VALUE INVESTING
High Yield Update

By Stephen Bland (TMFPyad)
January 25, 2002

Time for a review of my high yield portfolio (HYP) which I carry out every two months or so. The last report was the first anniversary in November 2001 and gave full details of the actual returns in year one, so this article brings us up to date some fourteen months from inception.

For new readers, I stress that the primary aim of the portfolio is growth of income not capital, although some people do use the concept as a growth vehicle by reinvesting dividends. It was designed essentially for income investors, to be held forever with no dabbling, and aims to deliver a decent initial yield and crucially, inflation beating income growth over the long term for investors prepared to take the risks of investing in equities for income. I believe that capital growth will go hand in hand with income growth, but as I say that is a secondary motive for this particular portfolio.

Here are the latest figures. The start date was 13 November 2000 and the cost includes all purchase expenses.

                                £ orig   no. price   val   move forec
                           invest price shs.   now   now      % yield
Un. Util(LSE: UU.)           5000  690   718   600  4308  -13.8  8.0
Gallaher (LSE: GLH)          5000  416  1190   489  5819  +16.4  5.5
Scot. & New. (LSE: SCTN)     5000  490  1010   541  5464   +9.3  5.5
Royal & Sun (LSE: RSA)       5000  498   994   362  3598  –28.0  4.6
All. & Leic. (LSE: AL.)      5000  645   768   860  6605  +32.1  4.5
Britannic (LSE: BRT)         5000 1020   485   770  3734  –25.3  7.6
Lloyds TSB (LSE: LLOY)       5000  705   702   742  5209   +4.2  5.0
Six Continents (LSE: SXC)    5000  723   685   734  5028   +0.6  4.9
Boots (LSE: BOOT)            5000  575   861   646  5562  +11.2  4.5
Land Sec. (LSE: LAND)        5000  771   642   862  5534  +10.7  4.1
Ass. Br. Ports (LSE: ABP)    5000  321  1542   401  6183  +23.7  3.6
Hilton (LSE: HG.)            5000  232  2275   223  5073   +1.5  4.2
Rio Tinto (LSE: RIO)         5000 1120   442  1327  5865  +17.3  3.2
Anglo American (LSE: AAL)    5000  942   526  1176  6186  +23.7  2.9
Shell (LSE: SHEL)            5000  572   865   466  4031  –19.4  3.5
Totals                      75000                  78199   +4.3  4.8



FTSE 100                   6274.8                 5180.6 -17.4  2.6

As can be seen the performance so far has been pretty good against the FTSE 100 and consequently even better than trackers which have to underperform that index. And since the yield on the HYP is much higher than the index, the outperformance is even better than the capital values alone indicate. I mention this because one of my personal beliefs in my HYP is that it will outperform the index and its trackers over the very long periods for which it is designed to be held. There is no way I can know of course, I am very much running on faith alone here because nobody can predict long term share dividend or price movements. We will only really know whether my faith is justified after say 20 years. Incidentally the combination of income and capital growth so far would also have beaten cash in the bank.

It is though important to bear in mind that fourteen months is really nothing against the very long term I advocate holding, so not too much should be read into the figures to date during which almost anything could have happened. In any event, as I say, I am concerned principally with establishing that the annual income will grow but that can be reported only once a year in November with each anniversary.

The initial forecast yield is now 4.8%, probably a bit more than most bank deposit accounts are offering and thus attractive. Interestingly, this yield is similar to that prevailing when I first set up the portfolio in 2000 even though the capital value has risen by 4.3%. A demonstration of the rising dividends for which I am aiming and this despite the cut in dividend forecast for Royal & Sun. The portfolio should still deliver the required total rise in income even with an individual dividend cut. We will know for sure on the second anniversary this November.

There continue to be massive individual swings in the shares compared with the average movement of +4.3% to date. Best performer by a long way is Alliance & Leicester up 32.1% with the worst being Royal & Sun, down by nearly the same figure, 28.0%. Nobody should be surprised by this, any portfolio, high yield or otherwise, containing a sector diversified selection of shares will very likely exhibit this kind of tendency as time goes on. Overall there are eleven winners and four losers at present.

One point I think worth mentioning. At the end of September 2001 following the sharp market falls that had just occurred, I published one of my regular reviews of the HYP when its yield stood at 5.5%, commenting that it was a terrific time for those wishing to go in, to go in. By doing so it was possible to lock into that exceptionally good yield, and the consequent expected growth of it, forever. Such opportunity does not come often.

I do believe that any time is the right time to invest in an HYP like this, considering the very long term holding period and that it is completely futile to try and time it. So don't hold your breath for another tragedy to hit share prices. But if an opportunity drops into your lap fortuitously at a time when you were thinking about buying anyway, go for it. Some readers did not fully understand this point at the time, and comments were made that it was more risky. The truth was though, as I saw it, that it was less risky, it only appeared worse because of recent events syndrome, a psychological phenomenon whereby inexperienced investors and dilettantes attribute excessive weight, wrongly, to more recent events than to older ones or long term trends. Otherwise known to old stock market farts like me as "this time it's different".

It is never different, never, or at least not until human nature changes, which of course is never at the absolute minimum.