HYP1 is 7: Still Doing The Business

Stephen Bland's first high yield portfolio continues to perform strongly.

On 13 November 2007 my first High Yield Portfolio had its seventh anniversary. I subtitled my article for the sixth anniversary It Gets Better. Well, this year it is better still.

Here are the details of the current value, income and other information. I started in 2000 with £5,000 in each of fifteen shares, totaling £75,000 but the portfolio has changed a great deal since then due to bids and various forms of reorganisation. This is an eternity portfolio meaning that there is no voluntary trading.

Annual Capital Value Against the FTSE 100

Income

The primary purpose of the strategy is increasing income and HYP1 has delivered again, continuing to beat inflation with the 2007 income of £4,452 being 7.8% up on 2006. The overall rise in income in the six years of 29.0% is also ahead of inflation, with the average annual compound increase in that time at 4.3%.

As often occurs there are some distortions in the dividend payments, this time due to the timing of new shares acquired in the year to replace those taken over. In particular new shares BATS and DSGI were both acquired after their first dividend in the year and thus produced only one payment instead of the normal two. Those omitted dividends would have added about £464 to the above total in a full year, a relatively large amount.

There were no compensating dividends from the shares taken over and thus the total income shown although factual, is understated as an indication of a full year's income on this portfolio. Consequently, assuming no distortions next year (though there often are) and that all the shares pay at least the same dividends, then there will be a decent boost to income for this reason alone in 2008.

Capital

As can be seen HYP1 has trounced the market with a total gain of 87.2% from the start compared with the FTSE100's 1.4% and is way ahead of inflation too. This means that a sum invested in HYP1 would have beaten the same amount in the index by 84.6%.

With quite remarkable consistency, it has beaten the index in every single year of its existence as the table shows, often by a wide margin, though don't expect this annual outperformance to occur every single year in future.

The annual compound gain of the portfolio capital is 9.4% whilst that of the index is as near zero as makes no difference. HYP1's capital performance is that which would have been achieved by an income investor withdrawing dividends, the person for whom I set up the HYP strategy originally. For a dividend reinvesting saver, I estimate that HYP1 would now be worth £176,972, a gain of 136.0% making an average annual growth rate of 13.0%.

Conclusions

HYP1 continues to do the business. The latest year's income has risen by more than inflation over the previous year as has the overall increase in income since the first year and the capital continues to beat the market, cash and inflation both in the latest year and since the initial sum was invested. It continues also to beat virtually all equity income funds over various periods of years including the IUKD mechanical income fund since the latter's inception two years ago which coincides very closely to HYP1's anniversary.

I remain convinced that non trading is the way to go for HYPs. But that doesn't mean the shares never change. On the contrary, there have been a lot of bids and reorganisations over the seven years of HYP1 which required attention, permitting the opportunity to reinvest cash to enhance portfolio yield or improve diversification etc.

The reason I am so convinced that HYPers should not trade is that most will sell too soon. Whilst sometimes this will be of benefit, more often it will not, so that from what I've seen of small investors it will impair performance long term.

I think it's far better to leave things alone and let the market trade for you via bids and reorganisations. HYP shares tend to attract more than an average proportion of bids and in most cases these will represent a handsome gain to the investor and at the same time take out a low exit yield share. A cash bid enables new higher yielding shares to be purchased. But voluntary trading may cause the investor to miss out on those opportunities.

Those people worried about their HYPs at the moment because it hasn't been a good time for the strategy lately should take heart from HYP1. Launched at around the worst time possible because the market was high and yields modest, I think from memory the FTSE100 was yielding only about 2%, it went straight into a bear market but much worse than that, it soon hit one of those very occasional periods of widespread dividend cutting by major companies.

Income is the purpose of this strategy so to have that happen within a year or two of commencement was shocking. Because of the capital and income decline I could easily have given it up as a failure after a couple of years but my long term experience with the market and the HY approach led me to persevere with it.

I was convinced HYP1 would work out in the end and it repaid this faith handsomely both on income and capital. I have no reason to doubt that this will continue to be the case for the strategy in general over time but I have to stress that it does require great patience together with the will to resist short term negative factors, both physical and psychological. By physical I mean periods of capital or income decline. By psychological I mean adverse comment that can get to you if you are not strong enough to ignore it.