How should an investor build a portfolio of high yield shares in 2023? Just transfer money into a Stocks and Shares ISA account, and then buy shares paying the biggest dividends, right?
I think investors would do well to take more care than that. Just from FTSE 100 and FTSE 250 shares, I could quickly identify enough with high yields to build a 10-stock portfolio. But not all high dividend yields are equal in the long term.
Some are cyclical. Suppose, a year ago, I picked from the top yields in the FTSE 100. I could easily have ended up with shares in Rio Tinto and BHP Group, both with forecast yields of 10%, and Glencore on an 8% yield.
Diversification
But I’d have ended up with a heavy concentration in the mining sector, which has a volatile long-term record. A year later, Glencore’s yield has fallen to 4%, and BHP’s is down to 6.5%. Analysts still predict 8% for Rio, but all three are expected to fall in the next two years.
If I chose today, I might pick up Persimmon on a 15% yield, and Taylor Wimpey and Barratt Developments, both on 9%. Again, I’d be concentrated in one sector, and again, it’s a cyclical one. And I don’t expect those yields to hold up over the next two years. Maybe not even this year.
I think there’s long-term potential in both those sectors. But I want diversification to help reduce the effect of one sector hitting hard times.
Cover
I also place great importance on dividend cover. Vodafone, for example, is on a forecast dividend yield of 8.3% this year. But it would be barely covered by earnings. Vodafone shareholders have been hit by poor dividend cover before, and the dividend was cut in 2019.
If we look at Imperial Brands, we see a predicted yield of 6.6%. That’s not as big as some. But it should be covered a healthy 1.6 times by forecast earnings. The company is strongly cash generative too, which boosts my confidence in its ability to pay reliable long-term dividends.
Progressive
The current dividend yield is not even my main consideration these days. Rather than a one-off high yield, I prefer a lower but progressive dividend. I think one that rises year after year, at least in line with inflation, can do better over the long term.
Investment trusts can be good for that. The forecast yield for City of London Investment Trust, for example, stands at 4.9%. That’s comparatively modest. But the trust has raised its dividend every year for the past 56 years.
Verdict
I’m not recommending any of these shares I’ve mentioned, I’m using them just as examples. Investors need to do their own research. But I want to quickly summarise my high-yield investing approach.
In 2023, I’ll be looking for a diversified variety of dividend shares. I want good yields, but not necessarily the biggest. I also want to see decent cover by earnings, and a good long-term record of dividend rises.
