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An update on 2007’s high yield portfolio

The ups and downs of the high yield portfolio reviewed

Back in the day, before the credit crunch – before our most precocious readers were even born – I wrote a series of posts on income investing via a high yield portfolio (HYP) of shares.

I think now may be an opportune moment to create a new HYP for dividend income, and I’ll do so in an upcoming post.

But it seems only right that we first go kick the tyres of the original, four years on.

There were several parts to my HYP series:

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

The article sequence ended with an example high yield share portfolio in Part 4, which was published on September 26th 2007. (Parts 5 and 6 have still not been completed. Blame the distracting financial crisis!)

Unfortunately I’ve discovered that the table of final picks embedded in Part 4 has been corrupted, and no longer displays. But you can still see the constituents of the portfolio in an update from February 2009.

That update, and the one I’m about to conduct today, suffers from the fact that I haven’t considered income, only the capital value of the shares.

You may argue that reviewing an income portfolio without taking into account income is like reporting from Wimbledon after all the players have gone home. I wouldn’t disagree. Income portfolios are constructed primarily for income, not for capital gain. The latter is left to fend for itself, which should hopefully happen with a well-chosen equity income portfolio, as a rising dividend stream will sooner or later mean rising share prices.

The trouble is when I picked my original demo portfolio, I didn’t consider posterity, and so it wasn’t set up for tracking.

Now, I could spend a few hours retrospectively rebuilding the portfolio with 2007 prices, allocate it say £100,000 of pretend money, and then manually calculate the income due in 2008, 2009, 2010 and in the year to come but, well, I’m still single and I’m not getting any younger.

If anyone out there has some spare time and would like to do so and report back in the comments below, I’m sure we’d all be very grateful!

The 2007 HYP and the subsequent bear market

Having explained (though not excused!) the lack of income monitoring with this portfolio, let’s turn to capital.

The idea, rightly or wrongly, was to buy a portfolio of blue chip shares and hold them for the long-term. For the full selection criteria, please see the posts linked to above.

The strategy in short: I selected 20 shares from the upper reaches of the index primarily by yield, looked for diversification between industry sectors, then ditched and replaced companies I didn’t like the look of for some reason (usually debt).

As we all know with hindsight, September 2007 was around the high water mark for the last stock market bull run. A few weeks later the sub-prime doodah hit the fan, making mincemeat of former FTSE darlings, including three constituents of this demo HYP: the bankers at Royal Bank of Scotland, low-end lender Cattles, and housebuilder Taylor Wimpey. Most other shares took a pounding, too.

By the time of my February 2009 update, the demo HYP had fallen in value by 44%. That was worse than the FTSE 100, which had fallen 39% over the same period. (Please read that update for full details).

The 2007 HYP in 2011

So how has the portfolio fared since those dark days of early 2009, which was pretty much the low of the past bear market?

Here’s how things stand as of Friday 15th April’s closing prices:

Company 2007 2011 Change %
A&L (delisted) 733 317 -416 -57%
RBS 517 43 -474 -92%
Tomkins (delisted) 222 325 103 46%
Taylor Wimpey 258 37 -221 -86%
Cattles (delisting) 348 1 -347 -100%
Investec 503 475 -28 -5%
BT Group 305 191 -114 -37%
Hiscox 256 403 147 57%
Royal Sun Alliance 148 133 -15 -10%
Signet Group 1621 2688 1068 66%
Pearson 739 1098 359 49%
National Grid 791 605 -186 -23%
Tate & Lyle 560 607 48 8%
Scottish & Southern Elec. 1510 1318 -192 -13%
InchCape (10:1 share consolidation) 4140 350 -64 -92%
IMI 535 989 454 85%
GlaxoSmithKline 1318 1259 -59 -4%
British American Tobacco 1777 2559 782 44%
BP 567 456 -111 -20%
Unilever 1590 1957 367 23%
Overall
2007 High Yield Portfolio -8%
FTSE 100 6,433 5,996 -7%

Note: All rounded to zero decimal places.

Looking at the portfolio, we see the usual lurches and collapses that happen in any portfolio of individual shares.

Most strikingly, two of the companies are no longer quoted: Alliance and Leicester was acquired by Santander, and Tomkins by a bunch of Canadian pensioners. Furthermore, benighted Cattles is in the process of being taken over, and its suspended listing will soon be wiped away entirely.

Of the remaining shares, the best performer has been IMI, which is 85% higher than in 2007. That’s a huge bounceback from 2009, when it was 48% lower.

