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

Preference shares versus ordinaries as part of a high-yield strategy

General discussions about equity high-yield income strategies
Wizard
Lemon Quarter
Posts: 2829
Joined: November 7th, 2016, 8:22 am
Has thanked: 68 times
Been thanked: 1029 times

Preference shares versus ordinaries as part of a high-yield strategy

#302182

Postby Wizard » April 21st, 2020, 11:32 am

There has been a lot of talk of Primary Heathcare (PHP) on the HYP-P board, with the suggestion it is a good safe port in the current storm for those needing to draw an income now. But the yield is currently about 3.6%, which seems pretty unattractive to me. This is old ground, but the context is new so I see no good reason not to cover it again.

Take an investor with £100 burning a whole in their pocket and a need to generate an income. If they buy PHP they will generate an income of £3.59 in year 1. Elsewhere somebody quoted an annual increase in the PHP dividend of just under 3% for the last 10 years, so assuming that continues at 3% for the next twenty years the income in year 10 would be £4.68 and in year 20 it would be £6.30.

But what if our investor instead invest the £100 in NatWest Preference Shares. These are still paying despite the RBS dividend suspension and in fact have a handy push feature that means they continued to pay right through the financial crisis (in the event of not paying cash they must issue new Pref's at a ratio of 4/3 of the missed cash payment). The income in the first year would be £6.71. Now this of course is fixed and won't rise, but it is much more than the PHO income, so our investor can reinvest some of it. Lets say they take a higher income, equivalent to the PHP equivalent of £3.39 plus 10% of the extra income generated by NWBD, so an annual income of £3.90. This leaves 90% of the additional income, £2.81, that can be reinvested in NWBD. If this approach is carried forward by year 20 the investor income of £6.79 from NWBD with a further surplus of £4.43 to reinvest, versus an income of £6.30 from PHP.

If NWBD is too racey, how about prefs from Ecclesiastical Insurance Office (ELLA), the preferred insurer for the Church of England. The yield is a bit less than NWBD, but by year 20 ELLA is still giving an income of 6.47 with a reinvestable surplus of £1.58.

So, is buying PHP economic madness for anyone drawing income?

moorfield
Lemon Quarter
Posts: 3523
Joined: November 7th, 2016, 1:56 pm
Has thanked: 1546 times
Been thanked: 1402 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302199

Postby moorfield » April 21st, 2020, 12:39 pm

Wizard wrote:But what if our investor instead invest the £100 in NatWest Preference Shares. These are still paying despite the RBS dividend suspension and in fact have a handy push feature that means they continued to pay right through the financial crisis (in the event of not paying cash they must issue new Pref's at a ratio of 4/3 of the missed cash payment). The income in the first year would be £6.71. Now this of course is fixed and won't rise, but it is much more than the PHO income, so our investor can reinvest some of it. Lets say they take a higher income, equivalent to the PHP equivalent of £3.39 plus 10% of the extra income generated by NWBD, so an annual income of £3.90. This leaves 90% of the additional income, £2.81, that can be reinvested in NWBD. If this approach is carried forward by year 20 the investor income of £6.79 from NWBD with a further surplus of £4.43 to reinvest, versus an income of £6.30 from PHP.


I did a similar analysis with preference shares here a few years ago, and was shouted down over on HYP Practical for daring to suggest it. I wonder how HSBA holders over there feel about that now. Will see if I can dig it out for you.

Wizard
Lemon Quarter
Posts: 2829
Joined: November 7th, 2016, 8:22 am
Has thanked: 68 times
Been thanked: 1029 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302203

Postby Wizard » April 21st, 2020, 12:46 pm

moorfield wrote:
Wizard wrote:But what if our investor instead invest the £100 in NatWest Preference Shares. These are still paying despite the RBS dividend suspension and in fact have a handy push feature that means they continued to pay right through the financial crisis (in the event of not paying cash they must issue new Pref's at a ratio of 4/3 of the missed cash payment). The income in the first year would be £6.71. Now this of course is fixed and won't rise, but it is much more than the PHO income, so our investor can reinvest some of it. Lets say they take a higher income, equivalent to the PHP equivalent of £3.39 plus 10% of the extra income generated by NWBD, so an annual income of £3.90. This leaves 90% of the additional income, £2.81, that can be reinvested in NWBD. If this approach is carried forward by year 20 the investor income of £6.79 from NWBD with a further surplus of £4.43 to reinvest, versus an income of £6.30 from PHP.


