at no more risk than the market or maybe even less, that delivers excellent returns of both income and capital and thus of total return, and which has done better I'm certain than the great majority of investments available. That is particularly the case when risk, liquidity and general lack of any impositions by third parties are considered.
It's all the more encouraging for the fact that HYP1 was born in one of the most inauspicious times, with hindsight, that could have been chosen for this strategy. The market was near a high so that yields were modest and shortly after it collapsed in a classic bear phase. Many major companies then proceeded to cut their dividends.
Like I always say, the time to invest is now. It was now then and it's now now.
