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The Monevator HYP: It’s alive!

Buying the high yield portfolio

I am now the proud owner of a new high yield share portfolio.

Since the method for picking the portfolio’s shares was not exciting enough to prompt Simon Cowell call me up with an offer to turn it into the new X Factor, we’ll not go through it again.

Instead, please refer back to see which high yield shares I bought and why.

This post will detail how much it cost to buy the 20 companies in my new HYP, and where I’m holding them.

In the future I’ll explain how I intend to manage the portfolio long-term, as well as what benchmarks we might use to judge its performance. Do subscribe to keep on-board with progress.

An ideal home for my High Yield Portfolio

As mentioned last time, all the online tools I tested to track a paper portfolio were flawed in some way, especially when it came to dividends.

So I decided to do it the proper way with real money. Carlsberg don’t do model share portfolios, but if they did they’d probably do the same thing.

Readers, much as I love you, I did not want to sink my entire wealth into a new portfolio, least of all one that I won’t be able to sell for years. (Houses don’t just buy themselves, you know).

I therefore limited my invested funds to £5,000.

Now, that’s not exactly a token amount of money, but it’s too modest to withstand much share purchasing at £10 or more a pop with 20 of the blighters to buy. But happily there is a cheap way to buy shares that’s worth exploring if you don’t have a lot to invest: Halifax’s Sharebuilder service.

The great attraction of Sharebuilder is it enables you to buy shares for a mere £1.50 an order – a fraction of the normal dealing fees at rival online brokers.

I have had a Halifax Sharebuilder account for many years, having originally opened it to buy a portfolio for income. (Long-time readers may remember my pain at calculating capital gains on the reinvested dividends. Not a mistake I will make again!)

Halifax enables you to run multiple accounts under the one roof, so it was a simple matter to allocate a new one for the Monevator HYP.

How to do the £1.50 share purchasing shimmy

The Sharebuilder service was conceived for people who want to transfer in perhaps £300 from their salary each month, and then build up a portfolio by regularly investing into a slate of shareholdings.

It’s a great idea in theory, and I’m all for encouraging wider share ownership. But in practice it can be costly if you invest too little per month, or if you spread yourself across too many holdings, even with just £1.50 trading fees.

For example, invest £300 across six different companies or ETFs every month, and you’ll pay £9 in dealing fees (£1.50 x 6), which is equivalent to 3% of your funds invested. That’s expensive.

But there’s a cunning plan! Rather than invest monthly, you can make a one-time investment of a larger lump sum, which is what I did. You can then turn this regularly reinvestment back off.

This is pretty much the equivalent of using the Sharebuilder like any other online broker, only it’s much cheaper. The snag is you can’t deal in real-time. Rather, you have to set up your trades the day before, and take whatever price you’re given in the market the next day.

In practice, when you’re buying a portfolio of blue chips at once, it doesn’t matter at all. Some will be higher priced on the day than you expected, and some lower, but it’s just random and nothing to worry about.

Of course, it doesn’t exactly make you feel like Gordon Gecko – more like your mum making out her Ocado grocery order. But we’re investing here, not playing Farmville for thrills, so that’s no bad thing.

Trading costs to buy my high yield shares

Faustian pacts with Mammon aside, here’s what I paid to buy my model HYP:

Dealing fees: There are 20 companies in my new high yield portfolio, and I wanted to invest equal amounts into every one. This meant putting £250 into each company, for a cost of £1.50 each time.

Stamp Duty: I also had to pay the UK’s ridiculous stamp duty tax for each transaction. This is a flat 0.5%, which came to £1.24 for each purchase.

The bid/offer spread: Market makers pay for their daughters’ school fees by charging you a bit more for shares they sell you than they will pay to buy them off you (think of a currency exchange at the airport). This bid/offer spread increases your costs, but for very big companies like those in the Monevator HYP, the spread is tiny. So tiny, in fact, that I can’t be bothered to work it out for each share – we’re talking a few pennies for each purchase.

In total, that’s £2.74 per share purchase for fees and stamp duty, plus a titchy bit more each time for the spread.

Multiply it up and you get to £54.80, or just over 1% of my £5,000, plus the price of a hamburger for that bid/offer business.

What I got for my money

Obviously I bought a different numbers of shares for each £247.26 lump sum I had left after fees to put into each company, depending on the share price.

