HYP Fallacy

[moorfield]

Moderator Message:
Moved from here because that board is a place for discussing practical matters involved in running an HYP (see that board's rules). C.f an atheist entering a church, and arguing that the congregation's practices are fallacious. Not polite. - Chris

It's a fallacy I think to believe that its possible to build a 15 share HYP consisting entirely of high yield holdings with an increasing dividend at any one time. Covid pandemic aside, I'm not sure that that has ever been done, or at best is a rare occurence.

The fortunes of various companies ebb and flow, as we all know. I thought I had teed up my point about overall portfolio income/yield well enough for someone to grasp that, GSKs history aside (and moaning about), what matters ultimately is a high and rising overall portfolio income. Perhaps not well enough.

Don't forget this is a place to discuss the practicalities of setting up and operating income-portfolios - it literally says that on the board's description!

[tjh290633]

It's a fallacy I think to believe that its possible to build a 15 share HYP consisting entirely of high yield holdings with an increasing dividend at any one time. Covid pandemic aside, I'm not sure that that has ever been done, or at best is a rare occurence.

The fortunes of various companies ebb and flow, as we all know. I thought I had teed up my point about overall portfolio income/yield well enough for someone to grasp that, GSKs history aside (and moaning about), what matters ultimately is a high and rising overall portfolio income. Perhaps not well enough.

Don't forget this is a place to discuss the practicalities of setting up and operating income-portfolios - it literally says that on the board's description!

Isn't that what PYAD did with HYP1 in 2001?

With the 2008 hiatus and upsets caused by COVID and the war in Ukraine, one can be justified in modifying the 5 years of increasing dividends to 5 years of at least maintaining dividends. So many companies felt it prudent to keep their payments steady at a time of uncertainty, that it would seem wrong to punish them.

Nevertheless I suspect that the original criteria could be met with a little effort. We have the anomaly of AZN, where the dividend has been held steady for several years, but the share price has raced ahead. I'm not in a position to do the exercise at the moment, and it is possible that, at a particular time, 15 eligible shares cannot be found. You have made that claim. Perhaps you should confirm it by doing the research.

TJH

[Mike4]

Proving a negative is always a tall order though. I mean, proving that apocryphal bowl of petunias in space doesn't exist is pretty difficult and no-one has ever done it.

OTOH proving it does exist (if you know it does) would be quite easy by posting say, a photo of it...

[Bubblesofearth]

It's a fallacy I think to believe that its possible to build a 15 share HYP consisting entirely of high yield holdings with an increasing dividend at any one time.

Please define;

1. High yield. Greater than FTSE100? FTSE All Share? Other?

2. Increasing dividend. Past increases, if so for how long? Something else?

3. Which index these HY shares must be taken from.

Without definition of terms it's not possible to say whether or not it's possible. It may be you are assuming definitions from other posts/boards but that still needs clarification.

BoE

[Arborbridge]

....at any one time?

As Terry said, HYP1 did that, but at any one time cannot easily be tested.

However, it is my belief that at most times it is possible to construction a 15 share HYP according to PYAD's original instructions (yield greater than FTSE, five years of rising dividends etc etc) and that we would have multiple universes of HYPs rippling forward. Some will fair better than others.
A do not find and fallacy here.

Arb.

[1nvest]

Fundamentally HYP is a tilt towards SCV (small cap value), initial equal weightings. Equal weighting in itself is a tilt towards smaller; Above average yield is a form of 'value'. A stable/rising dividend history, low/no debt etc. is a potential indicator or being more likely for the value to be outed by a recovery rather than failure/continued decline. The benchmark for fitting for that measure is the FTSE250 index, and historically the two have generally/broadly aligned. But where its more aligned with a tweaked HYP, similar to TJH HYP. Rebalanced and non-rebalanced broadly tend to yield similar overall total returns, but where rebalanced has the lower risk/volatility. Non rebalanced can/does become relatively highly exposed to single stocks/sectors that have a greater impact if/when they falter.

