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How the bear market hit the high yield portfolio

Long-time Monevator readers might remember my series of posts from September 2007 on selecting a high yield share portfolio (HYP) to secure a growing dividend income.

For those who missed it, the series so far comprises:

  • Grow your income with dividends from high yield shares: HYP Part 1
  • How to choose a good high yield share for the long haul: HYP Part 2
  • Diversifying your high yield portfolio: HYP Part 3
  • Selecting the shares for your high yield portfolio: HYP Part 4

I also picked an example high yield share portfolio in that fourth article, published on September 26th 2007.

I could not have chosen a worse time to write-up a demonstration portfolio.

Two weeks later the FTSE 100 closed at 6,730, just shy of the high it reached in summer. Then began the bear market we’re still living with today.

I’ve known for nearly 18 months that my demonstration portfolio must have taken a beating. Bank shares have been reliable constituents of income portfolios here in the UK for decades, and along with property companies they were murdered in the subsequent crash.

I recalled the portfolio included RBS, for one. I must sheepishly admit that revisiting this portfolio has not been top of my priorities!

Monevator is of course only meant as general entertaining thoughts on investment, and is certainly not investment advice. I think part 4 spelled out clearly the big risks of a bear market, and also made clear that my articles were not meant to (and never will) advise you to put your money into any particular shares.

That aside, the posts are some of my most popular articles, and I often get emails asking for parts 5 and 6.

But I don’t feel I can continue the series without taking a look back first.

I can hardly complain about fund managers advertising their winning funds while quietly closing their losers if I’m not prepared to monitor my own posts: good or bad.

I’ve therefore worked out how the demonstration HYP from part 4 has fared, and set out the results below.

Annoyingly, I didn’t record the prices when I wrote the article, so I’ve had to research back the price of every share using Yahoo Finance’s excellent historical prices service. My apologies in advance for any slips.

Monevator 2007 HYP versus the FTSE 100

Name  	                2007	Now	Change	as %
Alliance&Leicester 	733	335	-398	-54%
RBS 	                516.5	22.5	-494	-96%
Tomkins            	222	108.5	-113.5	-51%
Taylor Wimpey 	        258	16.98	-241	-93%
Cattles 	        348	4.95	-343	-99%
Investec 	        502.5	208.5	-294	-59%
BT Group 	        305	89.9	-215	-71%
Hiscox                  256     288     32      13%
Royal&Sun 	        148	128.1	-19.9	-13%
Signet Group 	        1620.50 499	-1121.5	-69%
Pearson 	        739	631.5	-107.5	-15%
National Grid 	        790.5	622	-168.5	-21%
Tate & Lyle 	        559.5	285	-274.5	-49%
Scottish&Southern 	1,510	1,129	-381	-25%
InchCape 	        414	43	-371	-90%
IMI 	                535	276.75	-258.25	-48%
GlaxoSmithKline 	1,318	1,138	-180	-14%
British American 	1,777	1,735	-42	-2%
BP 	                567	461.5	-105.5	-19%
Unilever 	        1,590	1,373.	-217	-14%
			                HYP	-44%

FTSE 100	        6,433	3,915	-2,518	-39%
			                FTSE100 -39%

Note 1: Prices grabbed between 1:30pm and 2pm on 23 February 2009. Alliance and Leicester was taken over by Santander, so I’ve used the final price agreed plus the dividend investors received and assumed the money was stuffed under a mattress.

Note 2: I’ve not tracked the dividend income for this portfolio. As it was initially much higher than the FTSE 100 index and the latter has also been hit by the same dividend cuts from banks and builders, as well as more from mining companies and others, I’m confident dividend income would have added at least a couple of percentage points of performance to the HYP’s final result.

HYP performance: Some thoughts

The HYP has performed worse than the FTSE 100, losing 44% of its value versus a 39% loss for the index. Even accounting for HYP’s higher yield, the FTSE 100 will have beaten it.

Chalk another mark on the board in favour of a cheap index tracking fund.

That said, I think the defensive properties of a typical HYP are apparent. Four shares have lost 90% of their value or more, yet the portfolio has been saved from a rout by the diversification we discussed in part 3.

If an investor had instead overloaded on banks in their 20-strong portfolio back in September 2007 (perhaps believing the market was over-reacting to the collapse of Northern Rock) they’d have lost far more.

It may seem laughably obvious now that no bank shares at all should have been bought in September 2007.

But despite all the pundits now claiming to have foreseen the banking crisis, the fact is a collapse on this scale was far from even most bearish minds.

Financial crisis aside, the selection criteria I went through in part 4 has actually performed fairly well.

The safety factors steered the portfolio clear of overly-indebted companies like Yell while the dividend yield criteria kept us largely clear of mining shares, whose extra steam petered out in 2008, bringing down the FTSE 100 with them.

Where now for the HYP?

Recent times have been terrible for high-yield shares, as can be seen by the equally poor performance of most equity income funds and investment trusts. (Neil Woodford’s bank-avoiding Invesco Perpetual Income Fund is one honorable exception).

If the economy keeps contracting, all shares will face a headwind.

One question is how much further the banks can fall? The two I currently hold, HSBC and Standard Chartered, offer a great yield but the market has marked them down recently and clearly believes their dividends will be cut, either outright or via a dilutive rights issue.

Too soon to write off the HYP

The fall of the pound versus the dollar offers a bright note. Many of the UK’s large dividend payers generate much of their profits overseas, and the fall in the pound will probably help to maintain those earnings, although such currency trends can reverse overnight.

Indeed, Stephen Bland, who introduced me to the high-yield portfolio via his articles for the Motley Fool, would say that 18 months is far too short a time to judge any portfolio, especially one bought for long-term income.

His preferred timecale was ‘eternity’, which cynics (not me!) might retort was convenient since he wouldn’t be around to be judged later.

For my part, I’ll certainly return to see how this HYP has got on in a couple more years (as well as finishing the HYP series with the much-delayed parts 5 and 6) so please do subscribe to keep up.

I may even create a new demonstration HYP, since the yields available right now are staggering, if far from secure. Some people never learn, eh?

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{ 2 comments… add one }
  • 1 EmergingMarkets December 4, 2009, 1:31 pm

    I believe the whole point of HYP investing is long term hold for the dividend. The capital values are generally irrelevant (unless there is going to be a massive fall or bankruptcy when you will have to get out).

    But that is usually stock specific. A market wide fall should have no influence on the underlying philosophy of HYP investing. the key with with is to make sure that you invest in a diversified portfolio of good dividend paying stocks, use the dividends to buy new stocks if you don’t need the income, and hang on in there.

    there is probably another fall coming along to take the market back to feb/march 2009 levels, but that is no reason to lose confidence in HYP strategy.

  • 2 The Investor December 4, 2009, 2:16 pm

    I agree that’s the general principle, but I’ve moved my personal position a little over the past few years and now think it’s not appropriate for a semi-active investor to ignore capital values. (Fine for Stephen Bland’s famous Aunt Doris).

    I agree a big flaw in this article is I didn’t track the income then or now. All the tools have flaws, making it a bigger job than I have had time for.

    I’m thinking of doing an ongoing demo Monevator trading portfolio for fun, and if I do I will likely use real money to get around this problem.

    Thanks for your thoughts.

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