New Years Resolution - Starting my HYP

[the0ni0nking]

Hi everyone,

I trundled across from TMF but haven't posted here as yet as far as I can recall although if I have it'll likely have been on the sport board or a.n.other non-financial board!

I've read plenty of the posts both here and now in the archive of the HYP boards on TMF and have been directly invested in the stock market on and off since the late 90s although currently I'm totally out of the market (with the exception of things like my work pension and share options/save scheme where I currently work).

My resolution for the New Year is to start building up a HYP. I could provide a bit of background etc but appreciate that for the purists that is probably all noise around the "buy and watch" principle of the pure HYP but from a tax perspective I'm a higher rate tax payer.

For various reasons, I've never had a stocks and shares ISA so could potentially subscribe now for the full amount and then again in April to get up to c£30k of cash. Overall, the total capital available for me to invest is c£50k with additional subscriptions of c£5k/quarter.

My plan would be to invest in 10 shares across differing sectors to account for the £50k and then add a further sector on each subsequent subscription until I would deem all are covered before then either adding to an existing holding or adding a further stock in a similar sector.

Reading the HYP summaries has been useful and I do like playing around with spreadsheets too so those conversations have been fun too!

In reality, this is more of a collection of my musing to try and keep me focused - although I am interested on any thoughts on initial shares but also as to whether people would stagger purchases such that the £50k is invested over a longer timescale (10 purchases now or 1 purchase a month for 10 months).

Fingers crossed, I should have no need to touch any of either the capital or the dividend stream for at least 15 years so if I stick to the continual investments over that timeframe I should build up a meaningful portfolio.

Happy to hear any thoughts or any other musings.

Regards,
0inK

[idpickering]

Welcome aboard the0i0nking,

You seem to have a well thought out plan there so I wish you well with it. It'd be handy if you put your prospective purchases on the board for all to see and offer their thoughts/views.

Regards,

Ian.

[Raptor]

In my own case, I would buy all in one go, as to whether I would buy 10 or any number does depend on the "shares" that pass muster at the time.Sector diversification sounds great but do not get hung up on that as we all know that "sometimes" it is hard to find a share that meets all our criteria in every sector. Also keep an eye on sector classification as there are a few companies out there that do not seem to fit the ICM sector they are placed in.

Also Tesco and M&S both. probably, sell the same "stuff" but in different proportions. Different sectors though.

To expand on buying all in one go, with the current rates available on savings I would rather have the opportunity of getting, say, 4% than 0.5%. Mind you if you want to buy a S&S ISA, then you will have to be patient with your buying.

Anyway, good luck and keep us informed..........

Raptor.

[the0ni0nking]

My initial screening through up the following - I have not undertaken any further research on any of these and the dividend data came from an external website without validation so I need to verify it but unsurprisingly it throws up a fair few of the usual suspects.

The screen is simply on divi yield - it has not taken account any requirement of growth/no cuts in divi and nor has it looked at any other valuation metrics such as P/E, PEG etc.

From a FTSE100 perspective:



From a FTSE250 perspective:



Some points to bear in mind on the above filters

(i) I've simply taken the company in position 1 in each of the sectors outlined. So for example, in FTSE100 consumer services the top 3 are Pearson, Easyjet and M&S. Given the differing nature of those 3 businesses, it suggests it would be possible to subdivide sectors further at some point in the future as further capital were introduced.

(ii) If a share is in the FTSE100 and isn't number 1, it does not roll down into the FTSE250 - by way of example, GSK has a higher yield than DPH but GSK is only included in the FTSE100 filters; it can't appear in the 2nd list as it's not a FTSE250 constituent even if it has a higher yield than the FTSE250 stock shown.

(iii) this has all been done through a stock screener and I've not had time to do further analysis and validate the yields. Subject to that further validation (and whether there is any other reason that comes to light so as to rule stocks out such as know divi cuts/incorrect data used above or any other legitimate reason) then the FTSE100 list would capture 10 shares to cover the initial £50k investment.

<Raptor - I read you post just after posting and hopefully my M&S/Easyjet point above is indicative of that point you raise>

Cheers,
0inK

[Dod1010]

An obvious omission are the tobaccos. If you have no moral aversion to them at least one of them should be there even if the yield is not as high as some you have thrown up. Do not chase yield.

