HYP1 is 23

[pyad]

Income gutted

Here is the data for the year ended 12 November 2023, the twenty third year of this non-tinker portfolio. Apologies for the poor formatting.

..........................................Income......................Value

Anglo American.........................493.53.....................9,621
BA Tobacco............................1,964.27....................21,407
BT Group ................................437.51.....................6,903
Currys......................................12.41.......................583
GSK.......................................155.96.....................3,933
Haleon.......................................14.78...................1,143
InterCon Hotels..........................471.75...................24,093
Land Sex..................................263.25.....................4,039
Lloyds.....................................193.89.....................3,211
Mitch & But.................................0.00.....................1,545
M&G.......................................258.90.....................2,640
Persimmon...............................845.60....................12,092
Pearson...................................195.13.....................8,639
Shell......................................390.00....................10,310
Rio Tinto...............................1,670.01....................27,153
United Utilities.........................362.26......................8,517

Total £.................................7,729.25...................145,829



Cost 75,000

Gain 70,829
...........................................+94.4%


FTSE100 at start 6,274.8

Now 7,360.6

Gain 1,085.8
...........................................+17.3%

HYP1 capital outperformance.......+65.7%





Income History

2001 3,451
2002 3,474
2003 3,197
2004 3,205
2005 3,546
2006 4,131
2007 4,452
2008 5,040
2009 3,187
2010 3,297
2011 3,843
2012 4,289
2013 5,828
2014 5,601
2015 6,093
2016 6,124
2017 7,327
2018 8,882
2019 10,557
2020 5,533
2021 11,338
2022 11,123
2023 7,729

Total to date £ 131,247


Corporate events in year
None


Income
This is the purpose of HYPs and the £7,729 for 2023 was down a very unwelcome 30.5% on last year's figure. Interestingly, despite the dividend carnage this year, it is still the fifth highest return out of the twenty three record of HYP1

Total income to date is £131,247, averaging £5,706 per year which is 7.6% pa on the £75,000 cost.

BA Tobacco became the single largest income contributor with 25.4% of total income and second was Rio Tinto on 21.6%. Persimmon was third at 10.9% and all others were well below these three. At the other end there was one zero, the long dividendless Mitchells & Butlers.

As I predicted last year, the primary culprits behind the big fall were the slashed payouts from the miners and housebuilder Persimmon. Mining shares do not pay progressively increasing dividends but base them on a percentage of profits. As profits can vary widely year on year due to fluctuating commodity prices, so do the dividends. Housebuilding is also cyclical. Despite their substantial income volatility I think big miners have a place in an income portfolio because the long term returns are excellent, but it requires having to live with the fluctations.

Against the cutters, good rises were paid by Lloyds and Shell and a few others but nowhere near enough to make much of a dent in the total portfolio fall.


Capital
This is irrelevant or very much secondary depending on your viewpoint.

The value of £145,829 is up 94.4% since the outset and continues to dwarf the market with the FTSE100 over the 23 years up only 17.3%. Thus HYP1 is outperforming it by 65.7%. These results do not include any reinvested dividends.

In the last twelve months the FTSE100 has risen 0.6% whilst HYP1 is down 5.8%, underperforming the index again this year.

Rio Tinto remains the largest holding at 18.6% of portfolio value with InterCon Hotels at 16.5% and BA Tobacco at 14.7%. The smallest holdings are Currys at 0.4%, Haleon 0.8% and Mitchells & Butlers at 1.1%.


Conclusions
A lousy year then for the all-important income and little excitement from the capital either. It happens, but one poor dividend year does not negate the underlying principle of HYP investing any more than the outstanding years do. This is a long term approach and it is bound to have a certain amount of income volatility. And as I mention above, despite the large dividend cuts by miners and housbuilders, the income is not that bad in the portfolio's historical context. It's just that it was a bit spoiled by outstanding previous years from these shares.

As I've noted before, the largest holdings move around over the years which to some extent counters the often repeated criticism of a no-tinker portfolio that it ends up concentrating income and capital in a very few shares. It does, but over time not always in the same shares. Plus there is always market trading which alters the portfolio gradually as illustrated by the fact that at least half the shares in my original HYP1have disappeared due to bids and reorganisations etc. Overwhelmingly, corporate action like this benefits the portfolio.

[Lootman]

one poor dividend year does not negate the underlying principle of HYP investing any more than the outstanding years do. This is a long term approach and it is bound to have a certain amount of income volatility.