I did a similar analysis with preference shares here a few years ago, and was shouted down over on HYP Practical for daring to suggest it. I wonder how HSBA holders over there feel about that now. Will see if I can dig it out for you.

Yes I knew it had been looked at before, but could not remember who by. The situation now is particularly of interest as many of the usual suspects for those investing for income are no longer producing an income. This means in order to secure an income likely to be sustainable options like PHP are being discussed which give a far lower income for each pound invested. There will be some who will not consider it on principle, but personally I think it is a question worth asking.

dealtn
Lemon Half
Posts: 6072
Joined: November 21st, 2016, 4:26 pm
Has thanked: 441 times
Been thanked: 2324 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302205

Postby dealtn » April 21st, 2020, 12:57 pm

Wizard wrote:There has been a lot of talk of Primary Heathcare (PHP) on the HYP-P board, with the suggestion it is a good safe port in the current storm for those needing to draw an income now. But the yield is currently about 3.6%, which seems pretty unattractive to me. This is old ground, but the context is new so I see no good reason not to cover it again.

Take an investor with £100 burning a whole in their pocket and a need to generate an income. If they buy PHP they will generate an income of £3.59 in year 1. Elsewhere somebody quoted an annual increase in the PHP dividend of just under 3% for the last 10 years, so assuming that continues at 3% for the next twenty years the income in year 10 would be £4.68 and in year 20 it would be £6.30.

But what if our investor instead invest the £100 in NatWest Preference Shares. These are still paying despite the RBS dividend suspension and in fact have a handy push feature that means they continued to pay right through the financial crisis (in the event of not paying cash they must issue new Pref's at a ratio of 4/3 of the missed cash payment). The income in the first year would be £6.71. Now this of course is fixed and won't rise, but it is much more than the PHO income, so our investor can reinvest some of it. Lets say they take a higher income, equivalent to the PHP equivalent of £3.39 plus 10% of the extra income generated by NWBD, so an annual income of £3.90. This leaves 90% of the additional income, £2.81, that can be reinvested in NWBD. If this approach is carried forward by year 20 the investor income of £6.79 from NWBD with a further surplus of £4.43 to reinvest, versus an income of £6.30 from PHP.

If NWBD is too racey, how about prefs from Ecclesiastical Insurance Office (ELLA), the preferred insurer for the Church of England. The yield is a bit less than NWBD, but by year 20 ELLA is still giving an income of 6.47 with a reinvestable surplus of £1.58.

So, is buying PHP economic madness for anyone drawing income?


Welcome to the world beyond simple dividends, and considering reinvesting excess income. Now take the small step and consider the "extra" income the REIT isn't paying out too, and reinvesting in itself. Now be brave and consider what share price PHP (or an alternative) might be trading at in year 10 if its dividend is now £4.68 (or year 20 at £6.30), compared to NWBD.

Before you know it you will be thinking of Total Return.

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1400 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302206

Postby Alaric » April 21st, 2020, 1:06 pm

moorfield wrote:I did a similar analysis with preference shares here a few years ago, and was shouted down over on HYP Practical for daring to suggest it.


Hard line proponents of what they term "The HYP Strategy" seemingly have a prejudice against any form of fixed income, including Preference Shares. That extends to Investment Trusts and shares with a lower yield but growth prospects.

A quick and dirty comparison is to compare the fixed income against the sum of current income and expected growth rate. There's an underlying assumption that the holder eventually sells or at the very least measures success by respective market values.