Sharebuilder does the sums for you – you just say how much you want to invest.

For example, Vodafone had a share price of about 168p last Friday, so my £247.26 bought me nearly 148 shares in that company. In contrast, I’ve got barely 11 Royal Dutch Shell shares to my name.

I say ‘nearly’ and ‘barely’ because Halifax Sharebuilder allocates you fractional holdings of shares (behind the scenes, your shares are lumped together with other customers in a pool). As it happens, I have specifically got “11.244775” Shell shares.

In reality, this precise number doesn’t make any odds. I’m interested in tracking the value of my shares, not the fiddly number I happen to own – as well as the total dividends they pay out, of course.

But for the record, I’ll conclude this post with a snapshot of exactly what I got for my money, and what share price I paid for them:

Company Quantity Cost per share
Aberdeen Asset Management 106.9 233.8p
Admiral 14.2 1,759.7p
AstraZeneca 8.0 3,121.1p
Aviva 56.4 443.4p
BAE Systems 76.1 328.6p
Balfour Beatty 75.6 330.6p
BHP Billiton 10.4 2,397.4p
British Land 41.8 597.5p
Centrica 79.3 315.1p
Diageo 20.1 1,245.5p
GlaxoSmithKline 19.0 1,318.3p
Halma 67.3 371.4p
HSBC 30.0 657.3p
Pearson 22.0 1,137.2p
Royal Dutch Shell 11.2 2,223.3p
Scottish & Southern Energy 18.9 1,351.0p
Tate 40.8 612.1p
Tesco 60.6 412.0p
Unilever 12.6 1,986.6p
Vodafone 147.9 169.0p

Note: Shareholdings and prices rounded to one decimal place. Costs include all fees.

Incidentally, having spent 30 minutes copying a load of fiddly numbers by sight from my web browser into this post – and rounding them as I go – I see one advantage of using an online tool… it would have done this for me!

Luckily I don’t plan on doing a review of the value more than every six months or so. This is a steady portfolio for income, remember, not a DIY hedge fund. 😉

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{ 17 comments… add one }
  • 1 ermine May 12, 2011, 10:04 am

    Congratulations on your new purchase, may it bring you lots of income, maybe a nice piece of furniture for your house 🙂 I will be following with interest, in no small part because I have a fair number of the same stocks!

    I have a iii isa, and I think it uses Halifax for the back end because they have the same function as sharebuilder. I use that for all my purchases, and accept the dealing delay, because I am looking to build a HYP so I try and take the Warren Buffet view – do I think this is good value at the moment, and do I feel I want to hold this for some time.

    The delayed purchase lets you mull it over, and indeed you can set it but cancel it up to the evening of the day before the scheduled purchase date. There’s an awful lot to be said for sharebuilder/trading plan because as you say, you don’t feel like Gordon Gekko but you get rid of some of the hotheaded stuff. I’m definitely a fan. I only have 7 holdings in my ISA but taking the slow and contemplative approach to buying has already saved me £60-ish.

  • 2 Moneyman May 12, 2011, 10:52 am

    Good tip for low trading fees – presumably this is all in an ISA with no other management costs & same fee to sell?

    Good luck!

  • 3 Luke May 12, 2011, 11:33 am

    Quick query Monevator – I know it won’t make a huge difference to the value of your portfolio, but am I right in assuming that dividends for partial shares etc. are distributed on a ratio basis (i.e. if you had 100.2 shares in Company X and the divi was 5p, you’d get get £5.01)?

    A HYP is something I’m giving real thought to for the 2012-13 ISA year (sticking with funds for the moment), so will stick around to watch developments.

  • 4 Sunit May 12, 2011, 12:24 pm

    Awesome purchase and thanks for the input! Didn’t know you could buy them in such small quantities. I’m thinking of doing the same thing in hong kong, need to find a similar service there and it’ll be fun 🙂

  • 5 Crucible May 12, 2011, 12:34 pm

    Perhaps I’m being paranoid, and I like the premise of it a lot, but doesn’t this sort of order raise suspicions about the slice your broker takes off the bid/ask? Bit of extra comission then can lop off without you noticing!