Looking through the income figures I see there are no less than 10 years when the income amount was below that of a previous year.

So whilst "one poor dividend year does not negate the underlying principle of HYP investing", isn't 10 poor years out of 22 an indication that the cashflows are too volatile for someone to rely 100% upon such a strategy?

And if so then what should an individual also invest in to provide an income that is more stable and more capable of growing in a steady and sustainable way?

[idpickering]

And if so then what should an individual also invest in to provide an income that is more stable and more capable of growing in a steady and sustainable way?

With respect, such thoughts/comments are not for discussion here surely?

Ian.

[MDW1954]

one poor dividend year does not negate the underlying principle of HYP investing any more than the outstanding years do. This is a long term approach and it is bound to have a certain amount of income volatility.

Looking through the income figures I see there are no less than 10 years when the income amount was below that of a previous year.

So whilst "one poor dividend year does not negate the underlying principle of HYP investing", isn't 10 poor years out of 22 an indication that the cashflows are too volatile for someone to rely 100% upon such a strategy?

And if so then what should an individual also invest in to provide an income that is more stable and more capable of growing in a steady and sustainable way?

Moderator Message:
For the avoidance of doubt, while Lootman may arguably pose these two questions on this board, any answers to them that are posted on this board would clearly be off-topic, as per the board's guidelines. Please direct any such answers to the High Yield Shares and Strategies board. -- MDW1954

[Itsallaguess]

‎
I've started a separate thread below, on the broader High Yield Shares & Strategies board, that continues to look at the underlying income and capital concentration of HYP1 as it develops over the years -

HYP1 is 23 - thread discussing income and capital diversification -

https://www.lemonfool.co.uk/viewtopic.php?f=31&t=41460

Cheers,

Itsallaguess

[moorfield]

one poor dividend year does not negate the underlying principle of HYP investing any more than the outstanding years do. This is a long term approach and it is bound to have a certain amount of income volatility.

Looking through the income figures I see there are no less than 10 years when the income amount was below that of a previous year.

So whilst "one poor dividend year does not negate the underlying principle of HYP investing", isn't 10 poor years out of 22 an indication that the cashflows are too volatile for someone to rely 100% upon such a strategy?

And if so then what should an individual also invest in to provide an income that is more stable and more capable of growing in a steady and sustainable way?

Iirc, £3451 was initially "enough" for a retiring Doris in 2000, and anything more was "icing" on the cake. If that was enough then, then it is still enough now, cost of living since factored in.

That said, you are quite right re income volatility. I am a big fan of high pyadic principles (buy high yield, hold, do nothing), it's just the implementation of I have come to disagree with. The other place is the right place to continue that discussion of course.

[Arborbridge]

The income has slightly more than kept up with RPI - a result that may surprise one or two. If you take the excess years into reserve (which most sensible people might have done), HYP1 has done rather well on the income side.

I don't believe it was ever claimed the income would steadily increase - indeed, I remember warnings of the opposite. The real worry must be what will happen now we have a period of high inflation, and I expect companies to be slow to build up from here on: there will alwys be some sort of lag, if only due to caution.

Arb.

[Itsallaguess]

The real worry must be what will happen now we have a period of high inflation, and I expect companies to be slow to build up from here on: there will always be some sort of lag, if only due to caution.

HYP1 certainly showed it's resilience following the sharp COVID-related drop in income between 2019 and 2021 -

Year   Income
2019   £10,557
2020   £5,533
2021   £11,338

With this more recent 30.5% drop in 2023 income of £7,729, compared to the £11,123 delivered last year, it will be interesting to see how any potential recovery looks from this stage, with the caveat of course that the 30.5% drop in HYP1 dividends seen this year will need a recovery of nearly 44% next year just to get back to the level of income seen in 2022 -

Year   Income
2022   £11,123
2023   £7,729

£7,729 x 1.439125 = £11,123

Cheers,

Itsallaguess

[Arborbridge]

The real worry must be what will happen now we have a period of high inflation, and I expect companies to be slow to build up from here on: there will always be some sort of lag, if only due to caution.

