Constructing an hyp (no capitals)

[TUK020]

Pulling part of a post by Wizard on going about constructing an "HYP" from scratch, that I thought was very interesting.

I wanted to divert the topic somewhat, and thought it impolite to do so on the main thread, so starting a new one.

My question is "What would you do from scratch for a high yield portfolio (no capitals), where both reliability track record and safety through diversity are important?"
Note that for this portfolio, I am assuming that some of the HYPyadic-P rules are relaxed: can go for ITs & F.I.to achieve additional diversity

From
viewtopic.php?p=316714#p316714
Wizard suggested:
So assuming you want to try and stay above £1b market capital the list is:
1. Standard Life Aberdeen - Investment Banking and Brokerage Services - 7.68%
2. Babcock International - Aerospace and Defence - 6.71%
3. British American Tobacco - Tobacco - 6.74%
4. Rio Tinto - Industrial Metals and Mining - 6.59%
5. IG Group - Investment Banking and Brokerage Services - 5.65%
6. National Grid - Gas, Water and Multi-utilities - 5.09%
7. GlaxoSmithKline - Pharmaceuticals and Biotechnology - 4.88%
8. Tate & Lyle - Food Producers - 4.26
9. United Utilities Group - Gas, Water and Multi-utilities - 4.56%
10. Legal & General - Life Insurance - 6.97%
11. Phoenix Group Holdings - Life Insurance - 6.82%
12. BHP - Industrial Metals and Mining - 6.52%
13. Vistry - Household Goods and Home Construction - 6.91%
14. NextEnergy Solar Fund - Closed End Investments - 6.51%
15. Workspace Group - REIT - 4.57

For the purposes of diversification, I am assuming that IG Group, Phoenix and BHP are ruled out. I think that United Utilities and NG are sufficiently differentiated that both are permissable. this takes it to 12

How else would one achieve additional safety through diversification?
What comes to mind are:
Geographic diversity: Henderson Far East Ltd (HFEL) and Murray International (MYI) Investment Trusts
Infrastructure: HICL
Property - covered by REIT?

Where else would one look?
And how many holdings to feel balanced?

[Alaric]

My question is "What would you do from scratch for a high yield portfolio (no capitals), where both reliability track record and safety through diversity are important?"

If it was intended to use the portfolio for immediate income, in retirement say, holding back from the capital a year or two's worth of income to place in cash or near cash could be desirable.

[TUK020]

My question is "What would you do from scratch for a high yield portfolio (no capitals), where both reliability track record and safety through diversity are important?"

If it was intended to use the portfolio for immediate income, in retirement say, holding back from the capital a year or two's worth of income to place in cash or near cash could be desirable.

Very much so, for immediate income, I think a cash reserve of say 18 months income would be appropriate

[Wizard]

My question is "What would you do from scratch for a high yield portfolio (no capitals), where both reliability track record and safety through diversity are important?"

If it was intended to use the portfolio for immediate income, in retirement say, holding back from the capital a year or two's worth of income to place in cash or near cash could be desirable.

Very much so, for immediate income, I think a cash reserve of say 18 months income would be appropriate

How much does the income seeker have to invest? A relevant factor IMHO. If 15 holdings of £15k or less I would certainly include a couple of preference shares, but any bigger than that and it may prove hard to acquire a full holding.

Also, how is the portfolio held? If in a SIPP there is no / reduced withholding Tax on US / Canadian shares and in that case a couple of those would probably feature.

How long does the income seeker anticipate needing the income for? If a shorter time I would likely include some FI with a decent running yield, but lower YTM.

My list was an answer to a different question of course (and I note I messed up with four duplicate sectors not three as I planned, though I do agree with you re NG. and UU.). My answer to your question would somewhat depend on the answers to the questions I have posed, but almost irrespective I am unlikely to include many of the shares on my list above.

[TUK020]

How much does the income seeker have to invest? A relevant factor IMHO. If 15 holdings of £15k or less I would certainly include a couple of preference shares, but any bigger than that and it may prove hard to acquire a full holding.

Also, how is the portfolio held? If in a SIPP there is no / reduced withholding Tax on US / Canadian shares and in that case a couple of those would probably feature.

