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The Monevator demo HYP: Five years (and a bit) on

Five-year old badge: Our demo HYP is now five years old.

Five years ago I experimentally invested £5,000 into 20 dividend-paying shares that I judged could deliver a growing income for the foreseeable future.

This simple investing approach is known as a High Yield Portfolio.

I’ve written a few articles over the years about high yield portfolios – or HYPs – and filed them under the HYP tag. Please check them out if you’d like to know more.

Briefly, the idea is to buy and hold blue chip stocks indefinitely.

In the version I was implementing1 you intend to never trade the shares. You just leave them alone, unless forced to act by corporate events such as takeovers.

The idea is this protects you from your worst instincts (that you think you know something the market doesn’t on any given Tuesday) and from the bad decisions and worse consequences that may result.

But there’s a subtler benefit, too.

By investing one-time in a basket of higher-yielding shares (with a few safety filters as I outlined in those previous articles) you hope to capture a collection of companies that are on-average undervalued – without needing to be an expert on any of them.

It’s a sort of ‘knowingly know-nothing’ way to try to get an investment edge.

If the portfolio works out, you’ll enjoy a growing income and perhaps some capital gains – a steady cash flow to buy all the Werther’s Originals you could want for in your old age.

To that end, please note that my demo HYP assumes all the dividends are spent each year. Such portfolios are usually intended as income vehicles, and that’s what I’m demoing here.

Investing for the ages

The HYP is basically how wealthy families used to invest in days of yore, when men were real men, women were real women, and small furry creatures from Alpha Centuari were real small furry creatures from Alpha Centuari.

Family members might even have passed their stakes in the great oil companies, industrial firms, banks – and yes, railroads and other eventually antiquated concerns – down through the generations.

Aunt Agatha bequeathing a trust to Bertie Wooster, Reginald Cornelius Hubert II an income to Reginald Cornelius Hubert III in the US – that sort of thing.

But to be honest, I’m not sure this good old-fashioned investing has much relevance today.

It’s now so cheap to buy and hold global equities with index funds, and you can get such funds with a dividend tilt if you want them. Much less hassle than even a low-hassle HYP, and much more diversified, albeit for a small additional fee.

Even for active investors, the advantage of saving money by avoiding trades has been much reduced by low-cost, fixed-fee brokers (although you usually still pay stamp duty in the UK, and the other drawbacks of trading will never go away).

You’ve always been able to buy income investment trusts in the UK as an income alternative, too, and I have a soft spot for them. But then we’re back facing the drawbacks of active management such as high costs, mean reversion, likely under-performance and so on.

Yet while it may be about as hip and happening as Roland Rat in a zoot suit, the HYP strategy remains popular with DIY stockpickers.

You could do a lot worse if you’re set on owning a portfolio of individual shares.

Note: The Monevator demo HYP is just that – a demo. It’s not a recommended list of shares to buy today, and it is not a reflection of my own wider portfolio, nor how I manage it. The demo HYP is just a small side-account set up for Monevator purposes. Please don’t take me to task (as some have done in the past) for this or that reason as if I’d bet my future on it, or say it’s inconsistent with some other article I wrote six months ago, or tell me why I shouldn’t invest all my money this way. I don’t!

2011 Demo HYP: Frequently Asked Questions

I expect there may be questions from new readers – as well as those of you who for your own selfish reasons haven’t memorized every last word we ever wrote – so here are some links to my previous posts, in FAQ form:

What’s another six weeks after 60 months?

Now for something annoying. You see, this isn’t going to be a five-year update.

It’s going to be a five-year and a month and a bit update.

In the grand scheme of things this doesn’t matter much – another 45 days or so around the sun is neither here nor there for a portfolio you intend to own until you die.

But it is needlessly clumsy.

It’d have been great to present a five-year anniversary snapshot. To be able to say that this is exactly what the demo HYP did over five years, and then to compare it with other strategies past and present over the same timescale.

Unfortunately, I forgot for two years to even do an update, and then after I became enthusiastic about this five-year anniversary, I got preoccupied writing something else. Sorry!