Dod101
The full Lemon
Posts: 16629
Joined: October 10th, 2017, 11:33 am
Has thanked: 4343 times
Been thanked: 7534 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302207

Postby Dod101 » April 21st, 2020, 1:07 pm

I bought PHP in 2015 I think it was for just under £1 per share. Now they are £1.50 or so. I do not think that buying PHP today is an act of economic madness and I do think you need to consider the effect of possible inflation and the rest of a portfolio but I am open to looking at fixed interest. I actually have enough in the four such funds that I hold.

Dod

richfool
Lemon Quarter
Posts: 3492
Joined: November 19th, 2016, 2:02 pm
Has thanked: 1195 times
Been thanked: 1280 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302211

Postby richfool » April 21st, 2020, 1:17 pm

Wizard wrote:So, is buying PHP economic madness for anyone drawing income?

The answer to that question must surely depend on your objectives.

If your objective is income at all costs then maybe "yes". But if your objective is a reasonable level of income along with capital growth, then the answer must surely be "no".

I invariably feel inhibited posting on the HYP Practical or HY Shares & Strategies boards, about Investment Trusts and investments like REIT's and Prop Coys, as although I seek dividend income, I also look for capital growth. Thus that begs the question as to whether I should post on this board or indeed make reference to capital growth, even though both are clearly part of the equation. That is why I now rarely post about IT's on the HYS&S board.

I have held PHP for some years and I like it for the very fact that it generates dividend income AND (if I dare mention it) capital growth. Indeed I topped up in the recent falls - at a price of £1.44 on the 28th February. My holding of PHP is one of my highest performers in terms of capital growth, currently being up 27%. Thus I am very happy with it. It is providing a very good return on my investment in terms of both income and capital growth, and has proved quite defensive in the recent turmoil.

richfool
Lemon Quarter
Posts: 3492
Joined: November 19th, 2016, 2:02 pm
Has thanked: 1195 times
Been thanked: 1280 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302226

Postby richfool » April 21st, 2020, 1:54 pm

I omitted to mention, there is also the matter of diversity of investments and diversity of income sources.

Wizard
Lemon Quarter
Posts: 2829
Joined: November 7th, 2016, 8:22 am
Has thanked: 68 times
Been thanked: 1029 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302240

Postby Wizard » April 21st, 2020, 2:19 pm

richfool wrote:
Wizard wrote:So, is buying PHP economic madness for anyone drawing income?

The answer to that question must surely depend on your objectives.

If your objective is income at all costs then maybe "yes". But if your objective is a reasonable level of income along with capital growth, then the answer must surely be "no".

I invariably feel inhibited posting on the HYP Practical or HY Shares & Strategies boards, about Investment Trusts and investments like REIT's and Prop Coys, as although I seek dividend income, I also look for capital growth. Thus that begs the question as to whether I should post on this board or indeed make reference to capital growth, even though both are clearly part of the equation. That is why I now rarely post about IT's on the HYS&S board.

I have held PHP for some years and I like it for the very fact that it generates dividend income AND (if I dare mention it) capital growth. Indeed I topped up in the recent falls - at a price of £1.44 on the 28th February. My holding of PHP is one of my highest performers in terms of capital growth, currently being up 27%. Thus I am very happy with it. It is providing a very good return on my investment in terms of both income and capital growth, and has proved quite defensive in the recent turmoil.

In terms of motive, I did start this by suggesting it was an income focussed investor.

Wizard wrote:There has been a lot of talk of Primary Heathcare (PHP) on the HYP-P board, with the suggestion it is a good safe port in the current storm for those needing to draw an income now.

But that aside capital appreciation is an interesting question. PHP currently yields 3.6%, if it were to be yielding the same in 20 years time with that 3% per annum increase in dividend having given a year 20 income of £6.30 that implies a capital value for the investment of c.£175. Now I would assume NWBD's price would be flat, but there is the matter of the reinvested surplus. Using my assumption of consuming 10% of the surplus and reinvesting 90% means that after 20 years the investor would hold an investment worth c.£172. For Ella the holding would be worth quite a bit less, at c.£139.

