Stephen Bland reviews the performance of his high yield portfolios.
Through a combination of indolence and memory lapse, the latter very likely a result of my advancing years when I'm lucky if I can remember my own name of John Doe, I've just noticed that I haven't written a quarterly review of my three completed High Yield Portfolios (HYP) for some time. The last one I could trace was back in April, some six months ago. So it appears I missed one. Anyway, here is the latest update.
I used to list out all the shares in each portfolio but with three to review, and it will be four in due course after HYP4 is finished, that makes the article a little too bulky so I'll just give the totals for the capital performance of each and its annual income for complete years to date.
Capital
| Started | Cost
£ | Value
£ | Gain
(Loss)% |
|---|
HYP1 | 13/11/2000 | 75,000 | 138,966 | 85.3 |
FTSE100 | | 6274.8 | 6564.8 | 4.6 |
HYP2 | 02/04/2003 | 75,000 | 155,526 | 107.4 |
FTSE100 | | 3753.4 | 6564.8 | 74.9 |
HYP3 | 31/07/2006 | 75,000 | 83,982 | 12.0 |
FTSE100 | | 5572.9 | 6564.8 | 17.8 |
Income
Year | HYP1 | HYP2 | HYP3 |
|---|
1 | 3451 | 4564 | 3508 |
2 | 3474 | 4347 | |
3 | 3197 | 5008 | |
4 | 3205 | 5600 | |
5 | 3546 | | |
6 | 4131 | | |
Increasing income is the main aim of the HYP strategy and as I remarked earlier at their anniversaries, both HYPs 1 and 2 have delivered the primary requirement of an increasing income so far, and moreover both have beaten inflation. There were fluctuations on the way and one year of decline in both portfolios as can be seen from the table but this is something with which HYP income investors have to live. It's too early to say anything about HYP3 income with its single complete year to date.
The nature of share dividends and share portfolios means that the total income of an HYP is never going to show a smooth steady increase year on year for several reasons. Comparing any particular year with the previous one, there will be some very modest rises or hardly any rise at all, some sharp rises and very occasionally a fall. So to judge the income performance, it has to be viewed as an annual average measured over several years.
For HYP1 so far the average total income increase has been 3.7% per year over the five years since year one, and for HYP2 7.1% over three years though these are both fairly short times over which to consider the matter.
If over many years the primary HYP target of increasing income is achieved to a decent extent, then the secondary aim of capital gain is very likely to follow though the relationship between the two can fluctuate substantially along the way.
In HYPs 1 and 2 this is what has happened in that the capital gain has shot way ahead of the income gain. The total increase in the income was 19.7% for the five years of HYP1 and 22.7% for the four years of HYP2. Yet the respective capital gains are 85.3% and 107.4%. Okay I'm not quite comparing like with like in that the incomes are for earlier complete years, not right up to date, whilst the capital values are as at now but nevertheless, even allowing for that, my principal point remains valid about the capital gain exceeding the income gain by a wide margin so far in those two portfolios.
It could have been the other way round and it is all down to the state of the market. A bull market in shares, specifically in the sort of shares held in HYPs, will have the effect of driving the capital ahead of income for a while. Equally, a bear or fairly static market will have the likely effect of pushing income ahead of capital. Not something with which HYPers should be concerned though they do have to live with it, over a long time they will see periods of both.
The periods of small capital gain, market underperformance or even loss may well test the resolve of some HYP investors who perhaps were attracted to the strategy for the wrong reasons of short term gains, overlooking that long term income growth has always been the principal aim. Those that cannot face poorly performing capital on occasion, something that is inevitable, should reconsider whether they wish to invest in this strategy.
As can be seen the capital performance of HYPs 1 and 2 has been excellent, way ahead of inflation and the market and of course cash in the bank which can only return zero on capital though without the risks. HYP3 is lagging the market, up 12.0% in the 15 months or so of its existence against the latter's rise of 17.8%. Too soon to draw any conclusions but that 12% still beats cash and inflation on top of delivering the income shown in its first year.
Note that my figures are for capital only, assuming income withdrawn. For saving HYPers reinvesting dividends the returns would be substantially higher.
Incidentally, beating the market long term is not a deliberate aim of HYPs, a corollary of capital gain itself not being something upon which the strategy is premised. Whilst I believe from experience and the research of others that HYPs are very likely to do so, that is not what this is all about. An HYP that starts with a decent income then over time increases it in line with inflation or more and delivers the same with the capital, will have done the business. Anything above that is a bonus.