If it’s any consolation, I invested 500,000 of my pennies just to make my record keeping easy, and yet I’m still unloosing a six-shooter into my foot every few years.

This hurts me more than it hurts you.

How has the demo HYP fared since inception?

Enough waffle – here’s how the demo HYP stood as of the market’s close on 23 June 2016:

Company Price Value Gain/Loss
Aberdeen Asset Management £3.13 £334.33 33.7%
Admiral £20.11 £285.71 14.3%
AstraZeneca £38.99 £312.27 24.9%
Aviva £4.45 £250.60 0.2%
BAE Systems £5.04 £383.48 53.4%
Balfour Beatty £2.55 £192.56 -23.0%
BHP Billiton £8.71 £90.77 -63.7%
British Land £7.63 £319.04 27.6%
Centrica £2.18 £172.87 -30.9%
Diageo £18.33 £367.91 47.2%
GlaxoSmithKline £14.29 £271.00 8.4%
Halma £9.66 £650.19 160.1%
HSBC £4.54 £172.86 -30.9%
Pearson £8.88 £195.21 -21.9%
Royal Dutch Shell £18.89 £212.41 -15.0%
South 32 £0.89 £9.28 n/a
Scottish & Southern Energy £15.50 £292.36 17.0%
Tate £6.27 £256.08 2.4%
Tesco £1.68 £101.63 -59.4%
Unilever £31.87 £400.99 60.4%
Vodafone  £2.18 £250.69 -0.5%
£5,522.25 10.2%

Note: The portfolio was bought on 6 May 2011, with £250 invested into each of 20 shares. All costs (stamp duty, spreads, and dealing fees) are included. See Vodafone and South 32 note below. Valuation from Halifax.

In summary:

  • The portfolio is currently valued at £5,522.
  • This is up 10.2% on inception.
  • It is down 5.2% since the last update three years ago.
  • Remember, these returns do not include dividends. Capital only.

Book keeping notes on Vodafone and South 32

Now a quick explanation about the Vodafone holding, and the £9.28 stake in South 32.

Following the sale of its massive stake in Verizon Wireless in 2014, Vodafone issued a big special dividend and shrunk as a company to around half its size.

I decided that this qualified a special one-off event, and that doing nothing in response – just treating that special dividend as income, and leaving the position roughly half-sized – would distort the returns for years to come. So I decided to reinvest income into Vodafone to restore its weighting within the demo HYP, and so offset the impact of that big payout.

I did this judiciously but not insanely precisely. I can’t remember my exact thought process, and I do not intend adjusting the returns from the benchmarks to reflect it because, well, life is too short.

Just keep in mind that the demo HYP benefited from an extra £90 or so as a cash infusion that the FTSE 100 didn’t enjoy, and that the investment trusts may or may not have seen (depending on whether they owned Vodafone and whether they chose to reinvest the special dividend or pay it out as income).

I’d argue that in real world terms this isn’t a bonkers deus ex machina payment, exactly, given the huge spike in income that it offset and which is unaccounted for here, yet would be if we were tracking total returns2.

You could certainly argue that I shouldn’t have done anything. Companies are rejigging their holdings all the time with mergers, acquisitions, and disposals. Some of the dividend income they pay out in any given year may well come from small disposals. Why make an exception for this move from Vodafone?

Simply because it was so big. I felt it was a pragmatic decision, and in the spirit of the portfolio.

As for South 32, this is a new company spun-off out of the BHP Billiton, trading under its own ticker symbol. In this instance, I didn’t sell the spin-off shares, and I didn’t top-up the BHP position. I kept my shiny and tiny stake in South 32, which I confidently expect to grow into a vast multinational, and to thus swell my wealth by fifty quid.

Perhaps you’d have made different decisions about Vodafone and South 32, and that’s fine.

All I’m trying to do here is follow the ups and downs of a particular 20-strong share portfolio. I’m no data hound (quite the opposite) and I’m not trying to sell this strategy versus another. But I do want to show my workings.

