How is HYP doing in the Covid-19 crisis vs alternatives?

[mao44]

I have only been running my HYP experiment for a shorter period than the other two, about three and a half years. What I know is the overall return over that period from HYP is negative and for my bond and preference share portfolios it is positive. I dare say you will say three and a half years is too short a period to judge HYP on. That may be your view, for me it is long enough to know I am not happy with it. The good news is that because it was an experiment I had committed only a small amount of capital to the HYP portfolio, so relative to my overall wealth and income the impact is pretty small.[/quote]

In that 3.5 year period we have had Brexit and now Covid 19. Just unfortunate timing I'm afraid. Now is the time to be topping up with any spare cash and then wait and see how your HYP is performing in another 6 or 7 years. Surely the present time is far too early to judge?

[dealtn]

In that 3.5 year period we have had Brexit and now Covid 19. Just unfortunate timing I'm afraid. Now is the time to be topping up with any spare cash and then wait and see how your HYP is performing in another 6 or 7 years. Surely the present time is far too early to judge?

So Brexit and Covid 19 didn't occur in that time period for the other two alternative strategies? Nor can you have any certainty that "something else" won't be a factor in a similar upcoming period.

I agree that 3.5 years is perhaps too early to draw a clear conclusion in a mathematical sense, but to draw the conclusion you appear to have done of "Now is the time to be topping up with any spare cash..." isn't correct either.

[kempiejon]

Many growth stocks have had a massive tailwind from CV19, especially SaaS stocks and the subset of those related to Work From Home.
Zoom, Microsoft, Amazon, etc (many we've discussed on more relevant TLF boards) have all hit new all time highs.

One more argument for a TR focus, I think.

That's a capital focus I think. My HYP is off around 20% in value from recent highs and although the numbers are not in I'd expect 50% off for income this year. My fixed interest is down 15% on capital, obviously income should be the same. My global trackers off about 15% but that looks to on the climb from a 30% drop. Scottish Mortgage Investment Trust above pre CoV-2 levels.

[vagrantbrain]

All I am saying is that HYP as described by PYAD is not for me, the promise of a hands off, never need to look or worry growing income is not a promise I trust after my relatively short experiment. I may end up with a portfolio with some non-PYAD HYP methods you use, I think you manage your portfolio very effectively. But in the terms I am using the nomenclature that would not be an HYP.

I tried a HYP for a few years and couldn't get on with it so moved to something else. I don't think there's any shame is saying it's not for you - at least you've tried it unlike some of its ardent opponents on here!

[Hariseldon58]

I invested with an HYP ( it was part of a larger portfolio) prior to the last major financial crisis but bailed out in April 2008, having taken unpleasant losses, but well before the really big losses that were to follow

In 2016 I decided to work out what if..... I had continued.

8 years on the capital value had increased from £177k to £191k and was producing a yield of 4.66%.

I then compared it with my actual portfolio, rebasing the starting value to £177k, the end value was £393k with a yield of 3% ( the cash amount was 33% more). The FTSE did better than my HYP at £209k and was in turn beaten by City of London at £231k

This is merely a comment, my HYP was just one example of many HYPs but clearly my actual portfolio, with a more diverse international approach did far better.

It goes without saying that many regulars here would have done far better, over the April 2008 To April 2016, HYP was just not for me!

[Wizard]

I invested with an HYP ( it was part of a larger portfolio) prior to the last major financial crisis but bailed out in April 2008, having taken unpleasant losses, but well before the really big losses that were to follow

In 2016 I decided to work out what if..... I had continued.

8 years on the capital value had increased from £177k to £191k and was producing a yield of 4.66%.

I then compared it with my actual portfolio, rebasing the starting value to £177k, the end value was £393k with a yield of 3% ( the cash amount was 33% more). The FTSE did better than my HYP at £209k and was in turn beaten by City of London at £231k

This is merely a comment, my HYP was just one example of many HYPs but clearly my actual portfolio, with a more diverse international approach did far better.

It goes without saying that many regulars here would have done far better, over the April 2008 To April 2016, HYP was just not for me!

That is an interesting perspective, thanks for sharing the data. Was your replacement to your HYP generally LTBH or did you do a reasonable amount of trading? Was it just equities? Can you share some of the international options you picked?

[Arborbridge]

Skimming through some of the comments, it's clear that we all have slightly difference needs and are at different stages. We should also bear in mind the character of different methods, but in my view, HYP is pretty niche. If I were just starting out, I doubt I would use a HYP - I'd try (as I did at one time) searching for good solid TR investments. Overall growth investing seems to perform better, and I judge this initally on a very crude observation - whenever I've checked in Trustnet, the average perfomance for the UK growth sector is usually high than the UK income sector.