Above average yield - associated with additional filters that will typically reject the highest yield.
Above average stability/progression of dividends
Importantly is adequate diversity across stocks (and sectors)
Equal initial weightings
HYP also preferred to select from more Blue Chip (FTSE100) stocks, big household name firms that are more inclined to sustain/persist.
15 stocks, 16.6% risk per stock, is reasonable enough risk dilution.

With such revised measures you might form a HYP style portfolio at any time. Better however is if you use a start date following a down-year as did HYP1.

[Wuffle]

HYP was an annuity substitute. Every other detail is second order. Do you get an income without laying out all the money?

W.

[88V8]

It's a fallacy I think to believe that its possible to build a 15 share HYP consisting entirely of high yield holdings with an increasing dividend at any one time. Covid pandemic aside, I'm not sure that that has ever been done, or at best is a rare occurrence....

For sure it was easier a few years ago.
Luni did it multiple times, so many times that TMFers had potential HYPs up the wazzoo.

Yield exceeding the FTSE100.... and a five year record of increases, for which we now have to forgive the covid blips.

What was never easy was the fire & forget aspect. To my mind, a degree of tinkering was always going to be necessary to weed out duffers, and minimise imbalance if wished.

I dare say it could be done now.

Let it not be forgotten though, that in the glory days of HYP, there was no tax on dividends. We never had it so good.

V8

[IanTHughes]

It's a fallacy I think to believe that its possible to build a 15 share HYP consisting entirely of high yield holdings with an increasing dividend at any one time. Covid pandemic aside, I'm not sure that that has ever been done, or at best is a rare occurence.

First of all you have to clarify what you mean by ”high yield” and ”increasing dividend”.

Once that has been done, surely your premiss would depend on the other criteria that may be taken into account during the selection process. Before making an assertion of fallacy, one should first be made aware that selection for a High Yield Portfolio (HYP) is not solely dependant on being ”High Yield” or ”Increasing Dividend”, however one ends up defining either term.

For example, if the only other requirement was that Market Capitalisation must simply put the selection within the FTSE350, I suspect finding 15 ”High Yield” holdings, with ”Increasing Dividend” might even be fairly straightforward.

For HYP selection, there are various criteria used which might include:

Market Capitalisation – minimum allowed.
Debt Level (or Interest Paid) – maximum allowed.

and others

And of course one must not forget “Diversification”.

For each criteria, there will be some sort of limit, maybe even a red-line “must not cross” limit. With more investing experience one will find that such limits must be set at levels that are testable. A limit that is never reached is hardly a limit, and not of much use

It therefore follows that many One-Shot, 15 Holding HYP portfolios being set up at any one time may well require compromising one or more of those criteria limits, including ”High Yield” and/or ”Increasing Dividend”.

As an experienced investor, I see no surprise there at all.

The fortunes of various companies ebb and flow, as we all know. I thought I had teed up my point about overall portfolio income/yield well enough for someone to grasp that, GSKs history aside (and moaning about), what matters ultimately is a high and rising overall portfolio income. Perhaps not well enough.

What you suggested was:

If you subscribe to the idea that a share held today is the same as a share bought today (or put differently what GSK has paid in the past has been spent, it's what it pays next year that matters) - then it is seemingly absurd that TJH both holds GSK and agrees that it wouldn't "cut it" in a new portfolio. That problem resolves itself easily by considering overall yield.

What you appear to be suggesting is that any yield is acceptable, just as long as it was at some time in the past, high yield! Rather absurd in my view. HYP is for “High Yield” now, not once upon a time.

You also appear to have ignored, or maybe not noticed, that selecting lower yields than might otherwise be available, will adversely affect the overall “Portfolio” yield. This is of course why, for HYP purposes, and right now, GlaxoSmithkline (GSK) should not be selected, if there are higher yields available and thought achievable. After all, it is a high overall Portfolio Yield that is the primary aim of an HYP.

Enjoy!


