Re: too high?
Posted: June 30th, 2022, 9:51 am
The level of Yield of a given share is NOT A MEASURE OF RISK. Rather it is A MEASURE OF REWARD being offered for taking that risk.
Like many of us I presume, I add to my HYP on a regular basis. What this means is, each time I add funds to my HYP I determine, subject to restrictions I may impose in order to maintain diversification or avoid over concentration, the highest yield available, where I consider the dividend to be sustainable.
Let us assume that such an investor imposes a limit on the yield at which they will buy, however such a limit is calculated.
In Month One the Yield Limit is calculated as 8.00%. The share with the highest yield available, where the dividend is considered sustainable, is 7.50%. The purchase is made. In Month Two the Yield Limit is reduced to 7.80% and the same share offers the highest yield available, where the dividend is considered sustainable. But the yield is now 8.20%. This breaches the Yield Limit, so the purchase is not made. In Month Three the Yield Limit is back up to 8.00% and the same share once again offers the highest yield available, where the dividend is considered sustainable. Now, the yield is 7.90%. The purchase is made.
In summary, when looking at the reward being offered each time:
The reward being offered is rejected when it is at the highest level, even though the underlying risk of a dividend cut is exactly the same as when the reward being offered is at a lower level and accepted! This makes no sense to me at all, especially if the investor is claiming to be an HYPer, i.e. looking for income.
A share which was acceptable at a Reward of X%, is surely even more acceptable when that Reward is greater than X%!
Each to their own of course!
Ian
Like many of us I presume, I add to my HYP on a regular basis. What this means is, each time I add funds to my HYP I determine, subject to restrictions I may impose in order to maintain diversification or avoid over concentration, the highest yield available, where I consider the dividend to be sustainable.
Let us assume that such an investor imposes a limit on the yield at which they will buy, however such a limit is calculated.
In Month One the Yield Limit is calculated as 8.00%. The share with the highest yield available, where the dividend is considered sustainable, is 7.50%. The purchase is made. In Month Two the Yield Limit is reduced to 7.80% and the same share offers the highest yield available, where the dividend is considered sustainable. But the yield is now 8.20%. This breaches the Yield Limit, so the purchase is not made. In Month Three the Yield Limit is back up to 8.00% and the same share once again offers the highest yield available, where the dividend is considered sustainable. Now, the yield is 7.90%. The purchase is made.
In summary, when looking at the reward being offered each time:
Time | Reward | Decision
Month One | 7.50% | Accept
Month Two | 8.20% | Reject
Month Three | 7.90% | Accept
The reward being offered is rejected when it is at the highest level, even though the underlying risk of a dividend cut is exactly the same as when the reward being offered is at a lower level and accepted! This makes no sense to me at all, especially if the investor is claiming to be an HYPer, i.e. looking for income.
A share which was acceptable at a Reward of X%, is surely even more acceptable when that Reward is greater than X%!
Each to their own of course!
Ian