How long does the income seeker anticipate needing the income for? If a shorter time I would likely include some FI with a decent running yield, but lower YTM.

My list was an answer to a different question of course (and I note I messed up with four duplicate sectors not three as I planned, though I do agree with you re NG. and UU.). My answer to your question would somewhat depend on the answers to the questions I have posed, but almost irrespective I am unlikely to include many of the shares on my list above.

Plucking some arbitrary figures out of the air:
£75k in a SIPP, for taking immediate income, and to last 20+ years (i.e. a retirement investment decision)

[Wizard]

How much does the income seeker have to invest? A relevant factor IMHO. If 15 holdings of £15k or less I would certainly include a couple of preference shares, but any bigger than that and it may prove hard to acquire a full holding.

Also, how is the portfolio held? If in a SIPP there is no / reduced withholding Tax on US / Canadian shares and in that case a couple of those would probably feature.

How long does the income seeker anticipate needing the income for? If a shorter time I would likely include some FI with a decent running yield, but lower YTM.

My list was an answer to a different question of course (and I note I messed up with four duplicate sectors not three as I planned, though I do agree with you re NG. and UU.). My answer to your question would somewhat depend on the answers to the questions I have posed, but almost irrespective I am unlikely to include many of the shares on my list above.

Plucking some arbitrary figures out of the air:
£75k in a SIPP, for taking immediate income, and to last 20+ years (i.e. a retirement investment decision)

As good a set of answers as any, I will ponder and come back with my suggestions a bit later this evening.

[Charlottesquare]

I would tend to ITs and REITs, below a list of those held over 3% yield (have not updated/checked, they are from my HL screen print 8/6/20)

First % is weight of my holding,I do not always buy equal weights, second % is what HL says div yield is- afraid I do not check, I dig around when I buy but afterwards just accept their numbers (Older I get the lazier I get as an investor) There are other holdings of individual shares and are some ITs with much lower yields, but as time passes I expect I will become 100% ITs and REITs.

European Assets Trust-50%-6.38%
Henderson Far East Income-100%-6.83%
Merchants Trust -100%-6.48%
Urban Logistics REIT-33%-5.20%
Edinburgh investment Trust-100%-5.65%
Athelney Trust-100%- 5.03%
City of London IT-50%-5.19%
Aberdeen Asian Fund -100%- 4.99%
Aberdeen Standard European Logistics-60%-4.88%
Invesco Perpetual Smaller Cos-50%-4.35%
Blackrock North American Income-50%-4.83%
Murray International-100%-5.19%
Schroder Oriental-80%-4.57%
Hipgnosis Songs Fund-10%- 4.42%
Warehouse REIT-80%- 5.33%
Aberdeen New Thai IT- 30%-4.11
JP Morgan Global Growth & Inc-100%-3.93%
North American IT-90%-3.78%
Aberforth Smaller Cos-60%-3.14

[daveh]

In my HYPish portfolio I have TRIG so I'd suggest looking at the renewable infrastructure funds such as TRIG, JLEN, etc.

[Wizard]

How much does the income seeker have to invest? A relevant factor IMHO. If 15 holdings of £15k or less I would certainly include a couple of preference shares, but any bigger than that and it may prove hard to acquire a full holding.

Also, how is the portfolio held? If in a SIPP there is no / reduced withholding Tax on US / Canadian shares and in that case a couple of those would probably feature.

How long does the income seeker anticipate needing the income for? If a shorter time I would likely include some FI with a decent running yield, but lower YTM.

My list was an answer to a different question of course (and I note I messed up with four duplicate sectors not three as I planned, though I do agree with you re NG. and UU.). My answer to your question would somewhat depend on the answers to the questions I have posed, but almost irrespective I am unlikely to include many of the shares on my list above.