InchCape might flatter to deceive if you look at my post from 2007. The share price appears to have advanced handily since then, but in reality the company did a 10-for-one share consolidation in 2010. InchCape almost went bust in 2009, and while management is to be congratulated for avoiding that fate, it’s still smells a bit to hide the body like this.

Overall, we still see the HYP is trailing the market, though only by 1% now as opposed to 5% back in 2009. This may be surprising, given the near blowouts of the likes of Cattles and that our only selection from the booming commodities sector that dominates the FTSE is error prone BP. In my experience it’s not unusual for HYPs, though, probably because the high yield is an indicator of value in some shares, as much as lurking calamity in others. Over time, it evens out.

As for income, the initial yield was almost 4.8% versus less than 3.2% for the FTSE 100, but as warned above I have no numbers on how income has done in practice. The likes of Pearson and Glaxo have kept delivering the dividends, but RBS, BP and Cattles certainly haven’t!

Final thoughts on this portfolio

This is a very rough review. Not only does it ignore income, but I’ve not included other factors such as that you would have reinvested your A&L and Tomkins takeover money back into a rising market.

That might have reduced the performance gap with the FTSE 100 a tad further. In addition, there would have been no charges to pay over the four years of holding the shares, though given the low-cost of the best FTSE 100 index trackers these days, it will have made negligible difference.

More importantly, it’s very possible I’ve missed certain critical facts out from my quick calculations above. I almost missed the InchCape share consolidation, for instance. There could have been others, or on the plus side special dividends.

While you’d have certainly been paying more attention if they were your shares, all this fuss highlights a big advantage of a passive ETF approach to investing. Another alternative is to buy income investment trusts or even white list funds (make sure you go through a discount broker to get initial charges rebated) and to let the managers worry about takeovers and bankruptcies.

But some of us will always actively enjoy owning companies. Also, income trusts are now trading at a premium, which means every £1 you invest buys less than £1 of assets. Not a great deal, considering most are only holding big liquid blue chips.

For that reason and more, I think now might be a good time for share enthusiasts to construct a new high yield portfolio. And I’ll be doing so next week!

As for the 2007 portfolio, this is probably its final public outing. The chances of introducing errors is only going to increase as the years go by, which makes the whole exercise pointless.

If anyone has a favorite online portfolio tool they can recommend for tracking the new HYP over the long-term (one that automatically accumulates dividend income please!) then do let me know below.

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{ 17 comments… add one }
  • 1 ermine April 19, 2011, 11:31 am

    Bravo – yes please, let’s have the update 🙂

    I would be up for the analysis but I am not sure I have the expertise for a methodology that would account for the turmoil and splits/takeovers. And anyway there is something to be said for moving on and starting from now,

    Presumably the allocation was not even, because running my eye down the percentages, most of which are in negative territory I would have expected the total result to be mayhem rather than an 8% loss!

    Looking forward to the new HYP posts next week!

  • 2 The Investor April 19, 2011, 11:54 am

    Hmm, you’ve worried me now. It was just a simple average! I did the spreadsheet late at night, and am away from my desk to check it!

  • 3 ermine April 19, 2011, 12:46 pm

    No, you’re right, I’ve just totalised the last column in Excel and divided by 20 to get 8%. It must have been my pessimistic vision amplifying the bad out fo proportion to the good 😉

  • 4 alan April 19, 2011, 4:03 pm

    I recently followed your HYP methodology, and this is what I came up with:

    Oil/Gas – BP
    Chemicals – Johnson Mathey
    Basic Resources – BHP Bilton
    Construction – Balfor Beaty
    Industrial Goods and Services – BAE Systems
    Food/Beverage – Robert Wiseman (although this is a bit on the small side)
    Personal & Household Goods – Reckitt Benkiser
    Automotive – none large enough
    Healthcare – AstraZeneca
    Retail – Home Retail Group
    Media – Reed Elsivier
    Travel – Thomas Cook
    Fixed line comms – Cable and Wireless Comms
    Mobile Comms – Vodaphone
    Electric – National Grid
    Gas & Water – United Utilities
    Banks – HSBC
    Insurance – Amlin
    Real Estate – British Land
    Financials – Close Brothers Group
    Tech – none large enough

    Overall, at the time this gave a yeild of about 5.5%. I’ll let you know how its gone in about 5 years time…

  • 5 Salis Grano April 19, 2011, 6:39 pm

    Looking forward to your new HYP list, but looking at yields alone is never a good idea. What counts is future dividends not current ones. Always look at the company, what it does and what its financials are — there are no spreadsheet short cuts.

