HYP3 Is One And I'm 400

Stephen Bland writes his 400th value article for The Motley Fool! He looks at his third High Yield Portfolio which has got off to a decent start.

This is my 400th value series article for the Motley Fool covering a period of some eight years of weekly pieces on various aspects of value and High Yield Portfolio (HYP) investing. A bit of a milestone.

When I started writing here back in 1999 I was still running my accountancy practice from which I retired a few years back. At the same time I was writing regular articles for The Fool on tax, the Beating The Footsie mechanical scheme and on value investing.

I hadn't introduced the HYP concept in those early days, it came a year or two later. I ceased writing the tax stuff a long time ago and my BTF reviews died when we abandoned the strategy as a failure after a five year test run. That left me with just the one weekly article, that dealing with value and HYP which is now up to number 400.

I hope that my readers have benefited financially from what I've had to say and that they were entertained and amused along the way. But principally I hope that I have enriched -- in the literal monetary sense --peoples' lives even if they weren't amused by my style. Better an unentertained but wealthier reader than an amused but poorer one.

Somebody on a message board described recently my style as "in yer face" which I took as a compliment though I'm unsure if our reader meant it that way. However my style is perceived by readers, it's not something I've consciously developed.

I didn't study writing styles and then go and adopt one off the shelf. For me writing is an art that flows from within, a kind of truth about myself that creates itself as I pound the keys, there is no artifice about it in my case.

Here's the status of HYP3 at its first anniversary of 31 July. Readers may recall that this portfolio started life being built up by monthly selections in my former subscription tipsheet Value Investor. After that was closed and HYP3 was incomplete, I decided after many requests to continue its construction with a monthly article on the public Fool and it reached what I considered to be full in July last year.

A few points. This is a trading portfolio and three shares Rank, F&C Asset Management and Gallaher have gone from the original list. I sold the first two because they cut dividends whilst Gallaher was taken out by a bid. The replacements were Hill, Vodafone and BAT respectively.

The dividends in year one are understated in total because of the timing of the trades with BAT in particular making no payment due to the short time it has been held and its predecessor Gallaher making one only.

Also, I have taken no account of dividends received during the building of HYP3. Those shown are purely for the year since completion but in reality there would have been a fair amount of money received before that, perhaps around £1,500 - 2,000, given that it took around sixteen months to complete the process. That extra income would have increased the total return to an investor by a relatively large percentage.

The opening FTSE100 figure of 5,572.9 is derived from a weighted average over the period of construction.

Right, income is the primary purpose of HYPs and at £3,508 that represents about 4.68% on the start capital of £75,000. Not bad for the first full year, around 50% more than the market and don't forget the decent tax advantage of dividend income over other sources like interest.

The capital has underperformed the FTSE100. I have pointed out before that I expect this to happen at some stage to all HYPs and nobody should be scared off by it, just as nobody should be by a fall in total income which can occur very occasionally in any year over the previous one. So I stress again that I do not expect that all HYPs will beat the market every year but long term I do expect them to do so. And this strategy is nothing if it is not very long term.

Despite not beating the market, HYP3 still returned a capital gain of 9.2% whilst delivering a around a similar or better return than cash. Hardly a disaster when compared with that alternative though cash does not carry the same risk of course. Investors should always consider the risks when comparing the returns of alternative ideas. Few do it seems to me.

The total return for a saver, a dividend reinvestor, looks rather better. I make it about 16.3% in year one and that would be around the same as a tracker at a guess, the portfolio's higher income making up for the underperforming capital.

So a mixed bag then for HYP3's first year. Delivering on income but lagging against the market on capital, particularly for an income investor withdrawing dividends. Income though remains the lead purpose of this.

Of the shares shown I hold Alliance & Leicester, BAT, BT, DSGI, Legal & General, Lloyds, Pearson, Rentokil, United Utilities