Plucking some arbitrary figures out of the air:
£75k in a SIPP, for taking immediate income, and to last 20+ years (i.e. a retirement investment decision)

Ok, so 15 holdings of about £5k each. My starter for ten, in no particular order, would be:

1. Natwest Prefs (NWBD): 6.4% - Solid income now, but inflation will dilute over time. Protected from an Aviva attack by issuance language
2. Ecclesiastical Insurance Office Prefs (ELLA): 5.6% - Ethical operation that has stated publicly it will never 'do an Aviva'
3. Bank of Montreal (BMO): 4.6% - Yield quoted after 15% withholding tax. Excellent track record on dividends, source of future income growth
4. Unilever (ULVR): 3.3% - Another solid dividend grower for many years
5. Legal & General (LGEN): 7.2% - A good yield now with good prospects of it increasing over time
6. SSE (SSE): 6.4%* - A recent cut, but at the current price a good yield that now rebased should give steady increases
7. Rio Tinto (RIO): 6.6% - A decent yield from a mega-cap, may not be the most stable but should be a good long term payer on average
8. Diageo (DGE): 2.4% - A better buy a few weeks ago and the yield may be too low for some now, but solid and stable
9. Henderson Far East Income (HFEL): 6.9% - Asian diversification, chosen for income, if capital more a consideration then maybe JAGI is better
10. International Business Machines (IBM): 4.8% - A tech giant that has a decent yield and an excellent dividend payment record
11. Blackrock North American Income (BRNA): 5.0% - N. American diversification with a decent yield
12. Murray International (MTU): 5.2% - More diversity, focus on income, not so great for TR
13. Temple Bar Investment Trust (TMPL): 5.9% - Out of favour so paying a good yield on a very good discount to NAV
14. JPMorgan European Investment Trust (JETI): 5.5% - Some European diversification at a decent yield and good discount to NAV
15. HICL Infrastructure plc (HICL): 5.0% - 3i Infrastructure popular around here lately, but this has a much better yield

Overall yield 5.4%

All yields as quoted by Hargreaves Lansdown except SSE (*) which I needed to correct for the cut to 80p.

I'm there will be challenges on many if not all of the constituents, but discussion is good...

[PinkDalek]

3. Bank of Montreal (BMO): 4.6% - Yield quoted after 15% withholding tax.
10. International Business Machines (IBM): 4.8% -

To be consistent for UK taxpayers and those who suffer the treaty rate, should not IBM also be shown net of withholding tax?

(In our situation the IBM withholding tax is fully offsettable against the UK Income Tax liability on that dividend income but that is a separate issue and won't apply to all.)

[Wizard]

3. Bank of Montreal (BMO): 4.6% - Yield quoted after 15% withholding tax.
10. International Business Machines (IBM): 4.8% -

To be consistent for UK taxpayers and those who suffer the treaty rate, should not IBM also be shown net of withholding tax?

(In our situation the IBM withholding tax is fully offsettable against the UK Income Tax liability on that dividend income but that is a separate issue and won't apply to all.)

As the portfolio is held in a SIPP there is no US withholding tax under the current UK:US agreements.

[88V8]

A new HYP now, Fixed Interest. Hmmm.

For someone nearing retirement, Prefs and other Fixed Interest can form an excellent bedrock.
But if we are talking about someone beginning their investment journey, then I would give Fixed Interest a miss.
The erosive effects of inflation on a static payment over an extended period are too damaging.

I do hold a lot of FI in my HYPish. But I have plenty of spare income so I can keep topping up the FI, and I am at an age where inflation will have less time to erode.

By all means move a portion into FI when rejigging the portfolio pre-retirement. In the meantime, ITs are perhaps a better resource for reliable income provision.

Just an observation.

V8

[PinkDalek]

Thanks, I clearly missed the mention of a SIPP!

[Wizard]

A new HYP now, Fixed Interest. Hmmm.

For someone nearing retirement, Prefs and other Fixed Interest can form an excellent bedrock.
But if we are talking about someone beginning their investment journey, then I would give Fixed Interest a miss.
The erosive effects of inflation on a static payment over an extended period are too damaging.

I do hold a lot of FI in my HYPish. But I have plenty of spare income so I can keep topping up the FI, and I am at an age where inflation will have less time to erode.

By all means move a portion into FI when rejigging the portfolio pre-retirement. In the meantime, ITs are perhaps a better resource for reliable income provision.

Just an observation.

V8

The exam question stated for immediate drawdown of income with an anticipated requirement for the next 20 years, seems a reasonable suggestion for somebody just retiring.