Lots of assumptions and others may want to make different ones, for example PHP's share price has increased from 28p twenty years ago to the price today of 155p, and increase of more than 550%. If that performance were repeated the £100 will grow to £550, killing NWBD's performance. But back to where we started, this was for somebody who has a priority for immediate income.

monabri
Lemon Half
Posts: 8396
Joined: January 7th, 2017, 9:56 am
Has thanked: 1539 times
Been thanked: 3428 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302288

Postby monabri » April 21st, 2020, 5:38 pm

Whatever the yield might be on PHP...it's better than on Aviva, HSBA...etc and much better than the B.Society. in addition, the capital position isn't as badly affected as many HYP shares have been.

Arborbridge
The full Lemon
Posts: 10371
Joined: November 4th, 2016, 9:33 am
Has thanked: 3601 times
Been thanked: 5229 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302302

Postby Arborbridge » April 21st, 2020, 6:37 pm

Alaric wrote:
moorfield wrote:I did a similar analysis with preference shares here a few years ago, and was shouted down over on HYP Practical for daring to suggest it.


Hard line proponents of what they term "The HYP Strategy" seemingly have a prejudice against any form of fixed income, including Preference Shares. That extends to Investment Trusts and shares with a lower yield but growth prospects.

A quick and dirty comparison is to compare the fixed income against the sum of current income and expected growth rate. There's an underlying assumption that the holder eventually sells or at the very least measures success by respective market values.


I think that is a bit of distortion. Most of us realise advantages in different investment styles, but also respect the guidelines for posting on HYP-P. In most cases, that's the source of any problem. And I hope you won't mind my pointing out, Alaric, that you although you know the rule perfectly well, you often post OT comments on HYP-P I suspect, just to get a response. Provokative, I calls it! So you can hardly be surprised if posters over there point it out.

Arb.

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1400 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302304

Postby Alaric » April 21st, 2020, 6:53 pm

Arborbridge wrote:I think that is a bit of distortion. Most of us realise advantages in different investment styles, but also respect the guidelines for posting on HYP-P.


The postings are on the "general" board. Castigating supporters of the "HYP Strategy" for their blinkered approach would seem quite in order.

At around this time last year, there was a "HYP" portfolio constructed. Perhaps no-one seeking income to live off was persuaded to follow the recommendations, but if they did, what do they now?

IanTHughes
Lemon Quarter
Posts: 1789
Joined: May 2nd, 2018, 12:01 pm
Has thanked: 730 times
Been thanked: 1117 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302315

Postby IanTHughes » April 21st, 2020, 7:22 pm

Alaric wrote:
moorfield wrote:I did a similar analysis with preference shares here a few years ago, and was shouted down over on HYP Practical for daring to suggest it.

Hard line proponents of what they term "The HYP Strategy" seemingly have a prejudice against any form of fixed income, including Preference Shares. That extends to Investment Trusts and shares with a lower yield but growth prospects.


It is the HYP Strategy, as laid out by pyad, which clearly states that "any form of fixed income, including Preference Shares" should be excluded. It has absolutely nothing to do with "Hard line proponents" of the strategy, whatever that ridiculous epithet is supposed to mean.


Ian

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1400 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302316

Postby Alaric » April 21st, 2020, 7:29 pm

IanTHughes wrote:It is the HYP Strategy, as laid out by pyad, which clearly states that "any form of fixed income, including Preference Shares" should be excluded.


Why does it make such statements? Is it not dogma for the sake of it? Why care what "pyad" lays out?

IanTHughes
Lemon Quarter
Posts: 1789
Joined: May 2nd, 2018, 12:01 pm
Has thanked: 730 times
Been thanked: 1117 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302319

Postby IanTHughes » April 21st, 2020, 7:44 pm

Alaric wrote:
IanTHughes wrote:It is the HYP Strategy, as laid out by pyad, which clearly states that "any form of fixed income, including Preference Shares" should be excluded.

Why does it make such statements?

Because it is a Strategy based on receiving Income from the dividends arising from Ordinary Shares.

I am sorry but, if you still fail to understand, I cannot put it more simply that that.

Alaric wrote:Is it not dogma for the sake of it? Why care what "pyad" lays out?

So, would you also suggest that, in order to not be "dogmatic", a "Gilt Edged Fixed Income" strategy should include Ordinary shares?