Ian

[kempiejon]

HYP was an annuity substitute. Every other detail is second order. Do you get an income without laying out all the money?

W.

If I recall correctly - and I might not - it wasn't offered as a substitute but an alternative, subtle but the ideas are not interchangeable. With pensions freedoms it became possible to take the accumulated capital and not be obliged to buy an annuity. Of course the HYP does not guarantee an income like an annuity does. It does keep access to the the capital so allows the owner to change their mind and the HYP doesn't die with the owner.

[IanTHughes]

HYP was an annuity substitute. Every other detail is second order. Do you get an income without laying out all the money?

If I recall correctly - and I might not - it wasn't offered as a substitute but an alternative, subtle but the ideas are not interchangeable. With pensions freedoms it became possible to take the accumulated capital and not be obliged to buy an annuity. Of course the HYP does not guarantee an income like an annuity does. It does keep access to the the capital so allows the owner to change their mind and the HYP doesn't die with the owner.

I believe that, at the time of the first article, for a pension being put into drawdown, 25% of the value was allowed to be taken as cash.

As I remember it, it was this 25% cash amount that, assuming it was not taken for other reasons, could be invested. The idea was not to leave it with the 75% which one was obliged to turn into an annuity, but rather invest it oneself in a separate retirement pot, which it was mooted could be a High Yield Portfolio (HYP).

Of course I may have mis-remembered.

Enjoy!


Ian

[kempiejon]

I believe that, at the time of the first article, for a pension being put into drawdown, 25% of the value was allowed to be taken as cash.

praps so.
https://web.archive.org/web/20140219210 ... 01106c.htm

Let's say you have retired with a lump sum available from your pension plan, or maybe have been made redundant with a payoff. Alternatively ,perhaps you have been saving hard for a long time and have created a fund to invest for income. What should you do? What options are open to you as an income seeker? There are a very large number.

[Arborbridge]

Fundamentally HYP is a tilt towards SCV (small cap value), initial equal weightings.

I'm not clear why you think it's a tilt towards SCV - indeed, I'd say this is quite erroneous.
The original HYP idea was always to take the largest companies possible as this factor was one of the safety factors of the system. The FTSE was the hunting ground, with later an occasional dip just below.

Small cap never came into it - they were avoided. I've tried to understand what other interpretation there is to your remark about "small cap value" but cannot.


Arb.

[1nvest]

Fundamentally HYP is a tilt towards SCV (small cap value), initial equal weightings.

I'm not clear why you think it's a tilt towards SCV - indeed, I'd say this is quite erroneous.
The original HYP idea was always to take the largest companies possible as this factor was one of the safety factors of the system. The FTSE was the hunting ground, with later an occasional dip just below.

Small cap never came into it - they were avoided. I've tried to understand what other interpretation there is to your remark about "small cap value" but cannot.


Arb.

Smaller cap. In the main/large cap the biggest might be weighted 10%, simply by diluting that down such as via equal weighting is a smaller cap tilt.

[Arborbridge]

I'm not clear why you think it's a tilt towards SCV - indeed, I'd say this is quite erroneous.
The original HYP idea was always to take the largest companies possible as this factor was one of the safety factors of the system. The FTSE was the hunting ground, with later an occasional dip just below.

Small cap never came into it - they were avoided. I've tried to understand what other interpretation there is to your remark about "small cap value" but cannot.


Arb.

Smaller cap. In the main/large cap the biggest might be weighted 10%, simply by diluting that down such as via equal weighting is a smaller cap tilt.

Well, that's a strange use of language! HYP is about taking the biggest and best in class, so to speak, and your phraseology could give people not in the know that it was about picking small cap shares. Shame about you typo, small cap, for smaller cap, which made the meaning more obscure, but it would still have been misleading, I think.

[vand]

I'm sure that if you filter FTSE 350 on:

6%+ forward dividend yield
5yrs+ rising dividend payouts

you will get a lot of companies that meet that criteria.