The title of this thread does beg the question: what are the alternatives? - in particular what do you think HYP is for? My understanding is that HYP specifically promises "high and increasing income with a chance of capital growth". That's it: it is primarily about income, and in addition, HYP is specifically UK only as an investment.

The alternatives for me, that suggests, are UK centre investments trusts, - and annuities.

I don't think there is much doubt that if you are prepared to take the risk that HYP is preferable to an annuity. Which leaves UK income ITs. I could bore you all my my charts, but won't just yet, but for my particular HYP (that's a really significant sample of one!) I'd say that ITs have the upper hand. But what you gain with ITs for capital growth you may lose in another direction: immediate income produced, i.e. via the yield.

But one has to say that my HYP has ( pre Covid) done what it says on the tin. It's given me a higher income than I could have drawn from my ITs this past ten years since I retired, and my capital is worth more than that which I invested. So, although I have to say the HYP promise, or description, was accurate - and that's surely how we should judge it - no one ever said it would be the best thing since sliced bread. I can promise you, I've had decades of people finding investments with fantastic go-faster stripes - but do they perform for you, does the magic stop working?

Anyhow, I'll stop rambling. As to the answer to the question posed, it is "moderately well but by no means brilliantly".

But that depends which HYP and which alternatives one chooses

Arb.

[ADrunkenMarcus]

That's a capital focus I think. My HYP is off around 20% in value from recent highs and although the numbers are not in I'd expect 50% off for income this year. My fixed interest is down 15% on capital, obviously income should be the same. My global trackers off about 15% but that looks to on the climb from a 30% drop. Scottish Mortgage Investment Trust above pre CoV-2 levels.

I maintain what I call a 'dividend growth portfolio' which does have a reasonable dividend yield (over 3 percent) but is not HYP as my focus is more towards dividends which grow and which will, hopefully, provider a higher yield on cost in the future. It contains directly held foreign equities as well as UK holdings and a few collectives, including Murray International trust which forms a global core. From its monthly peak (I record around the 10th) in February 2020 to 20 May 2020, the accumulation unit value is down about 7 percent. My year is 1 May to 30 April, so a loss of 2.8 percent in 2019-20 has been followed by a rise of 3.9 percent since 30 April 2020.

Since 30 April 2016, the accumulation unit price is up almost 42 percent. This compares to about 36 percent for the FTSE All World, 12.8 percent for the FTSE All Share.

I do not know what dividends will be like this year but I fully expect that my dividend per income unit could fall 15-25%. Part of that is related to increasing the portfolio's size by 10.7 percent - the additional monies went into investments yielding 0.3% which would have a dilutive effect on the dividend per income unit, because that yield was so much lower than the existing portfolio. Therefore I was expecting the dividend per unit to decline even before the current pandemic.

Best wishes

Mark.

[Alaric]

I do not know what dividends will be like this year but I fully expect that my dividend per income unit could fall 15-25%.

You could attempt to predict it. Cross check your holdings against the dividenddata site or similar. Worst case is that if they've announced a cut, cancellation or suspension, that applies for the rest of a year. Best case is that the change only applies to the next dividend due, although some cancellation announcements seem indefinite.

I cannot think that anyone who used higher yielding equities as the exclusive source of their retirement income is feeling particularly comfortable. They would likely need a cash buffer or have a safety margin of assets they could sell to meet a required income target. Those investing indirectly through OEICs may well also suffer when OEICs fail to distribute at previous levels. Holders of ITs will relatively benefit from the practice of holding Income Reserves, although these are finite.

I haven't seen much if any comment, but are dividend paying Companies on overseas markets also cancelling dividends?

[ADrunkenMarcus]

I do not know what dividends will be like this year but I fully expect that my dividend per income unit could fall 15-25%.

You could attempt to predict it. Cross check your holdings against the dividenddata site or similar. Worst case is that if they've announced a cut, cancellation or suspension, that applies for the rest of a year. Best case is that the change only applies to the next dividend due, although some cancellation announcements seem indefinite.

I have taken a look. I am assuming a 50% cut from Marlborough Multi Cap Income, as it's an open-ended fund with no reserves. I assume Standard Chartered's is gone entirely / same for Renishaw for this year (it slashed in 2009 then rapidly recovered). On the other hand, Murray International, Acorn Income Fund (an IT), Unilever, AstraZeneca, Diageo, Kone, Reckitt Benckiser and Spirax Sarco Engineering seem well placed to continue paying. Some companies such as Domino's Pizza Group could easily, IMHO, afford the dividend and said they would review later in the year.

I haven't seen much if any comment, but are dividend paying Companies on overseas markets also cancelling dividends?

