Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Varieties of HYP

General discussions about equity high-yield income strategies
Hornblower
Lemon Pip
Posts: 84
Joined: May 17th, 2022, 6:10 pm
Has thanked: 57 times
Been thanked: 27 times

Varieties of HYP

#502755

Postby Hornblower » May 25th, 2022, 2:08 pm

One of the 'problems' that inevitably comes up with any portfolio that's held for a length of time is, it tends to become unbalanced. Some stocks rise, some fall, dividends get cut & so on.

One of the original issues with the PYAD HYPs was that after a few years they became reliant on a few dividend giants that supplied the bulk of divi returns in those portfolios. One obvious solution to this is an ever-rebalancing portfolio that uses the divis from the giants to purchase other high-yielding stocks that add diversification. Perhaps this approach already has a name & even a board of it's own?

Note, I'm not talking about buying more stock of the existing members of a HYP that have decreased in price/divi payout, I think that this would likely result in underperforming a passive HYP.

Obviously this works best with a HYP that's still under construction.

Thoughts? Experiences?

Arborbridge
The full Lemon
Posts: 10367
Joined: November 4th, 2016, 9:33 am
Has thanked: 3601 times
Been thanked: 5227 times

Re: Varieties of HYP

#502772

Postby Arborbridge » May 25th, 2022, 3:31 pm

Hornblower wrote:One of the 'problems' that inevitably comes up with any portfolio that's held for a length of time is, it tends to become unbalanced. Some stocks rise, some fall, dividends get cut & so on.

One of the original issues with the PYAD HYPs was that after a few years they became reliant on a few dividend giants that supplied the bulk of divi returns in those portfolios. One obvious solution to this is an ever-rebalancing portfolio that uses the divis from the giants to purchase other high-yielding stocks that add diversification. Perhaps this approach already has a name & even a board of it's own?

Note, I'm not talking about buying more stock of the existing members of a HYP that have decreased in price/divi payout, I think that this would likely result in underperforming a passive HYP.

Obviously this works best with a HYP that's still under construction.

Thoughts? Experiences?


This is regularly advocated and discussed on the HYP practical board: viewforum.php?f=15

1nvest
Lemon Quarter
Posts: 4323
Joined: May 31st, 2019, 7:55 pm
Has thanked: 680 times
Been thanked: 1316 times

Re: Varieties of HYP

#520256

Postby 1nvest » August 6th, 2022, 4:15 am

John Mauldin back in 2009 published a article about how the Dow constitutes back then, equal initial capital weightings, just held as is, resulted in superior results. Beat the regular Dow by around 1.5%.
Next, we find that the S&P 500 cap-weighted index outperforms the Dow by about 0.2% annually, for a total return of 9.1%. Not much difference there.

Now we come to the interesting part. The next-to-the-top line is the original Dow 30, using a price-weighted index, just like the current Dow 30 uses. The only changes in the next 80 years are companies getting bought or dying. That "Original 30" gives us an annual return of 9.6%. Just 0.7% a year, so you might think, not much difference. But if you start with $100 and compound it for 80 years, that 0.7% becomes a quite large differential. With the Dow 30, your $100 would have grown to $96,993 as of December 2008, but the Original 30 would have grown to $161,603.

And there is an even bigger differential if you simply equal-weight the components rather than use a price-weighting methodology. Your $100 grows at a 10.4% clip and becomes $272,554, or almost three times the actual Dow 30.
https://www.mauldineconomics.com/frontl ... -mwo040309

LEXCX that bought equal amounts in 30 stocks has achieved similar long term results, but where its relatively high 0.5%/year type fund fees reduced the difference/out-performance

https://eu.usatoday.com/story/money/per ... g/2924419/

In such cases there is a tendency to see concentration, but in effect heavier weighting into the stock(s) that did very well.

Consider the FT30 from 1935 where only a single stock out of the original set is still in that index, Tate and Lyle. If 30 stocks were equally weighted of which one was Tate and Lyle, and that saw broad inflation pacing of its share price, and paid a dividend of 4%, then after the near 90 years that alone would have totalled more than the inflation adjusted original total portfolio value. Whilst some of the others have gone broke, yet others have evolved, taken over ...etc. If broadly a single stock offset total portfolio value inflation, then the rest reflect real gains, above and beyond that.