Ian

Wizard
Lemon Quarter
Posts: 2829
Joined: November 7th, 2016, 8:22 am
Has thanked: 68 times
Been thanked: 1029 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302320

Postby Wizard » April 21st, 2020, 7:55 pm

Whilst it is always a risk, I did not start this thread to discuss the overarching HYP approach.

Rather, I was reflecting on the fact that one share currently being suggested, PHP, because of the view it had a sustainable dividend was much lower yielding that high yield investors may have considered 3 months ago. To that end I was questioning whether in the current climate if that was the best level of sustainable yield viewed as available from ordinary shares maybe prefs, with a considerably higher yield, should be considered as an alternative.

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1400 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302322

Postby Alaric » April 21st, 2020, 8:07 pm

IanTHughes wrote:Because it is a Strategy based on receiving Income from the dividends arising from Ordinary Shares.


As I said, those who support it appear prejudiced against other forms of income investment.

In current circumstances, something of a failure. Not something to use on its own as a means of providing income in retirement.

IanTHughes
Lemon Quarter
Posts: 1789
Joined: May 2nd, 2018, 12:01 pm
Has thanked: 730 times
Been thanked: 1117 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302323

Postby IanTHughes » April 21st, 2020, 8:12 pm

Alaric wrote:
IanTHughes wrote:Because it is a Strategy based on receiving Income from the dividends arising from Ordinary Shares.

As I said, those who support it appear prejudiced against other forms of income investment.

Wrong, again!! Those who follow any strategy, follow the strategy, prejudice does not come into it.

Or would you also suggest that someone constructing a "Gilt Edged Fixed Income" portfolio was "prejudiced" against other forms of income investment?


Ian
Last edited by IanTHughes on April 21st, 2020, 8:13 pm, edited 1 time in total.

88V8
Lemon Half
Posts: 5769
Joined: November 4th, 2016, 11:22 am
Has thanked: 4098 times
Been thanked: 2560 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302324

Postby 88V8 » April 21st, 2020, 8:12 pm

As a pure income investor, I would not buy PHP or indeed any share below the FTSE average. Not even Unilever. What is the point when one can get a decent yield and rising income via a few ITs.
Yes, there is the argument that it's the portfolio yield that matters and so one can tolerate some low-yielding sturdies, but I'd need to be pretty desperate for options before I acted on that argument.

That said, Prefs and other fixed interest have a drawback, the clue is in the name. Happily we live in a time of low inflation, but even 2-3% can make a dent in a static income over time.
So time matters. Time remaining on earth, and in that regard time is, alas, on my side. I can afford to cock a snook at inflation in a way that would be unwise for someone, say, in their 40s. And currently I can enjoy the fact that none of my Prefs has cut, nor will they.

Prefs also have weak sectoral diversity, so many Financials. Risk.
Never mind. Thus far the perfume of the income has outweighed the pong of the risk.

PHP... along with Unilever, if they maintain growth, plus a steady and rising divi, might make sense for someone building a portfolio and might even make sense once they start drawing the income, provided they have enough income and don't need to maximise the yield.
I suppose to an extent I have been foregoing yield by buying ITs in recent times, instead of solely FI and Ords. But I have plenty of income so I can afford to.
Like so many investment decisions, it depends.

V8

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1400 times

Re: Preference shares versus ordinaries as part of a high-yield strategy

#302327

Postby Alaric » April 21st, 2020, 8:28 pm

IanTHughes wrote:Wrong, again!! Those who follow any strategy, follow the strategy, prejudice does not come into it.


Strategies can and should be modified rather than blindly followed.

If looking for high income, it's by no means obvious why ITs and Prefs should be excluded even if the original writer was prejudiced against them.

Anyone relying exclusively on HYP shares for spending income in the current circumstances has two choices.
One is to starve, the other is to dump some of the cancelled HYP stuff in favour of cash, ITs, lower yield shares like PHP or Bonds/Prefs.


Return to “High Yield Shares & Strategies - General”

Who is online

Users browsing this forum: No registered users and 7 guests