Of mine, MasterCard raised its dividend 21 percent for 2020 and has continued to pay its dividend and this increased level. I fully expect further dividend increases in the years ahead. Kone, a Finnish company, paid its single annual dividend early in March 2020 so I would hope it will do so again come March 2021, given its reliable revenue streams and cash-rich balance sheet. PayPal doesn't pay dividends.

Best wishes

Mark.

[SalvorHardin]

I haven't seen much if any comment, but are dividend paying Companies on overseas markets also cancelling dividends?

I own shares in more American and Canadian companies than British companies, and spend more time looking at these markets than the UK. I haven't seen anything like the cuts that the UK has been experiencing.

A good example is that ExxonMobil recently declared an unchanged dividend. As did KraftHeinz. The only cancellation I've had is Disney. I can't see the Canadian banks cutting theirs; they are much better run than the British banks and treat their shareholders more favourably.

I suspect that a lot of British quoted companies are using the coronavirus as an excuse to cut dividends.

[dealtn]

I suspect that a lot of British quoted companies are using the coronavirus as an excuse to cut dividends.

It will be interesting to see whether UK companies, and investors, take this opportunity to more widely align dividend policies to those seen as more normal across the world. We are a bit of an "outlier".

Personally I doubt it.

[JuanDB]

This twitter account is a good view into investing for income in the US market with dividend aristocrats.

https://twitter.com/dividendgrowth/status/1262756862211964928?s=21

75% have increased their dividends this year.

[Arborbridge]

I cannot think that anyone who used higher yielding equities as the exclusive source of their retirement income is feeling particularly comfortable. They would likely need a cash buffer or have a safety margin of assets they could sell to meet a required income target. Those investing indirectly through OEICs may well also suffer when OEICs fail to distribute at previous levels. Holders of ITs will relatively benefit from the practice of holding Income Reserves, although these are finite.

Except those who are wealthy enough not to worry

And I'd say "ditto" those who are sitting on a fall in their capital gains which they need to realise for income. Whether depending on selling down capital or using dividends for income: both techniques need a safety margin and an income reserve. Or perhaps call both a healthy "cushion" - no difference really for either party.

The difference between the two ideas essentially boils down to: which collapses further, and which comes back faster. I guess each recession could give a different answer, but I wouldn't know. Know doubt someone will have the answer.

Arb.

[Alaric]

The difference between the two ideas essentially boils down to: which collapses further, and which comes back faster. I guess each recession could give a different answer, but I wouldn't know. Know doubt someone will have the answer..

Earlier this year, the FTSE 100 Index was in the range 7000 to 7500. It's now in the 5500 to 6000 range. If not exactly expected, a 25% drop is not so unusual and formed part of Insurance Company solvency tests back in the 1980s. We won't know the actual fall in annual dividends until a whole year has elapsed, but almost 50% of the FTSE 100 Companies have announced cancellations, suspensions or cuts, so a 50% drop in annualised income may be on the cards and isn't that unprecedented?

[Wizard]

...And I'd say "ditto" those who are sitting on a fall in their capital gains which they need to realise for income. Whether depending on selling down capital or using dividends for income: both techniques need a safety margin and an income reserve...

Yes, but...

...In my own damaged goods portfolio, the growth investments are at or near all time highs. While the income side of it has been shredded and lies in tatters.

So somebody using caputal gain may not be sitting on much of a capital fall if they have a growth portfolio.

It does seem to me that HYP, as an income strategy, has not faired well in this crisis. It appears to have underperformed bonds, prefs, income ITs and realising capital growth for income by some considerable margin, even when only looking at income generation. I also think the recovery will be long and slow, so the impact on those taking an income will increase over the next few years. I think that from the points above it seems that HYPs realiance on only UK shares may be a significant contributory factor to that relatively poor performance.

The test for HYP must be against its objective, to deliver a "high and increasing income". I guess it depends what you compare it with as to whether it is high or not. But I think ITs are a good benchmark. Is it high at the moment? Hard to say in the abstract as it will to some extent depend on the individual start point, but it certainly looks like it will fall by a lot more so it would have needed a very good start point. Considering increasing is easy, with 2019 as the base I suspect a no tinker HYP will take years to recover to the same income level. Some will claim increases year-on-year, but that will be deceiving themselves because the income will still be below the 2019 level. Some may trade their way to a faster recovery if they are skilled, those less skilled who just flit between shares may actually delay the recovery. But that is not really what HYP was initially intended to be about.

I cannot conclude anything other than HYP has performed poorly in the Covid-19 crisis versus the alternatives discussed here.

[moorfield]

...And I'd say "ditto" those who are sitting on a fall in their capital gains which they need to realise for income. Whether depending on selling down capital or using dividends for income: both techniques need a safety margin and an income reserve...

Yes, but...

...In my own damaged goods portfolio, the growth investments are at or near all time highs. While the income side of it has been shredded and lies in tatters.

