HYP Defensiveness

[baldchap]

Due to the usual companies held in HYP's, I suppose that they are quite defensive by nature.

However, my own personal guidelines force me to hold at least 50% of my portfolio in traditional defensive stocks.

Do Forum members think I am being a tad too cautious and possibly missing out on extra yield because of it?

I would be very interested to hear your views, particularly from anyone who is as rigid as myself. I suppose that would be confirmation bias

[JohnnyCyclops]

As a starting point one needs to define 'defensive'. I presume you're using the term to differentiate from 'cyclical'.

I found Capita Registrars Dividend Monitor Report to be a ready-reference of sector categories. It's about 3/4s down on this link.

http://www.capitaassetservices.com/arti ... nd-monitor

'Defensives' in that sense mean sectors such as Pharma/Biotech, Utilities, Beverages, Tobacco, Fixed Line Telco (more later), Food Producers, Food Retailers, Non-Life Insurers, Personal Goods, and Health Care Equip/Services.

'Cyclical' is everything else.

But that's quite broad brush. That link above gives the annual Q3 total dividend changes. On a very small sample size, I thought it interesting that the 'defensive' fixed line telco dividends changed by 21% y-o-y, whereas the 'cyclical' mobile telco was pretty steady at 2% change. I suppose beyond standard sector categories it's up to each investor to assess individial companies to determine whether or not they are truly 'defensive'.

Defensive may or may not also be a proxy for 'ex-growth' companies, at which point an investor may wish to receive a higher return from dividend yield to allow for lower valuation growth potential.

You seem to argue from different points of view. First you state that people following a high yield strategy usually invest in 'defensive' companies (ergo they must be to some extent higher yielders). Then you state that your own defensive investing style is keeping you away from higher yielders. Both statements could be true, but then implied is the defensive stocks you hold are not the same or strongly aligned to what a 'typical' HYPster might hold.

It might be instructive to know the average yield of your investments, or perhaps post a list of the holdings with proportions (% not value). From gut feel many HYPsters who post here seem to be in the 4-5% range for portfolio yield. But there may be many others who don't post here, or are achieving results above or below that range.

[tjh290633]

Tell us which shares you hold and then we can comment. Also mark those which you consider to be "defensive".

TJH

[baldchap]

Thanks for the detailed reply Johnny, and my apologies for not being clear.

In the first instance I meant that HYP's are possibly more defensive in nature as they tend to focus more on Blue chips rather than small caps, and the protection that provides.

When I say traditional Defensive stocks I meant, as you suggested, non-cyclical.
I stick to the ICB sector definitions although it is a very blunt tool when so many large companies are themselves quite diversified.

I notice in your link for the Q3 Div. monitor that Capita include Mobile Telecoms & Aersospace/Defence as Cyclical rather than Defensive. I am a bit bemused...as recently as Q1 2016 they were back in Defensive where I thought they belonged?
Maybe Morningstar have it right by putting them in their 'Sensitive' sector.

Anyway, using the spreadsheet available from the site my running yield is 5.2%
So I suppose the question I am asking is..

By rigidly selecting 50% of my 30 share portfolio from the ICB defensive sectors, am I missing out on extra yield by being too cautious?
I could reduce it to 40%, which would allow me to let go of 3 defensive shares in the 2.8%-3.5% dividend range(DGE,GRG etc) for cyclical shares yielding 5%+.

I realise that this may only increase the portfolio yield by an extra 0.5% at best, but this is not insignificant for portfolio's above a certain size.
As you say, it would be interesting to hear what the 'HYPsters' think. Maybe they think that half a percent is the price of being able to sleep at night?

Thanks again for you time.
BC

[monabri]

Baldchap - Have a read of the "Tweedy Browne" (page 13&14) on the HYP practical - might be of interest to you regarding defence vs yield . It seems to suggest that, long-term, a middle ground gives best overall returns ( "Goldilocks..Not too hot, not too cold)!

[JohnnyCyclops]

Thanks for the detailed reply Johnny, and my apologies for not being clear.
....

I notice in your link for the Q3 Div. monitor that Capita include Mobile Telecoms & Aersospace/Defence as Cyclical rather than Defensive. I am a bit bemused...as recently as Q1 2016 they were back in Defensive where I thought they belonged?

Anyway, using the spreadsheet available from the site my running yield is 5.2%
So I suppose the question I am asking is..