Ups and downs in the individual shares

So what of the performance? Well, at £5,522 it’s down from the last update in June 2013, when it sat at £5,828. Harrumph.

But it could be worse. In fact it was at the end of the first year (it had fallen below its starting capital value) and it has also recovered a bit since the turbulent times of spring.

According to UK inflation data, £5,000 in 2011 money is worth £5,782 today, so the capital value of the portfolio is so far failing to keep up with inflation.

That’s disappointing, but then it would have been a different story a year or so ago when the market was 15% higher. Certainly something to watch in the future though.

In terms of the individual shares, you can see that there’s been quite a bit of divergence since inception – and also since we last checked in at the two-year mark.

Back then Aberdeen was up 102%, while the worst performer, Balfour Beatty, was down around 32%.

Since then Balfour has recovered a bit but BHP Billiton has taken the wooden soon and run with it, with a lurching 63% plunge.

As for Aberdeen it is now up a mere 34% since inception, having suffered from the turmoil in the emerging markets.

But boring and beautiful Halma is now up 160%!

These gyrations might seem perturbing if you’re used to only seeing the aggregate returns of trusts or funds. Indeed they are a bit disturbing, and the sort of thing that gives a 20-stock portfolio a bad name.

But they’re very normal.

Check in after 10 years and we’ll probably have a few multibaggers3, and perhaps one or more companies that have disappeared, or as good as done so return-wise. Par for the course.

Again, these are just share price returns. All the dividends have been ‘spent’ by the portfolio (in reality snaffled off by me to be reinvested elsewhere) so they’re not full reflections of how the companies have delivered for their shareholders.

Also note that several companies cut their dividends – BHP, Tesco, and Centrica for starters.

Again, pretty standard. I expect Centrica and Tesco will grow their dividends again soon, and perhaps BHP will eventually.

Many of the other companies raised their payouts by a fair clip though.

How did the HYP do versus the benchmarks?

The HYP was bought on 6 May 2011. I decided to compare it two benchmarks from that date – a small basket of investment trusts, and the iShares FTSE 100. You can read more about this in the benchmark article.

Benchmark One: The iShares FTSE 100 Tracker

The ETF benchmark is a hypothetical £5,000 that was invested into 836 shares4 of the iShares FTSE 100 tracking ETF ISF.

The ETF shares were notionally bought at £5.98 per share. The (tiny) purchase costs were taken into account, and there was no stamp duty to pay.

Here’s where the ETF stood at close of 23 June 2016.

Company Price Value Gain/Loss
iShares FTSE 100 ETF £6.29 £5,260.63 5.2%

Note: Prices from Yahoo.

Back at the two-year mark the ETF was up 12.3%, but that gain has been more than halved by the miserable markets of the past few years.

Pah! It’s not been an easy time to be an investor in UK shares – or a writer of an investing blog for that matter.

For now, the demo HYP is ahead of the FTSE 100 ETF.

Benchmark 2: A trio of income trusts

I also track three income investment trusts as an alternative to the HYP.

Again I assumed these were bought via Halifax Sharebuilder, and again I averaged the opening and closing prices on 6 May 2011 to get the initial buy prices. Stamp duty and a penny spread on each trust’s price were factored in.

Here’s where a hypothetical £5,000 pumped into these three trusts stood at close of 23 June 2016.

Trust Price5 Value Gain/Loss
City of London IT £3.86 £2,114.18 26.9%
Edinburgh IT £6.88 £2,422.80 45.4%
Merchants Trust £4.13 £1,617.67 -2.9%
£6,154.65 23.1%

Note: Prices from Yahoo.

Firstly, it’s interesting to me that the highest yielding trust at the outset – Merchants – has done by far the worst in capital terms since then. It’s relative performance would be enhanced by reinvesting income, but not by enough to really undo the marked contrast with the other two trusts. A nice reminder that a high starting yield isn’t everything.

In terms of the basket’s returns, whereas the FTSE 100 has slipped back from its position at the two-year market, the investment trust folio has continued to make progress.

It’s turned a 19.3% advance at last check-in into a 23.1% gain since inception.