Standard HYP buy in equal measure, diversifying widely (across sectors) selecting by value (above average dividend yield), bought and held as-is, seemingly works, and indications are that it can work well, yielding superior results than the alternatives. If you rebalance, to reduce some of what might be the greatest performing stock to add to others, then that reduces concentration risk, but at a cost, becomes more like the regular Dow/S&P500/whatever.

John (Jack) Bogle also advocated his optimal choice being to buy 50 of the S&P500 stocks in around equal measure - buy and hold. But highlighted that was not a product that Vanguard could viably sell. https://www.forbes.com/forbes/1999/0614 ... 9290776874

Bubblesofearth
Lemon Quarter
Posts: 1080
Joined: November 8th, 2016, 7:32 am
Has thanked: 8 times
Been thanked: 432 times

Re: Varieties of HYP

#520264

Postby Bubblesofearth » August 6th, 2022, 8:03 am

1nvest wrote:John Mauldin back in 2009 published a article about how the Dow constitutes back then, equal initial capital weightings, just held as is, resulted in superior results. Beat the regular Dow by around 1.5%.
Next, we find that the S&P 500 cap-weighted index outperforms the Dow by about 0.2% annually, for a total return of 9.1%. Not much difference there.

Now we come to the interesting part. The next-to-the-top line is the original Dow 30, using a price-weighted index, just like the current Dow 30 uses. The only changes in the next 80 years are companies getting bought or dying. That "Original 30" gives us an annual return of 9.6%. Just 0.7% a year, so you might think, not much difference. But if you start with $100 and compound it for 80 years, that 0.7% becomes a quite large differential. With the Dow 30, your $100 would have grown to $96,993 as of December 2008, but the Original 30 would have grown to $161,603.

And there is an even bigger differential if you simply equal-weight the components rather than use a price-weighting methodology. Your $100 grows at a 10.4% clip and becomes $272,554, or almost three times the actual Dow 30.
https://www.mauldineconomics.com/frontl ... -mwo040309

LEXCX that bought equal amounts in 30 stocks has achieved similar long term results, but where its relatively high 0.5%/year type fund fees reduced the difference/out-performance

https://eu.usatoday.com/story/money/per ... g/2924419/

In such cases there is a tendency to see concentration, but in effect heavier weighting into the stock(s) that did very well.

Consider the FT30 from 1935 where only a single stock out of the original set is still in that index, Tate and Lyle. If 30 stocks were equally weighted of which one was Tate and Lyle, and that saw broad inflation pacing of its share price, and paid a dividend of 4%, then after the near 90 years that alone would have totalled more than the inflation adjusted original total portfolio value. Whilst some of the others have gone broke, yet others have evolved, taken over ...etc. If broadly a single stock offset total portfolio value inflation, then the rest reflect real gains, above and beyond that.

Standard HYP buy in equal measure, diversifying widely (across sectors) selecting by value (above average dividend yield), bought and held as-is, seemingly works, and indications are that it can work well, yielding superior results than the alternatives. If you rebalance, to reduce some of what might be the greatest performing stock to add to others, then that reduces concentration risk, but at a cost, becomes more like the regular Dow/S&P500/whatever.

John (Jack) Bogle also advocated his optimal choice being to buy 50 of the S&P500 stocks in around equal measure - buy and hold. But highlighted that was not a product that Vanguard could viably sell. https://www.forbes.com/forbes/1999/0614 ... 9290776874


Echoes my own thoughts on rebalancing. As regards HYP1 I have long argued that the main issue was starting with only 15 shares. Bogles' 50 is much closer to my own portfolio approach.

BoE

1nvest
Lemon Quarter
Posts: 4323
Joined: May 31st, 2019, 7:55 pm
Has thanked: 680 times
Been thanked: 1316 times

Re: Varieties of HYP

#520365

Postby 1nvest » August 6th, 2022, 5:20 pm

Bubblesofearth wrote:
1nvest wrote:John Mauldin back in 2009 published a article about how the Dow constitutes back then, equal initial capital weightings, just held as is, resulted in superior results. Beat the regular Dow by around 1.5%.
Next, we find that the S&P 500 cap-weighted index outperforms the Dow by about 0.2% annually, for a total return of 9.1%. Not much difference there.