  • 6 RetirementInvestingToday May 12, 2011, 12:41 pm

    Hi TI

    I’ve been thinking for a while that as I near retirement and look to move from accumulation into drawdown a HYP could be the way to go. There’s a lot of guys who take it quite seriously over on the Motley Fool boards.

    I’ll certainly be watching your portfolio with interest to learn the pro’s and con’s over time. Wishing you much success with the strategy.

    Cheers
    RIT

  • 7 Macs May 12, 2011, 6:15 pm

    Congratulations on the new baby 🙂

    One quick question – what’s the Y? Have you worked out the prospective divis for the coming year?

  • 8 ermine May 12, 2011, 7:42 pm

    Did you attempt to balance/diversify by sector as well? Running a casual eye it seems like you are heavy on financials (Aberdeen, Aviva, HSBC, Admiral) and energy (Shell, Centrica, SSE) than others, but then these are big sectors in our economy too so that may well make sense.

  • 9 The Investor May 12, 2011, 10:25 pm

    Thanks for all the comments everyone, very supportive.

    But first off, I have to say you’re all very naughty for not reading my post properly. 😉

    I linked back to my previous post where I both give the sectors and also the prospective yield (@Macs – it just over 4.3%).

    Sector diversification is very important for a HYP in my view, yep, as I explained in an even older post I wrote before.

    @ermine – Yes, there is some overlap, but in a 20-share equal-weighed portfolio where you’ve made some attempt to diversify by sector, it’s less than in the FTSE 100. From memory, near-50% of the FTSE 100 is 2 mega-miners, 3 mega-energy, and 2 mega-pharma, plus HSBC, Vodafone and BATS. I’d argue too that the financials aren’t all cut from the same cloth (Admiral holds most of its assets in short-term bonds, HSBC has tonnes of mortgages and Asian savings, Aviva has a fair chunk of *cough* European bonds, etc — and their business models are all different). Shell is very different from those two other energy companies, which are regulated utilities. Actually, Centrica and SSE are probably the most overlapping, except for Glaxo and Astra, of course. Really if you’ve no qualms, buy British American Tobacco instead for one of them.

    That defended, I do accept the overlap is a tad more than I’d like. I’d love to have an extra miner, and I’d love to have a tech share of some sort. (Intel in the US is yielding over 3%, from memory). Perhaps that will be one factor to consider if/when I trade in the future.

    A few other answers/comments:

    @moneyman – Alas it’s not in an ISA – mine are maxed out pretty much by the end of 6 April every year. 😉 So another reason not to trade! I’ll have to take the tax on the dividends on the chin. As I’ll detail in the future, I won’t be reinvesting income, anyway (so importantly this WON’T be a total return portfolio). There are no more fees to pay though, unless/until I trade.

    @Luke – Exactly. This is why it’s a good reason to think in terms of dividend yield. Numbers and prices of shares are only really an issue with big holders who want to retain control, (rarely) high share prices which can be less liquid, and (rarely) shareholder perks related to owning a certain number of shares.

    @Sunit – Good luck, I know there’s similar services in the US at least.

    @Crucible – Yep, always good to be paranoid. But in reality these shares are so liquid and the spreads so tight that it’s not likely to happen, and I’ve never had a problem with big companies. I *have* sometimes had problems (or perceived problems) with small cap shares, which I used to buy via Sharebuilder many years ago. Now I’d only deal with those in real-time at a quoted price. Perhaps the quotes have improved since then, too. Remember it’s the market maker who takes the spread, not Halifax, here (though they may be doing something clever like netting off a certain amount of customer buys against customer sells before going to the market to sort out the balance – not sure!)

    @RIT – Yes, I recall the Fool board (the practical one) is a good source of info for this strategy. I think it’s very valid way of generating retirement income, in combination with other income streams, including some allocation to an annuity for most people.

  • 10 Macs May 13, 2011, 9:17 am

    @TI, no I hadn’t missed the previous post 🙂 I asked about the *actual* divis as these will now be fixed (pending each payoput being set) and the average yield quoted in the previous article was at the time you first evaluated the shares, and I know some of those shares moved a bit recently (as I own them too…) so the achieved yield might have changed a tad between then and buying. Although I take you’ll be reporting payments as and when they are paid out?