Now it isn’t hugely surprising to see it doing better than the ETF tracker, if you’re a follower of the markets.

The commodity crash over the past few years and the ongoing train wreck that are bank stocks both hit the FTSE 100 hard. Investment trusts would have been lighter in both those sectors.

Will the FTSE 100 ever bounce back? Or will investment trusts always maintain this edge? We’ll see.

It obviously bears stating that the IT basket is doing much better than my 20 shares, too.

As I’ve said many times before, UK equity income investment trusts are pretty much my favourite vehicle for active UK investors. I keep an eye on a small portfolio of them for my mother, as it happens.

But even if we are still remembering to look back at this comparison after 20 years, we won’t be able to say anything truly definitive about their merits versus trackers or the HYP, because this portfolio is just a snapshot in time, from 2011 to whenever.

What if we’d started in 2007? Or 2003?

Also the whole shebang reflects my particular 20 stock picks and my arbitrary selection of three trusts. (Arbitrary in the sense that you might have chosen differently). That’s idiosyncratic, not the stuff of scientific rigour.

Obviously the same is all true if the HYP comes good in the years to come, too.

What about income and reinvestment?

In the early years of this project I maintained a spreadsheet that tracked income and tried to estimate what would happen if you reinvested it every year.

However I feel that boat has sailed after the three-year hiatus, and it’s not coming back. (Even looking at the spreadsheet makes my head hurt.)

It would be interesting to see where the annual income-delivering power of these three strategies stands at the five-year mark, however.

While the focus of my tracking is on capital, the actual aim of the strategy is to deliver a rising income. That’s what really matters.

I’ll take a (shorter!) look at that next time.

  1. Popularized by writers such as Stephen Bland of The Motley Fool in the UK and Robert Kirby with his similar Coffee Can portfolio in the US. []
  2. That is, capital and income. []
  3. Gains of 100%, 200%, 300% and so on. []
  4. Actually 835.87 shares to be precise. []
  5. I’ve rounded these here for clarity, but have used the exact price in my spreadsheet. []

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{ 21 comments… add one }
  • 1 ermine June 23, 2016, 10:18 pm

    Interesting that the ITs did better than the HYP. I see the same sort of thing from the ITs in my HYP, to the extent I will probably prioritise that direction.

    But you do need the second bit qualifying the income thrown off as a percentage of the purchase cost, because that’s the whole point of a HYP strategy 😉

    One plus a HYP or IT strategy seems to have is no platform fees as long as you don’t sell – depending on the platform, but TD haven’t charged me for holding shares.

    There’s also the lower volatility of the income, compared to volatility of the market valuation. That has to be seen to be believed, and makes a much easier ride.

  • 2 The Investor June 23, 2016, 11:38 pm

    @ermine — Yes, I really should have squeezed the income in too, given it’s the whole point. 🙂 But after such a hiatus there seemed so much to say… I’m already being asked for Total Return on Twitter, but that’s not going to happen (or at least not the ay I used to do it, trying to work out reinvestment across the portfolio etc. I might be able to some day source total return data for the individual shares, then aggregate them. Not ideal though as it assumes dividend reinvestment always into the same companies, which isn’t always what accumulating HYP-ers do. But nothing is ideal from that perspective really!)

  • 3 david June 24, 2016, 6:50 am

    HSBC is certainly looking like a high-yielder now, down 10% in Hong Kong.

  • 4 david m June 24, 2016, 3:25 pm

    It will be interesting to see your total return position. In the meantime I’ve had a look at some total returns.

    Total return value of £100 invested for the 5 years to 29/4/16 (approximately your period invested) from my monthly magazine is:

    FTSE 100 £124
    FTSE All Share £129
    City of London IT £156
    Edinburgh IT £185
    Merchants Trust IT £125

    Results for the UK Equity Income IT sector averaged £160 and ranged from £123 to £249.

    It will be interesting to see your HYP total return once you have it calculated, but my guess is that it will be about £140, i.e. a 40% increase.

    I continue to prefer income investment trusts rather than the HYP approach based on these sort of results, but am interested to follow the progress of HYP approaches such as yours.