From your FTSE 100 list I would include HSBC, AstraZeneca, Vodafone, Shell, SSE and possibly Rio Tinto, but I would need to think bout the latter. I would also include Legal & General and/or Chesnara. So that would be 8/9 without going to the FTSE250, and I could easily find a 10th with say National Grid.

The market is high(ish) at the moment but you cannot time it. I would be inclined to put all your available funds in now as you are looking at a long(ish) period for investing. Then fasten your seatbelt (like the rest of us) because I suspect that there may be some turbulence with the Brexit negotiations.

Dod

[idpickering]

Do not chase yield.

From your FTSE 100 list I would include HSBC, AstraZeneca, Vodafone, Shell, SSE and possibly Rio Tinto, but I would need to think bout the latter. I would also include Legal & General and/or Chesnara. So that would be 8/9 without going to the FTSE250, and I could easily find a 10th with say National Grid.

Dod

I took the liberty of emboldening your point up there about chasing the yield Dod, hope you don't mind. I got that impression too. It's not a matter of just wading into the highest yielders. They may well be high for a more sinister reason than capital performance. Your paragraph above is sound advise indeed.

Regards,

Ian.

[Breelander]

From a FTSE250 perspective...

While I do have some from the 250 in my HYP, mine's a mature HYP with 29 holdings. For a starter HYP I'd look at filtering for market cap and stick to the ftse100. It shouldn't be necessary to look outside the 100 or at least, only at the largest 250 members. There's a useful table of market cap. here: http://www.stockchallenge.co.uk/ftse.php

[Raptor]

The idea of chasing yield in the FTSE100 and FTSE250 made me think. I did a dirty scrape, rising div for 5 years, bigger than £1000M.



Not that I would encourage going for this 10 myself. Have not run that scrape for a long while and it bears no resemblance to the last time I run it. (which I cannot find anywhere). The PE for all look OK but did not dig deeper.

Raptor.

[the0ni0nking]

Absolutely - my post probably came across a bit too frivolous around that approach as opposed to acknowledging the fact that there could be known reasons as to why the yield is high such as profit warning, uncovered etc and I will be looking into them before actually opting for one or the other. The list I have has the top 3 in each but I didn't want to do two sets of tables consisting of 90 rows each!

Going into a bit of the detail, I work for a company that is a competitor to Capita in one of its business areas and the various problems that they are going through from an operational perspective (TfL punitive fines in FY16 for failure to deliver on time and major issues with the CoOp Bank outsourcing contract still ongoing in addition to a host of other challenging headwinds) are well known.

While they've said they'll maintain the divi in FY17 with the intention to grow it in line with earnings subsequently I can't help but feel there are more challenging times ahead for them and the B/S will come under strain, especially if they fail to offload the areas they have announced in their last trading update - the majority of the Capita Asset Services division - alternatively if they fail to achieve the price they expect. Given there are probably only a handful of prospective buyers for them and some are similarly restricted in terms of available cash for acquisitions I think it's a distinct possibility.

Cheers,
0inK

[tjh290633]

0inK, I think your plans are basically correct, using the ISA now and after 5th April for the first two lots. I would buy your selected shares in two goes, one with the current year subscription and the other after 5th April. Which you choose is up to you and will need to be reassessed when you are ready to buy. Use the classic HYP approach, ranking by yield above your minimum market cap, and take the highest from each sector as you work your way down.

I would be a bit uneasy about Talk-Talk, and take a careful look at the projected yields, going to the source data before you decide. I prefer to work on historic yield, but even that can have pitfalls. Best to look through the latest RNS postings of results and trading updates to see if there have been anything in the appropriate woodpile.

Good luck with your project.

TJH

[Gengulphus]

An obvious omission are the tobaccos. If you have no moral aversion to them at least one of them should be there even if the yield is not as high as some you have thrown up. Do not chase yield.