  • 6 The Investor April 19, 2011, 10:48 pm

    @Salis – Absolutely, please feel free to peruse the original articles where I reject a fair few ostensible high yielders. The general theory of the portfolio approach is you don’t try to pretend you know *too* much though. You hope that overall it over-panics.

  • 7 The Investor April 19, 2011, 10:50 pm

    Er, didn’t mean that to sound so harsh! Answering on an iPhone. 🙂

  • 8 ermine April 19, 2011, 11:17 pm

    > Answering on an iPhone

    you gadget geek 😉

  • 9 The Investor April 20, 2011, 7:49 am

    @ermine – In my defense, it’s nearly two years old!

  • 10 The Investor April 20, 2011, 7:51 am

    @Alan – Looks a very good list to me. Surprised the yield is quite so high — I was thinking we might get 5%.

    I’d have gone for Diageo instead of Robert Wiseman I think. Sage , Misys and and Logica have helped out with tech income before, but haven’t seen their figures recently.

    Thanks very much for sharing! Look forward to your thoughts on the new one.

  • 11 Cheapskate April 20, 2011, 10:11 am

    Re: “There would have been no charges to pay over the four years of holding the shares, though given the low-cost of the best FTSE 100 index trackers this days, it will have made neglible difference”

    Um, up to a point. I quite agree there would have been no management charges while holding the shares, but the transaction charges involved in buying individual 20 shares and reinvesting proceeds/dividends from time to time are surely significantly greater than those of buying one tracker once?

  • 12 Moneyman April 20, 2011, 11:31 am

    Hi

    Always good to read about HYPs – and your article illustrates well some of the pitfalls. My own strategy is to combine a HYP with fixed interest investments, including gilts and corporate bonds, which has helped to smooth out the volatility.

    My own (actual) portfolio is at my blog ‘s, together with some recent dividend mining.

    I believe that a Y

  • 13 Richard Beddard April 20, 2011, 2:54 pm

    Hi Monevator. Sharescope will account for dividends for you, but you have to pay.

  • 14 Benj April 20, 2011, 4:07 pm

    Thanks so much for your excellent site. It’s all a constant source of wonder to me.

    I am just going through some of the dividends and yields and wonder whether you’ve missed a 20:1 consolidation on Signet in 2008? (If that’s Signet as in jeweller.) And is the starting price correct?

    Benj

  • 15 The Investor April 20, 2011, 7:23 pm

    @Benj – Thanks for the kind comments! 🙂

    I have checked the Signet price in several sources inc Bloomberg and I think it’s right. The starting price in the column above has been rebased according to the consolidation I believe.

  • 16 The Investor April 20, 2011, 8:04 pm

    @Richard – Thanks, will investigate.

    @Moneyman – Sounds good. All investors should of course be diversifying like that, with a recipe to suit.

    @Cheapskate – Yep, as you quote above in this era of cheap trackers, holding your own shares for cost reasons doesn’t make much sense anymore. Besides vanilla ETFs, Vanguard do an equity income tracker fund now IIRC too, though it’s very new. Not paying any fees at all is a nice feeling though.

    (Don’t know what happened to my spelling in the section you’ve quoted btw! Fixed in the copy now! 😉 ).

  • 17 Macs April 22, 2011, 8:47 pm

    Here’s another one looking forward to the update, and eager to see what choice picks you might make 😉

    I took the plunge into equities last year, looking to build up an income stream. I took some inspiration from your original articles, enough to satisfy myself this was an avenue I wanted to pursue, then for good measure added a couple of [male chicken]-ups of my own to keep it interesting. The biggest of these was HMV, where I was overly swayed by yield and missed the obvious decline until it was too late. I got out with bit of a bruising, and have yet to recoup the capital loss. But even having absorbed that, my divis are coming in at 5.3% across the portfolio referenced to the capital put into it.

    To keep costs low I’ve gone with the iii ISA, so £1.50 per buy (and £10 to sell out of HMV…) with 0.5% commission on auto-reinvestment. For now I’m taking divis as new shares to keep building up so long as the actual income isn’t required.

    As I don’t have a huge wadge in it, it’s still not fully diversified, but there are some good performers in there. Very happy with VOD, BP, GSK, NG and CGL (Catlin). I think FGP was bit of an error, though… but time will tell

    On the other side of the aisle, I’ve also seen my gold and silver go up 60% and 90% respectively, so I think the capital loss from HMV is reasonably well hedged 😉

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