Whether or not any randomnly selected 15 of those will continue to grow their dividend payout or - most importantly - delivery a reasonable total return - over the next 5-10 years and beyond, of course no one can be sure, but there are no guarantees when it comes to the markets for a HYP or any other strategy, so if you are going to be a stock picker then pick your poison and take your chances!

[Charlottesquare]

I'm sure that if you filter FTSE 350 on:

6%+ forward dividend yield
5yrs+ rising dividend payouts

you will get a lot of companies that meet that criteria.

Whether or not any randomnly selected 15 of those will continue to grow their dividend payout or - most importantly - delivery a reasonable total return - over the next 5-10 years and beyond, of course no one can be sure, but there are no guarantees when it comes to the markets for a HYP or any other strategy, so if you are going to be a stock picker then pick your poison and take your chances!

Not sure that with target 6% or higher initial yield I would be that comfortable that dividends would continue to rise, for one thing markets are certainly likely not predicting same given initial yield is already at 6% or higher.

No proof re this no back testing, but my gut experience is there is a greater chance of earnings growth, and therefore dividend growth with sustained dividend cover, coming from slightly lower starting yields. (money not distributed hopefully helps fund the growth)

Of course no surefire winners here, some companies have limited space for reinvestment or their ROCEs are weak and therefore they ought to spray out their surplus cash, but if increasing dividends was my primary concern I might start nearer the 3-4% div yield level (and of course if I can live with lower initial div yield perhaps I should look at more markets outwith the UK like the USA-which I do via ITs)

[Alaric]

Not sure that with target 6% or higher initial yield I would be that comfortable that dividends would continue to rise, for one thing markets are certainly likely not predicting same given initial yield is already at 6% or higher.

No proof re this no back testing, but my gut experience is there is a greater chance of earnings growth, and therefore dividend growth with sustained dividend cover, coming from slightly lower starting yields. (money not distributed hopefully helps fund the growth)

An approximate proxy for total return is the sum of dividend return and dividend growth. Dividend return can be stable but dividend growth can be all over the place. Sorting by dividend yield will also identify Companies with declining share prices. In other words the market collectively thinks there's something dubious about the Company, but the Directors have yet to reflect this in a dividend cut.

Another point is that income seeking investors, the professional ones at least, seem to value dividend increases. This is likely to bid up the prices of Companies expected to provide these which has the effect of lowering the running dividend yield.

[88V8]

I'm sure that if you filter FTSE 350 on:
6%+ forward dividend yield
5yrs+ rising dividend payouts
you will get a lot of companies that meet that criteria.

Not sure that with target 6% or higher initial yield I would be that comfortable that dividends would continue to rise, for one thing markets are certainly likely not predicting same given initial yield is already at 6% or higher.

No proof re this no back testing, but my gut experience is there is a greater chance of earnings growth, and therefore dividend growth with sustained dividend cover, coming from slightly lower starting yields.

One's tolerance of higher yields also depends on one's age.
It takes a long time for a rising divi with a 4% start to cumulatively overtake a 6% static.

V8

[Lootman]

One's tolerance of higher yields also depends on one's age. It takes a long time for a rising divi with a 4% start to cumulatively overtake a 6% static.

V8

If you need the income then that makes sense. However many older folks may have too much money (insofar as that is possible). In which case their primary concern may be the minimisation of taxation.

A high level of income is taxed, but a high level of growth is not, at least not until sold and then not at all via CGT if you pop your clogs before then.

As it happens I was looking yesterday at my holding of every HYPer's favourite non-yielding share: Berkshire Hathaway. I bought 100 shares some 15-20 years ago for about $10,000 (which was say £6,000 at the time). It has quadrupled since then with a current value of about $40,000 (£32,000 at current FX).

So I have gone from 6K to 32K with not a penny of tax. And ironically much of that is due to BRK collecting dividends but not paying them out.

Of course IHT could take 40% of it in the end, but at least for now this old codger runs a LYP.