  • 11 The Investor May 13, 2011, 1:45 pm

    @macs – Ah, I see. Well I bought the portfolio the morning after the article before, and don’t think it moved more than +/- 1% or so. At some point I’ll hopefully find time to create a spreadsheet with macros to grab the forward yield at any point but, well, I’ve not yet.

    I won’t be reporting every time a dividend is paid — that’d be several dozen very boring posts a year! 😉 I’m currently thinking every six months, plus special posts if news forces consideration of a trade (eg dividend cut) or I do trade.

    I think hyps can be overmonitered to be honest.

    Which shares do you hold, out of interest? 🙂

  • 12 Macs May 13, 2011, 3:29 pm

    “Which shares do you hold, out of interest? :)”

    Must resist the temptation to link back to a previous comment 😉

    BP, Catlin, First Group, GSK, Inmarsat, NG, PVCS & VOD in my ISA, plus Resolution outside being as I had some Friends Prov demutualisation shares. I need to diversify more, when I can afford to, and I look at my yield in terms of (next 12-months divi / book cost) and on that basis it’s showing BP 4.51%, CGL 6.55%, FGP 5.77%, GSK 5.54%, ISAT 3.81%, NG 6.91%, PVCS 3.22% and VOD 5.35%. Figures for RSL are pretty meaningless due to complications of demutualisation and rights issue, but it’s about 6% on current share price.

    FGP and PVCS show a capital loss, everything else has gained. I’m overweight on BP, GSK and VOD. I did have a flutter on HMV which was not my best decision… I’ve just about recouped the capital loss from that now. I’m actively avoiding retail now, and banks, though might be tempted by HSBC 😉

    Strictly speaking PVCS wasn’t chosen on ‘HYP’ grounds, and as there was a divi cut, wouldn’t qualify, but I think it’s a well-run company and I like to support the sector 🙂

    I bottom-trawled BP post-Macondo, and snapped up ISAT (which had been on my watchlist) in a fearful over-selling frenzy with the remnants of my HMV cash. The rest were conscious ‘high-yield’ choices, though in retrospect I seriously mis-timed the FGP purchase.

    Glad to see your portfolio coincides with a fair proportion of my current watchlist 🙂

  • 13 Salis Grano May 14, 2011, 10:01 am

    I have around 22 shares in the HYP part of my portfolio, around 50% by value, with a current historical yield of 4.4%. 8 of them are the same as yours, so that gives me some confidence, but there are a few that are a bit dodgy: BMS, HOME & PVCS, for example.

  • 14 The Investor May 14, 2011, 11:11 am

    Yes, PVCS isn’t a HYP share by my definition… 😉

    HOME (owner of Argos and Homebase, for those who don’t speak share ticker) is an intriguing prospect… I had a quick ponder when it broke below £2 but didn’t buy. From memory earnings have been declining almost since it delisted from GUS. If the UK consumer bounces back soon it’s a bargain, but that’s quite some ‘if’ and dividend cover must be getting pretty tight now.

  • 15 JEH May 23, 2011, 9:34 pm

    Just a small point. Why have you ruled out tobacco on ethical grounds whereas in your previous HYP you had BAT?

  • 16 The Investor May 23, 2011, 9:37 pm

    @JEH – Good spot! No change in BATs activities to warrant the shift, except in as much as it’s becoming ever clearer that these big cigarette companies are relying on living off ill-education and poverty in the developing world to survive (on current trends, there won’t be a single smoker in Europe by 2050).

    Slight change in me.

  • 17 Halfretired June 4, 2011, 1:33 pm

    Great blog.
    I have now started a high yield portfolio. Like ermine, this is with iii. Ive used their £1.50 Portfolio builder which sounds just like the Halifax purchasing shimmy. I think perhaps Halifax run the iii operation.

    I’ve got my dividend option as reinvestment – mindful of the benefits of compounding. But I’ve only just picked up on the iii small print that reinvestments are charged at 1%, capped at £10. So I’m wondering if I’d be better not reinvesting the dividend and allowing it to accumulate until there’s a reasonable amount to reinvest on the £1.50 portfolio builder shimmy.

    I noticed that you are not reinvesting the dividends on the HYP. But thought that might just be your personal choice. I also looked for the small print on the Halifax site for dividend reinvestment, but there is no mention of charges for reinvestment. Perhaps a reason to choose Halifax rather than iii?

    Great blog – I’ve learned a lot from it and continuing to do so.

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