HYP1 certainly showed it's resilience following the sharp COVID-related drop in income between 2019 and 2021 -

Year   Income
2019   £10,557
2020   £5,533
2021   £11,338

With this more recent 30.5% drop in 2023 income of £7,729, compared to the £11,123 delivered last year, it will be interesting to see how any potential recovery looks from this stage, with the caveat of course that the 30.5% drop in dividends seen this year will need a recovery of nearly 44% next year just to get back to the level of income seen in 2022 -

Year   Income
2022   £11,123
2023   £7,729

£7,729 x 1.439125 = £11,123

Cheers,

Itsallaguess

Well, not impossible - there was a doubling between 2020 and 2021.

[DrFfybes]

Very interesting, and I am glad this has been followed through.

One thing I take issue with slightly is the choice of comparator index...

Capital
This is irrelevant or very much secondary depending on your viewpoint.

The value of £145,829 is up 94.4% since the outset and continues to dwarf the market with the FTSE100 over the 23 years up only 17.3%. Thus HYP1 is outperforming it by 65.7%. These results do not include any reinvested dividends.

Whilst the components are UK listed, a quick eyeball suggests the majority of the components by value generate a lot, if not most, of their profits overseas. Therefore the capital 'outperformace' is a lottle random.

And capital IS important, as this is a HYP, and the important part is Yield, which should not be independant of value, and this year is still a quite reasonable 5.3%.

Paul

[moorfield]

With this more recent 30.5% drop in 2023 income of £7,729, compared to the £11,123 delivered last year, it will be interesting to see how any potential recovery looks from this stage, with the caveat of course that the 30.5% drop in HYP1 dividends seen this year will need a recovery of nearly 44% next year just to get back to the level of income seen in 2022 -

Or even 46.6%, here

[Lootman]

The income has slightly more than kept up with RPI - a result that may surprise one or two. If you take the excess years into reserve (which most sensible people might have done), HYP1 has done rather well on the income side.

I would agree that such one-off "excess" income should be added to cash reserves. That is the prudent thing to do to smooth out all this income volatility.

But then HYP1's capital performance would be significantly lower, no? And with less cash invested, future income would also be negatively impacted. Or at least if you started out with a cash reserve, which would be prudent, then again the capital and income numbers would be lower.

[Bubblesofearth]

I would agree that such one-off "excess" income should be added to cash reserves. That is the prudent thing to do to smooth out all this income volatility.

But then HYP1's capital performance would be significantly lower, no? And with less cash invested, future income would also be negatively impacted. Or at least if you started out with a cash reserve, which would be prudent, then again the capital and income numbers would be lower.

There's no need to sell down the capital. A reserve would have been built up from income that has risen ahead of inflation. This would have been significant.

BoE

[Lootman]

I would agree that such one-off "excess" income should be added to cash reserves. That is the prudent thing to do to smooth out all this income volatility.

But then HYP1's capital performance would be significantly lower, no? And with less cash invested, future income would also be negatively impacted. Or at least if you started out with a cash reserve, which would be prudent, then again the capital and income numbers would be lower.

There's no need to sell down the capital. A reserve would have been built up from income that has risen ahead of inflation. This would have been significant.

That assumes that there is surplus income in the early years.

But what if instead those early years are down years for income? That would be the case for various other starting points.

[daveh]

The income has slightly more than kept up with RPI - a result that may surprise one or two. If you take the excess years into reserve (which most sensible people might have done), HYP1 has done rather well on the income side.

I would agree that such one-off "excess" income should be added to cash reserves. That is the prudent thing to do to smooth out all this income volatility.

But then HYP1's capital performance would be significantly lower, no? And with less cash invested, future income would also be negatively impacted. Or at least if you started out with a cash reserve, which would be prudent, then again the capital and income numbers would be lower.

No HYP1 has not had income reinvested at all so reserving some of the excess income in the good years would not have affected the capital performance.

[kempiejon]

I would agree that such one-off "excess" income should be added to cash reserves. That is the prudent thing to do to smooth out all this income volatility.

But then HYP1's capital performance would be significantly lower, no? And with less cash invested, future income would also be negatively impacted. Or at least if you started out with a cash reserve, which would be prudent, then again the capital and income numbers would be lower.

No HYP1 has not had income reinvested at all so reserving some of the excess income in the good years would not have affected the capital performance.