  • 5 The Investor June 24, 2016, 4:22 pm

    @david m — I don’t know that I can properly calculate it, because I don’t know the portfolio value at years 3 and 4 (nor precisely at year 5). Reinvesting all income into the same shares that delivered it is the other option (though I don’t have a data source for total return data for UK shares currently — if somebody does please shout! 🙂 )

  • 6 david m June 24, 2016, 5:05 pm

    @the investor
    Morningstar has returns that may be total returns but you can’t select earlier dates:
    http://tools.morningstar.co.uk/uk/stockreport/default.aspx?tab=0&vw=pf&SecurityToken=0P00007NVM%5d3%5d0%5dE0EXGSXLON&Id=0P00007NVM&ClientFund=0&CurrencyId=GBP
    Historic daily prices and dividends are on yahoo finance, e.g.
    https://uk.finance.yahoo.com/q/hp?s=ADN.L&b=28&a=02&c=1991&e=24&d=05&f=2016&g=d
    That would involve a lot of calculation work to get to a total return.

    Alternatively you could calculate based on reinvesting the dividends received into the ETF each quarter.

    My guess is based on the HYP matching the average of City of London IT and Merchants Trust IT total return. I regard those IT’s as a more diversified version of a HYP.

  • 7 The Investor June 24, 2016, 6:56 pm

    @David — Thanks for the research, but yes, absolutely it can be calculated from dividend records from many different data sources. The issue is that without total returns per share/company, it’s a massive amount of work.

    What I was doing on a portfolio aggregate basis for the first couple of years was totaling all the dividends for the year and assuming reinvestment into the portfolio as if it were a unit trust at each anniversary (or something similar, I can’t remember exactly and haven’t looked). Anyway that’s now impossible to do accurately, because the hiatus means I don’t have the annual valuation snapshots for two years. I could fudge or estimate it, but that rather defeats the point.

    Given that I am monitoring this as an income generator story, I am very unlikely to dig into all that I suspect. I don’t deny it would be interesting (I’d personally love to have the data to hand) but sadly I just haven’t got the 10-20 hours (at least) required for what I suspect would be of niche interest.

    I will be doing an income post and talking about the current yield on the portfolio next week, though. And if I do more updates annually (which I hope/plan to) then I’ll roll them into the single update post as this is a bit silly splitting them up.

    Cheers again for your interest! 🙂

  • 8 magneto June 24, 2016, 7:02 pm

    Two or three of the HYP companies above are essentially non-UK and therefore influenced by exchange rates.

    The past tumultuous week with the slump in £ Sterling, has caused this investor to begin to think more about currency issues when assessing portfolio’s performance!
    Over the week we find, as no doubt other investors have found, that our stock position valuations have all moved up!

    Yet we know that in US$ terms a portfolio loss has been suffered!

    Have no idea whether there is any clear way to think about this issue.
    Trade weighted Sterling adjustments would be a nightmare!
    Might be worth touching on in a future article?

  • 9 The Investor June 24, 2016, 7:03 pm

    p.s. That Morningstar data is an interesting spot, and purely on inspection it looks like annual total returns. But as you say that’s not quite enough for our purposes here, because we’re not running to calendar years. I wonder if a subscriber could get dates over a particular timeframe? I do suspect this is available via say a Bloomberg but unfortunately I no longer have access to one.

    p.p.s. Sorry for all the typos in the first version of my last comment, which you might have been emailed. 30 minutes sleep last night!

  • 10 david m June 24, 2016, 7:48 pm

    @the investor

    One option you have is to compare the separate income and capital returns for the portfolio against the same for a benchmark IT portfolio of 50% City of London IT and 50% Merchants Trust IT. If my previous guess is correct then they should roughly match.

  • 11 R June 24, 2016, 8:25 pm

    @magneto

    The value of the portfolio in SDR might be a useful shortcut. I’ve been calculating once a quarter the total value of my portfolio in GBP, USD, EUR and SDR. Over the last 2 years or so the value has increased about 31% in EUR, 21% in GBP, 6% in USD, and 17% in SDR. So very different results and associated feelings. Curious to know what others do, if anything.