[88V8]

[...15 holdings of about £5k each. My starter for ten, in no particular order, would be:
I'm there will be challenges on many if not all of the constituents, but discussion is good...

As a non-finance option to NWBD, Bristol Water Prefs BWRA where the language is also comforting, yield 5.6%

Murray, I think the ticker is MUT.

SSE, yes if we exclude cutters the list will be very thin. Do think though that recurrent cutters such as Aviva should be off limits.

IBM, also Withholding tax 15%. Quoting yields with tax mixed in could be a little confusing? And some of us have the privilege, as the Beeb might put it, of paying HRT which is another complication is calculating net yield, so perhaps gross yield might be better?

Canadian Prefs are a temptation. There are a lot of them. But I know nothing about the regulatory environment. If the issuers wanted to 'do an Aviva' where would one stand. Just musing really, not something I feel obliged to get into at present.

V8

[88V8]

A new HYP now, Fixed Interest. Hmmm.
For someone nearing retirement, Prefs and other Fixed Interest can form an excellent bedrock.
But if we are talking about someone beginning their investment journey, then I would give Fixed Interest a miss.
The erosive effects of inflation on a static payment over an extended period are too damaging.

The exam question stated for immediate drawdown of income with an anticipated requirement for the next 20 years, seems a reasonable suggestion for somebody just retiring.

Yes, in our current low inflation world.

V8

[dundas666]

If I recall correctly, the entire UK stock market is about 3% and falling of all the world's stock markets. I am more convinced than ever that to ignore the other 97% of the world's markets is simply daft. I commend those thinking of HFEL (I own), MYI (thinking of owning) as a great staring point to deversify away from a totally UK centric portfolio.

RVF.

I was thinking along those lines too and a few weeks ago re-aligned my portfolio from a 100% vanilla HYP of 28 UK shares, to:
a) mini-HYP of 12 'decent quality' UK shares: Admiral, Chesnara, Glaxo, HSBC, L&G, NG, Phoenix, PHP, Schroders, Smith(DS), SSE, TritaxBB
...including going overweight in HSBC and L&G in the hope of reinstated/maintained dividends
b) mini-basket of global income ITs: Henderson Far East HFEL, Murray International MYI, Middlefield Canadian MCT

Currently they're weighted 50% each, but any top-ups will initially go to the global ITs as I am aiming for 60-40 in the long run.

Cheers, Pete

[monabri]

My hyp is

60% HYP (individual companies - some of which are still paying a dividend )
31% Income ITs (Global)
6% Growth ITs (Global)
3% Bonds/Private Equity

New money will not be going into the HYP!

I'm not really sold on the idea of HYP (as defined by HYP Practical). I started my HYP about the same time as Terry (Wizard) and I think we have drawn similar conclusions based on our experiences. It might simply be that end 2016/start 2017 was a bad time to start a HYP but the total return on my HYP has been very poor (TR of 20% negative in 3+ years), not helped by "investments" in Carillion and Provident and IMB falling off a cliff). I strongly believe that collectives are the way forward and - if I was starting again - I would avoid HYP - the general "investor" is not skilled enough in reading balance sheets and sniffing out danger. It is better (IMHO) to pay the experts a 0.6%-ish tariff to avoid the situation where your pot of 20 individual shares sees a couple or three get wiped out.

At the moment, HYP shares which are withholding dividends, for whatever reason, are non starters. What do they offer...little growth prospects and currently no dividend. Rebasing of dividend at a lower level seems to be on the cards for many companies. So, reduced dividends and no growth...yep, not doing anything for me!

As for the UK - mmm! Anything that does not have a multinational presence I treat with caution. The outlook for the UK is (and this is my opinion) poor. The rest of the World is moving on and we are pratting about with the likes of Brexit + a government that has performed & continues to perform very badly over Covid 19. A slow decline to obscurity and "also ran" status.

[TUK020]

I'm there will be challenges on many if not all of the constituents, but discussion is good...

Wizard,
super response. just the sort of thing I was hoping for in posing the question.
thank you
tuk020

[TUK020]

Murray, I think the ticker is MUT.

Murray Income is MUT.
Murray International (the Bruce Stout IT cited here) is MYI