VALUE INVESTING
High Yield Portfolio Update

By Stephen Bland (TMFPyad)
April 5, 2002

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It's time for another review of my high yield portfolio (HYP) which I carry out every two months or so. I started it in November 2000 so this article brings us up to date some sixteen 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 around twice that of the FTSE100 index 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    612  4394  -12.1  7.8 
Gallaher (LSE: GLH)          5000  416  1190    564  6712  +34.2  4.9 
Scot. & New. (LSE: SCTN)     5000  490  1010    560  5656  +13.1  5.4 
Royal & Sun (LSE: RSA)       5000  498   994    301  2992  –40.2  5.4 
All. & Leic. (LSE: AL.)      5000  645   768    898  6897  +37.9  4.5 
Britannic (LSE: BRT)         5000 1020   485    727  3526  –29.5  5.2 
Lloyds TSB (LSE: LLOY)       5000  705   702    718  5040   +0.8  5.2 
Six Continents (LSE: SXC)    5000  723   685    740  5069   +1.4  4.9 
Boots (LSE: BOOT)            5000  575   861    670  5769  +15.4  4.3 
Land Sec. (LSE: LAND)        5000  771   642    897  5759  +15.2  4.0 
Ass. Br. Ports (LSE: ABP)    5000  321  1542    445  6862  +37.2  3.4 
Hilton (LSE: HG.) *          5000  232  2275    245  5574  +11.5  3.9 
Rio Tinto (LSE: RIO)         5000 1120   442   1388  6135  +22.7  3.2 
Anglo American (LSE: AAL)    5000  942   526   1176  6186  +23.7  3.2 
Shell (LSE: SHEL)            5000  572   865    506  4377  -12.5  3.0
 


Totals                      75000                   80948   +7.9  4.6
FTSE                       6274.8                  5209.5  -17.0  

*Hilton replaced Blue Circle which was taken over for cash at a profit over the £5,000 cost, the whole of the proceeds being reinvested. This is why the total original cost of Hilton derived from the above table is more than £5,000. The start investment of £5,000 has though been retained here so as maintain the original cost of the portfolio at its true figure of £75,000, which has to be done in order to facilitate accurate measurement of capital value fluctuations.

The income in the first year to November 2001 was £3,451 representing an actual yield on the £75,000 invested of 4.6%.

The forthcoming year to November 2002 will be a baptism of fire for the second year of this HYP because two companies so far announced, Royal and Britannic, will be cutting their dividends. The big question is whether the increases on those holdings that do raise their dividends will compensate for the cuts, in order to produce the desired inflation beating rise over the first year figure shown above. It is too far away yet to predict anything.

Note that the forecast start yield for an investor buying this portfolio now is 4.6%. This is a fall over the initial forecast of 4.8% back in November 2000 primarily due to the rise in the capital value of most of the HYP shares. That rise in a lot of cases has outstripped the dividend increases thus lowering yields on many of the constituents. Similarly, dividend cuts can lower a yield if the share price falls by proportionally more but here, rises are the main cause of the overall lower yield. Even 4.6% though is way over the index yield and more than most bank deposits.

The capital performance of the portfolio continues to be very satisfactory compared with the index, actually showing a small profit against a sizeable fall by the latter, though I do stress that because this is meant to be held forever, the movement over the short period to date does not mean too much. It will only become meaningful over, say, ten years.

There continues to be massive individual swings in capital performance ranging from a fall of about 40% by Royal to a rise of about 38% by Alliance & Leicester. Nobody should be alarmed or surpised by this. It is typical of a sector diversified portfolio and in fact illustrates why such diversification is critical for security reasons. Expect such differences in individual holding values to continue for all time, though not the same ones. In total there are eleven rises and four falls. The two largest falls, unsurprisingly, are the dividend cutters Royal and Britannic.

My suggested approach to the whole strategy, which I designed for the hands-off investor, is simply to forget about it once invested, don't follow the shares, don't listen to any comment, just enjoy the income. Perhaps take a peek at it once every decade or so if you feel you have to get involved in some way.

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