  • 12 The Investor June 24, 2016, 8:43 pm

    @magneto @R — Yes, but the same is true of the FTSE 100 and of the trusts, too. We’re an international country with a hyper-international trade. (75% of earnings of the FTSE 100 are derived from overseas).

    @david m — To be honest I don’t see the point of doing a lot of a work for a rough match that doesn’t really tell us anything accurate. Just my view. As I say, I see the value of the information, but the fact is this is a portfolio where the income is assumed to be spent, and that’s how I’ve set up the tracking. (Perhaps I might have set-up two portfolios at the start and switched on automatic dividend reinvestment for one of them, but even the £5K investment in a demo seemed fanciful at the time! 🙂 Perhaps I could set-up a new demo HYP sometime that’s a total return HYP with dividends reinvested, provided the dividend reinvestment charges are free (I don’t do that anymore, it’s a CGT pain, so not sure!)).

    @all — R is referring to Special Drawing Rights. (See this IMF article). It’s very thoughtful if people can explain three letter acronyms when they introduce them, unless they’re use is extremely commonplace.

  • 13 R June 25, 2016, 8:32 am

    @TI
    Apologies for not spelling out my TLAs! (Three-Letter Acronyms).
    I’m not sure I understand your counter-examples. I thought magneto was interested in how to assess the performance of a portfolio by finding a way to reduce the somehow “illusory” effect of currency movements in the valuation of a portfolio. How to invest to have a currency-diversified portfolio (FTSE 100, trusts, VWRL,…) is a related but different issue, I think. But may be I got it all wrong!

  • 14 magneto June 25, 2016, 9:13 am

    @R
    ” I thought magneto was interested in how to assess the performance of a portfolio by finding a way to reduce the somehow “illusory” effect of currency movements in the valuation of a portfolio”

    Yes this is exactly the thought process troubling me.
    Many Thanks

    @TI
    Thanks for the link to SDR.
    New one for this investor.
    Every day in every way ……

  • 15 The Investor June 25, 2016, 9:56 am

    @R @magneto — Ah, apologies, read too quick and thought @magneto was saying the HYP was exposed to currency effects in a way that the two benchmarks I was comparing it with were not.

  • 16 SemiPassive June 25, 2016, 10:31 am

    Confession time, I sold out of all my UK equity funds two weeks ago – including FTSE100 and 250 trackers, City Of London IT and a UK Dividend Aristocrats ETF.
    Looking at CTY, yes the fees are slightly higher but still reasonable and it has performed closer to a world tracker than the FTSE100 over the last few years. But will it suffer reversion to mean and loss of premium?
    The dilemma is when and which of the above to buy back in post-Brexit vote. FTSE250 will be getting a wide berth from me, the 100 has held up amazingly well though, I guess down to the large amount of dollar earnings bolstering it.

    I also have Lars Kroijer’s Investing Demystified book (great timing) to read this weekend so maybe will stick everything into a world tracker, think of total return and forget about my dividend fetish which has seen a heavy UK bias until now.

  • 17 david m June 25, 2016, 11:03 am

    @the investor

    I still think it would be interesting to see the total income received for this HYP portfolio since May 2011, ideally split by year so we could see how dividend income had risen or fallen. Whatever you have that doesn’t involve too much work would be appreciated.

  • 18 Mroptimistic July 27, 2016, 8:44 pm

    Does it say anywhere what the best guess yield is on this portfolio or the forecast yield at inception? Comparison with the FTSE 100 would be good.

  • 19 The Investor July 28, 2016, 12:39 am

    @Mroptimistic — I am going to do a follow-up article on yield soon. Got distracted by Brexit. 😉

  • 20 The Investor July 29, 2016, 2:20 pm

    @all who are interested — That income update has now been posted here:

    http://monevator.com/monevator-demo-hyp-income-update/

  • 21 Mr optimistic July 29, 2016, 5:49 pm

    Good man, thanks for your hard work.

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