It's worth noting the reason why the tobaccos are omitted is not so much yield-chasing, as that the "sector" classification used in the portfolio construction is the 10 "industries" of the ICB classification (see https://en.wikipedia.org/wiki/Industry_Classification_Benchmark). This is its coarsest-grained classification, and the Consumer Good 'industry' that includes Tobacco companies also includes Automobiles & Parts, Beverages, Food Producers, Household Goods & Home Construction, Leisure Goods and Personal Goods companies at the classification's "sectors" level. As a result, the tobaccos are being forced to compete for a "slot" in the resulting HYP against a pretty wide variety of different types of company, for IMHO no good diversification reason. E.g. a HYP that contains BATS, Tate & Lyle, Greene King, Persimmon and 11 other shares seems fine from the diversification point of view to me, despite being over 25% from the Consumer Goods 'industry'.

I think most HYPers would base their diversification either on the ICB classification's 41 'sectors' or on a modification of it with a similar number of sectors, and I think that a tobacco would get in with ease on a similar exercise done at ICB 'sector' level.

I should add that 41 is the number of ICB 'sectors' that exist at all - few if any would expect to fill them all, and indeed many would regard an attempt to fill them all as 'philately'. Most HYPers would probably be satisfied to have a well-scattered 1/3rd-to-2/3rds of them, and the similar exercise done at ICB 'sector' level would almost certainly end up leaving quite a few of them unfilled because of the absence of an even remotely plausible candidate. Basically, the point of my comment about a tobacco getting in with ease is that I don't think there would be any question of leaving the Tobacco slot unfilled!

And incidentally, don't expect HYPers even to know for certain exactly how many sectors exist at all in their sector classification! For example, I basically use a modified ICB 'sector'-level classification - mostly following ICB but making some changes where it doesn't make sense to me. I only think out such changes 'on demand' though, i.e. when I actually encounter a situation in practice where the ICB sectors don't make sense to me. There are ICB sectors that I've never yet had to consider a candidate from, and so haven't yet considered whether I'm going to change them - so while I'm fairly certain that I use about 40 sectors, I can't give an exact count!

The other thing to say is that while "do not chase yield" is reasonable advice, it does depend on a proper understanding of the difference between going for high yield and 'chasing' it. Going for high yield is not an essential part of an investment strategy, but it is one of a HYP strategy - simply because an investment strategy doesn't merit being called a HYP strategy if it doesn't go for high yield. The added ingredient that makes something 'chasing' high yield rather than just going for it is taking on unduly high risk in trying to get high yield. But that depends on a crucial judgement call, namely about what makes a risk unduly high...

As a result, I personally don't find "do not chase yield" particularly useful advice - I would personally prefer "think through the risks to the dividend".

Gengulphus

[Dod1010]

Gen

I agree with most of your comments. My advice re yield is I guess shorthand for 'do not simply go for the highest yielders'. As I have just posted to Spiderbill, anything over say 6% needs to be looked at very carefully. Buying 6% plus yielders blindly is what I would call chasing yield. I think they all need to be looked at very carefully. For instance, Shell and HSBC look reasonably OK but Carillion and many of the others?

Dod

[TUK020]

I would reinforce TJH's comments about using your ISA and timing accordingly, so that you don't wind up incurring additional trading costs to shelter stuff later. Getting your whole HYP sheltered in one spot also makes life easier in terms of being able to reinvest income in the right place.

This year's allowance is £15k, and next April I think it goes up to £20k.
This gives you 35k, would would be an excellent start to a 10 share portfolio, or you go spread this amount across 15 shares without getting dealing costs to be too high a percentage.
Subsequent additional investment you could then add in 2019 and focus on where to top up.

[the0ni0nking]

Thanks - the increase to £20k had slipped my mind so that was a helpful reminder.

I think I will set-up the HYP partly within the ISA shelter (£15k already transferred in this month) with a further £20k to go in in April and a remaining £15k outside of the wrapper.

This gets me to the overall £50k position and if need be I can "bed and ISA" those positions outside of the wrapper as part of the 2018 allowance which may or may not need topping up depending on the performance of those shares outside the wrapper.

Now time to run the filters, dissect and identify the proposed 10 shares.

I'm happy with 10 shares @ £5k each rather than bringing in additional diversification. Over time I can further diversify as capital will be added to the HYP on an ongoing basis either in the ISA or outside.

Cheers,
0inK