Now we come to the interesting part. The next-to-the-top line is the original Dow 30, using a price-weighted index, just like the current Dow 30 uses. The only changes in the next 80 years are companies getting bought or dying. That "Original 30" gives us an annual return of 9.6%. Just 0.7% a year, so you might think, not much difference. But if you start with $100 and compound it for 80 years, that 0.7% becomes a quite large differential. With the Dow 30, your $100 would have grown to $96,993 as of December 2008, but the Original 30 would have grown to $161,603.

And there is an even bigger differential if you simply equal-weight the components rather than use a price-weighting methodology. Your $100 grows at a 10.4% clip and becomes $272,554, or almost three times the actual Dow 30.
https://www.mauldineconomics.com/frontl ... -mwo040309

LEXCX that bought equal amounts in 30 stocks has achieved similar long term results, but where its relatively high 0.5%/year type fund fees reduced the difference/out-performance

https://eu.usatoday.com/story/money/per ... g/2924419/

In such cases there is a tendency to see concentration, but in effect heavier weighting into the stock(s) that did very well.

Consider the FT30 from 1935 where only a single stock out of the original set is still in that index, Tate and Lyle. If 30 stocks were equally weighted of which one was Tate and Lyle, and that saw broad inflation pacing of its share price, and paid a dividend of 4%, then after the near 90 years that alone would have totalled more than the inflation adjusted original total portfolio value. Whilst some of the others have gone broke, yet others have evolved, taken over ...etc. If broadly a single stock offset total portfolio value inflation, then the rest reflect real gains, above and beyond that.

Standard HYP buy in equal measure, diversifying widely (across sectors) selecting by value (above average dividend yield), bought and held as-is, seemingly works, and indications are that it can work well, yielding superior results than the alternatives. If you rebalance, to reduce some of what might be the greatest performing stock to add to others, then that reduces concentration risk, but at a cost, becomes more like the regular Dow/S&P500/whatever.

John (Jack) Bogle also advocated his optimal choice being to buy 50 of the S&P500 stocks in around equal measure - buy and hold. But highlighted that was not a product that Vanguard could viably sell. https://www.forbes.com/forbes/1999/0614 ... 9290776874


Echoes my own thoughts on rebalancing. As regards HYP1 I have long argued that the main issue was starting with only 15 shares. Bogles' 50 is much closer to my own portfolio approach.

BoE

FT30 index relatively lagged, its geometric base is flawed, losing stocks have a disproportionate bias. At the extreme a single stock failing results in the entire index failing. Yet many were happy to hold a FT30 tracker for many decades. Investors moved over to cap weighted as being 'better', the likes of the FT100, S&P500 ...etc. But even that is flawed. The more optimal reward 'index' is to buy in equal initial weightings, bought and held.

Consider a index comprised of UK large cap, UK mid cap, US stocks, silver, gold, T-Bills. If you bought and rebalanced back to equal weightings yearly then over the last 125 years you saw rewards of around 60% of that of the best performing asset (total real gains). Non-rebalanced saw you with 80% of the best performing assets gains - but did mean ending with a portfolio that was nigh on around 50/50 weightings in the best and second best assets (52% in best, 41% in second best, 5% in third best, small amounts in others).

A factor is that whilst non-rebalanced is more total reward optimal, its concentration risk also increases, and concentration risk is a major risk factor. Many might quite reasonably opine that the additional rewards aren't worth the additional risk. Where the rewards can still be "good enough". 7% real for best, 5.8% for second best (and non rebalanced), 5% for third best compared to 4.5% for yearly rebalanced (that averaged 50% in stocks) ... and if you're spending just 4% (SWR) then 4.5% is more than enough. Yes non-rebalanced would have you up near the top, tending to leave more for heirs, but be at greater risk that if the asset(s) you were heavily weighted into endured some form of big dipper then the pain could also be very intense, maybe even fatal.


Return to “High Yield Shares & Strategies - General”

Who is online

Users browsing this forum: No registered users and 8 guests