So somebody using caputal gain may not be sitting on much of a capital fall if they have a growth portfolio.

It does seem to me that HYP, as an income strategy, has not faired well in this crisis. It appears to have underperformed bonds, prefs, income ITs and realising capital growth for income by some considerable margin, even when only looking at income generation. I also think the recovery will be long and slow, so the impact on those taking an income will increase over the next few years. I think that from the points above it seems that HYPs realiance on only UK shares may be a significant contributory factor to that relatively poor performance.

The test for HYP must be against its objective, to deliver a "high and increasing income". I guess it depends what you compare it with as to whether it is high or not. But I think ITs are a good benchmark. Is it high at the moment? Hard to say in the abstract as it will to some extent depend on the individual start point, but it certainly looks like it will fall by a lot more so it would have needed a very good start point. Considering increasing is easy, with 2019 as the base I suspect a no tinker HYP will take years to recover to the same income level. Some will claim increases year-on-year, but that will be deceiving themselves because the income will still be below the 2019 level. Some may trade their way to a faster recovery if they are skilled, those less skilled who just flit between shares may actually delay the recovery. But that is not really what HYP was initially intended to be about.

I cannot conclude anything other than HYP has performed poorly in the Covid-19 crisis versus the alternatives discussed here.

Let's look at the HYP1 income history for some guidance (of sorts).

The first reduction in income came in 2003, 8% less than and took another 2 years to recover to 2002 level.
(Only the third year after the strategy was touted btw, I wonder if anyone can recall what commentators were writing back then? - I can't.)

The second reduction in 2009, the credit crunch, 37% less than and took another 4 years to recover to 2008 level.

The third reduction in 2014, 4% less than and recovered in the following year to 2013 level.

Clearly, the larger the income 'shock', the longer the recovery. I suspect most of us here will be seeing more than a 37% reduction in our overall HYP incomes this year.

I am rebasing/flattening my own portfolio target income expectations and not expecting a return to 2019 income level until 2024. Fortunately I am still working, contributing to my portfolio, and will be in my early 50s by then. Not a complete disaster for me, I'm not panicking, yet.

[dealtn]

Let's look at the HYP1 income history for some guidance (of sorts).

The first reduction in income came in 2003, 8% less than and took another 2 years to recover to 2002 level.
(Only the third year after the strategy was touted btw, I wonder if anyone can recall what commentators were writing back then? - I can't.)

The second reduction in 2009, the credit crunch, 37% less than and took another 4 years to recover to 2008 level.

The third reduction in 2014, 4% less than and recovered in the following year to 2013 level.

Clearly, the larger the income 'shock', the longer the recovery. I suspect most of us here will be seeing more than a 37% reduction in our overall HYP incomes this year.

I think you should adjust for inflation too, isn't that one of the aims not to just grow, but to outpace inflation too?

Slightly trickier to show, but more accurate, although the general theme you describe still holds.

[moorfield]

I think you should adjust for inflation too, isn't that one of the aims to just grow, but to outpace inflation?

Slightly trickier to show, but more accurate, although the general theme you describe still holds.

Yes absolutely, you'll see that in my portfolio update next January. More on that then.

[tikunetih]

It does seem to me that HYP, as an income strategy, has not faired well in this crisis. It appears to have underperformed bonds, prefs, income ITs and realising capital growth for income by some considerable margin

Something to consider...

While my view is that HYP as commonly practised is really not an approach I like (but each to their own etc.), in regards my bolded bit above, bear in mind that there will likely be IMO a future market crisis where the type of growthy stocks that have held up very well / rebounded very strongly in this crisis get taken behind the woodshed with an axe.

My hunch is - and has been for some years now - that the current secular bull market will eventually end (NB years away yet IMO) with extremes of equity valuations akin to or beyond those seen at the end of the previous secular bull market (ie. the peak of the tech/dotcom bubble in 2000). That being the case, broad-based indexes dominated by stocks with extreme valuations, and growthy portfolios tilted even further to those stocks, will at that future time experience very large and sustained falls, whereas other portfolios with some sort of value tilt, even if using a weaker value proxy such as divi yield, may fair much, much better. Somewhat akin to what happened 20 years ago, a period and experience that quite possibly launched many current investors' initial strong interest in value and HYP-type investing...

Back to the present, today's situation will serve to fuel greater interest in more growthy strats and corresponding lesser interest in other strats such as value, thereby helping to effectuate the outcome I envisage above: some existing "value" focused investors will begin tilting away from their previous approaches, and newer investors will be drawn less to those methods that have struggled and more to those that have relatively or absolutely prospered in recent times. So the wheel turns.

I cannot conclude anything other than HYP has performed poorly in the Covid-19 crisis versus the alternatives discussed here.

Yup. But for investors, it's the future that matters most.