VALUE INVESTING
More High Yield Joy

By Stephen Bland (TMFPyad)
April 16, 2004

My second high yield portfolio (HYP) started on 2 April 2003 and has just passed its first birthday. Here are the latest details.

HYP2 start date 02 April 2003 

                           £    orig.  no. price   val   move     div
                         invest price shs.   now   now      %       £

Lloyds TSB (LSE: LLOY)    5000  338  1479    414  6123  +22.5  505.82
Scot. & Newc. (LSE: SCTN) 5000  348  1436    406  5830  +16.6  479.62
Dixons (LSE: DXNS)        5000   87  5762    150  8643  +72.9  392.39
United Util. (LSE: UU.) 1 5000  546   915    528  4831   -3.4  393.05
Hays (LSE: HAS)           5000   78  6435    122  7851  +57.0  346.20
Leg. & Gen. (LSE: LGEN)   5000   75  6696     95  6361  +27.2  328.10
BA Tobacco (LSE: BATS)    5000  580   862    817  7043  +40.9  334.46
Br. & Bing. (LSE: BB.)    5000  297  1685    290  4886   -2.3  278.80
Hanson (LSE: HNS)         5000  320  1563    423  6611  +32.2  264.15
Land Sec. (LSE: LAND)     5000  736   680   1086  7385  +47.7  244.12
BOC Group (LSE: BOC)      5000  795   628    920  5778  +15.6  244.92
BAA (LSE: BAA)            5000  465  1075    528  5676  +13.5  207.48
Shell (LSE: SHEL)         5000  394  1271    382  4855   -2.9  200.18
AMVESCAP (LSE: AVZ)       5000  311  1609    417  6710  +34.2  185.04
Anglo American (LSE: AAL) 5000  970   516   1308  6749  +35.0  159.91

Totals                   75000                   95332  +27.1 4564.24
FTSE100                 3753.4                  4485.4  +19.5 

Notes

1 United Utilities cost per share and total holding amended following rights issue.

The total income shown of £4,564 for the year represents a return of just over 6% on the original capital invested of £75,000. This is substantially in excess of interest rates available on cash and even more substantially in excess of the yield on the index. Note too that this income would be tax free to a basic rate taxpayer whilst higher rate payers would suffer only 25% tax.

The capital has also delivered a good return of 27.1% and moreover beaten the index rise of 19.5%. The result is that the value of the portfolio for someone reinvesting income would be about £100,512, an increase of 34% on the original investment in the period. Much better than the market and way ahead of cash.

For comparison on a reinvested income basis, the L&G tracker fund for example is up around 22.8% and thus has been left behind by HYP2. The portfolio has also beaten at least 90% of funds in the UK equity income unit trust sector.

I don't regard the performance of individual shares in the portfolio or their dividends to be particularly important, it is the whole value and annual income which should be considered, but it is hard not to observe that the typical diversified portfolio phenomenon of large individual share fluctuations has asserted itself, ranging from strong winners, like Dixons up 73% and Hays up 57%, to losers United, Shell and Bradford all down by around 2-3%. These dramatic individual fluctuations are something with which HYP investors have to live with - they cannot be avoided. Over time though the actual shares putting in the best and worst showings will change.

One year is too short a time to conclude anything because my HYPs are designed for the very long term. However the performance in this period has been more than satisfactory both of capital and, more importantly, of income.

I am particularly pleased with the performance against the background of a bull market in the period because in my opinion there are almost certain to be periods when long-term HYPs underperform the market and that is more likely to occur during rising markets than falling ones. The reason is that during bull markets the attention of many investors switches away from value style shares into growth shares. That this has not happened in the period under review is very encouraging. During the ultimate type of bull market - the short-term sector bubble as occurred with techs a few years ago - HYPs will almost certainly underperform quite seriously. Bubbles are always followed by an almighty collapse so I believe that HYPs will perform in the longer term where it matters, leave such markets trailing far behind whilst all the while delivering those crucial dividends.

In my new value newsletter I feature a long term hold high yield selection each month to show readers how to construct an HYP by purchasing suitable shares at regular intervals.

Stephen holds Lloyds, Scottish & Newcastle and United Utilities shares.