Although reserving or buffers weren't in my mind when I started a HYP as I built it up over years and years and got nearer the time to draw rather than accumulate I did think about a strategy to maintain my income.
To have
an excess of income, earn more each year than I needed to spend, a living within my means strategy.
a cash buffer so that unequal dividend income could be smoothed into a regular monthly stipend
a contingency fund to get me though inevitable income catastrophes.
So my plan is not investing all my money. For that to tally with HYP1 it would mean either the initial pot was bigger but not all invested or with less starting in each pick. My numbers are about 2 or 3 years of desired income in the cash pot and an income of 110% of my annual spending requirement. When no longer accumulating any bonus years could add to the cash pot or if the pot gets to big directed into more income paying high yield shares. These ideas are not radical but were not a part of HYP1 or other pyad suggestions as I remember which were just about how to build the portfolio of shares not manage your retirement.

[Bubblesofearth]

That assumes that there is surplus income in the early years.

But what if instead those early years are down years for income? That would be the case for various other starting points.

If that happened then you would need to either rely on other sources of income or tighten your belt.

I don't think anyone has ever claimed that HYP, or any share strategy, can provide a guarantee of an income that rises with inflation every year. You can get that from an index linked annuity (although AIUI even these are capped in terms of annual rise) but you will sacrifice your capital. You can maybe increase your chances of an inflation-linked return from share income but will need to start from a significantly lower level of income. There's no free lunch.

I would guess that there is no-one, certainly no-one on these boards, that is so dependent on their HYP income that they would struggle if it didn't keep up with inflation. If there is then they are keeping very quiet about it! The vast majority will have other sources of income, work, pension, benefits or other investments.

The performance of HYP1 needs to be taken in the context of what it is, i.e. an equity income strategy, not some imaginary panacea. Not sure anyone has ever claimed otherwise. IMO as such it's been both informative and very successful, both capital and income-wise.

BoE

[Lootman]

That assumes that there is surplus income in the early years.

But what if instead those early years are down years for income? That would be the case for various other starting points.

If that happened then you would need to either rely on other sources of income or tighten your belt.

I would guess that there is no-one, certainly no-one on these boards, that is so dependent on their HYP income that they would struggle if it didn't keep up with inflation. If there is then they are keeping very quiet about it! The vast majority will have other sources of income, work, pension, benefits or other investments.

That all sounds reasonable. But if it is the case that HYP is not sufficient for retirement income, for the reasons identified, then it raises the question of what percentage allocation should be devoted to it, if not the 100% that HYP1 assumed? And that is not a topic I have seen advocated very much by its proponents.

So yes, sure, if you also have a salary, a pension, an annuity and other investments then you do not have to worry so much that your HYP income just went down by one third in a year. But I do not recall Pyad ever placing much emphasis on the idea that HYP cannot be completely relied upon, and so must be augmented by other income streams. If he cited such caveats and warnings then I must have missed them.

[BullDog]

If that happened then you would need to either rely on other sources of income or tighten your belt.

I would guess that there is no-one, certainly no-one on these boards, that is so dependent on their HYP income that they would struggle if it didn't keep up with inflation. If there is then they are keeping very quiet about it! The vast majority will have other sources of income, work, pension, benefits or other investments.

That all sounds reasonable. But if it is the case that HYP is not sufficient for retirement income, for the reasons identified, then it raises the question of what percentage allocation should be devoted to it, if not the 100% that HYP1 assumed? And that is not a topic I have seen advocated very much by its proponents.

So yes, sure, if you also have a salary, a pension, an annuity and other investments then you do not have to worry so much that your HYP income just went down by one third in a year. But I do not recall Pyad ever placing much emphasis on the idea that HYP cannot be completely relied upon, and so must be augmented by other income streams. If he cited such caveats and warnings then I must have missed them.

Dead simple. For stuff that the tip sheet buyers don't want to hear, either ignore or gloss over them.

[Alaric]

But I do not recall Pyad ever placing much emphasis on the idea that HYP cannot be completely relied upon, and so must be augmented by other income streams. If he cited such caveats and warnings then I must have missed them.

There was a suggestion of sorts that it might be suitable for someone retiring with a defined benefit (DB) or defined contribution (DC) pension scheme where 75% of the value had to be used to purchase an annuity if DC, or was an annuity by definition if DB. This is early 2000s before pension drawdown was mainstream. The idea was a suggestion as what to do with the remaining 25% that was different to taking it as an annuity. Financial advisors at the time might advise an insurance bond, so HYP was an alternative. In those circumstances it would never be more than an annuity supplement rather than annuity replacement.

Suggesting its suitablility as a vehicle for acculumating wealth by reinvestimg dividends came a bit later and for someone trying to accumulate wealth it seems odd to advocate ignoring capital values.