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 [1]. 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 [2] 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 [3] 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 [4] of trading will never go away).
You’ve always been able to buy income investment trusts [5] 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 the trading strategy? [10] (Don’t get your hopes up…)
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 [13].
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 [14].
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 [15], 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 [9].
Benchmark One: The iShares FTSE 100 Tracker
The ETF benchmark is a hypothetical £5,000 that was invested into 836 shares4 [16] 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 [5] 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 [17] | 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.
- 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. [↩ [22]]
- That is, capital and income. [↩ [23]]
- Gains of 100%, 200%, 300% and so on. [↩ [24]]
- Actually 835.87 shares to be precise. [↩ [25]]
- I’ve rounded these here for clarity, but have used the exact price in my spreadsheet. [↩ [26]]