HYP2 Is Four

Stephen Bland reports on the fourth anniversary of his second high yield portfolio.

My second eternity High Yield Portfolio (HYP) commenced on 2 April 2003 and recently had its fourth anniversary. Here are the figures for year four.

Income being the main aim of the strategy I'll start with that and it is very encouraging. At £5,600 it is up 11.8% over the £5,008 of 2006 and 22.7% up on the first year of 2004. The average annual growth rate of HYP2 income over the whole period to date is about 7.1%, well ahead of inflation and thus doing exactly what is expected of it, so I am satisfied.

Note that there are several dividend anomalies in the income list. Anglo American paid a special additional dividend. Pearson shows no income in the year though in fact it paid out the usual twice, because the acquisition date was too late in the portfolio's year for any dividend to go xd. Land Securities income shows a small decline over the previous HYP year, not due to a cut but because of changing the balance between its interim and final dividends. Amvescap shows a decline because there was only one dividend xd in the HYP year following a timing difference on change of dates, though it continues to pay twice in its financial year.

Some dividends were received on sold shares, as shown in the table. These sorts of oddities will occur in most years in most portfolios but the effect on total income, positive or negative, is normally minor and tends to even out between years.

Turning to the secondary aim of HYPs, capital growth, this is outstanding. At £159,473 it is 112.6% up on the start figure of £75,000 in four years, an average annual growth rate of 20.8%. The FTSE100 has done much worse by gaining a still respectable 69.2%, an average annual growth rate of 14.1%. It follows that a sum of money in HYP2 is ahead of that sum in the index by some 25.6%, assuming dividends are withdrawn.

There has been a bull market more or less since I started HYP2, and theoretically at least one might expect a high yield portfolio made up of blue chips to underperform slightly in such conditions. So much for theory. Footsie butt has been kicked yet again by the HYP strategy which at the same time has delivered a much higher income, the best of both worlds.

But what of dividend reinvesting savers? Well, I estimate that HYP2 on that basis would now be worth about £189,984, a gain of 153.3% over the four years and an average annual growth rate of a substantial 26.2%.

Readers should note that I don't expect these very high annual capital growth rates of 20.8% for income withdrawn and 26.2% for income reinvested to continue long term for HYP2. A lot of that is due to the portfolio being launched in the depths of a bear market and not having experienced a bear market itself yet.

Although HYP2 is non trading, there have been three mandatory changes resulting from bids. BAA, BOC and DX Services were all taken over in the year. I replaced them respectively with BT, Pearson and added to United Utilities in the case of the DX Services proceeds because this was only a small holding acquired in an earlier demerger. As a result of all this, the portfolio is back to its original fifteen shares though for a time it was running sixteen with DXS.

That's quite a lot of action for what is supposed to be an eternity portfolio. Paradoxically there have probably been more mandatory changes than I would have made voluntarily if this was a high yield portfolio in which I permitted myself trading. That actually is the pattern for eternity HYPs. Over time investors can expect a considerable number of alterations to the their portfolios as a result of various corporate activities.

To show that the capital outperformance is no mere isolated one year event, here is a comparison of the FTSE100 and HYP2 annual values on a dividends withdrawn basis.

In every single year so far HYP2 capital growth has exceeded the FTSE100. On a dividends reinvested basis, it would look even better because the yield is higher than the index.

And if anyone thinks that is some sort of effect peculiar only to this portfolio or this market, take a look at the lengthier table I published for my HYP1 sixth year anniversary article in November 2006 where similar unbroken outperformance each year occurs since that portfolio commenced, covering both bear and bull markets. However nice though this is, I do not expect this or any HYP to outperform the market in every single year of its existence.

Four years is still young in eternity HYP terms but in its short life HYP2 has done the business in both areas, income and capital. And all by doing almost nothing apart from dealing with the unavoidable corporate activities that arise on occasion. I continue to be more than pleased with it.