By rigidly selecting 50% of my 30 share portfolio from the ICB defensive sectors, am I missing out on extra yield by being too cautious?
I could reduce it to 40%, which would allow me to let go of 3 defensive shares in the 2.8%-3.5% dividend range(DGE,GRG etc) for cyclical shares yielding 5%+.

I realise that this may only increase the portfolio yield by an extra 0.5% at best, but this is not insignificant for portfolio's above a certain size.
As you say, it would be interesting to hear what the 'HYPsters' think. Maybe they think that half a percent is the price of being able to sleep at night?

BC - no worries, we'll get there in the end.

I just grabbed the latest Dividend Monitor as I knew it has the standard sectors in. I didn't stop to check if they made sense!

So you have a 30 share portfolio with a yield of 5.2%. Assuming it's all equity stocks (i.e. no preference shares) I'd say you're doing pretty well already on the yield. Ours is at ~4.6% currently.

You need to rethink the maths a bit. Say you let go of three stocks at 2.8% to 3.5%. Let's call that 3.2% for convenience, which is 2.0% under your portfolio average. Those three are 1/10th the total holdings (assuming the 30 are equal weight). I stand to be corrected but I think they are pulling the average down by 0.2% (1/10th of 2.0%). But if you replace with new stocks (not already held) each delivering 5.2% you'll improve by 0.1% overall, thus to 5.3%. I think!!!!

Or, looked at the other way, I'm not sure dropping 3 stocks averaging 3.2% from a portfolio of 30 runnning at 5.2% yield and replacing them will boost overall yield by 0.5% to 5.7%. Unless the replacement yields were very very high.

[JohnnyCyclops]

( "Goldilocks..Not too hot, not too cold)!

You are Luniversal, and I claim my £5.

[monabri]

Moi?

[tjh290633]

You need to rethink the maths a bit. Say you let go of three stocks at 2.8% to 3.5%. Let's call that 3.2% for convenience, which is 2.0% under your portfolio average. Those three are 1/10th the total holdings (assuming the 30 are equal weight). I stand to be corrected but I think they are pulling the average down by 0.2% (1/10th of 2.0%). But if you replace with new stocks (not already held) each delivering 5.2% you'll improve by 0.1% overall, thus to 5.3%. I think!!!!

Or, looked at the other way, I'm not sure dropping 3 stocks averaging 3.2% from a portfolio of 30 runnning at 5.2% yield and replacing them will boost overall yield by 0.5% to 5.7%. Unless the replacement yields were very very high.

In my list of holdings ranked by yield, I have a column which shows the average yield of the shares down to that row. Hence the cumulative mean starts at 8.2% with CLLN and falls to 4.3% with TSCO, the non-yielder and 37th rank.

Now, were I to sell all shares yielding less than 3.0% (SMDS ranked 30th) my average yield would now rise to 4.9%, assuming that the cash released was spread evenly over the remaining shares.

If I took 4.0% as the cut-off, that is below IMB at 4.1% in 20th position, the average of the remaining 20 shares would rise to 5.7%.

This would probably lead to a loss of diversity because of keeping a number in the same sectors and getting rid of other in single share sectors.

Here are the bottom 17:

Rank   EPIC   Yield
  21   UU.    3.90%
  22   TATE   3.65%
  23   RIO    3.65%
  24   BA.    3.43%
  25   SGRO   3.35%
  26   ULVR   3.30%
  27   IMI    3.17%
  28   BATS   3.12%
  29   KGF    3.09%
  30   SMDS   3.00%
  31   DGE    2.68%
  32   CPG    2.19%
  33   RB.    2.17%
  34   INDV   2.02%
  35   BLT    1.57%
  36   S32    0.48%
  37   TSCO   0.00%

TJH

[JohnnyCyclops]

In my list of holdings ranked by yield, I have a column which shows the average yield of the shares down to that row. Hence the cumulative mean starts at 8.2% with CLLN and falls to 4.3% with TSCO, the non-yielder and 37th rank.

Now, were I to sell all shares yielding less than 3.0% (SMDS ranked 30th) my average yield would now rise to 4.9%, assuming that the cash released was spread evenly over the remaining shares.

If I took 4.0% as the cut-off, that is below IMB at 4.1% in 20th position, the average of the remaining 20 shares would rise to 5.7%.

This would probably lead to a loss of diversity because of keeping a number in the same sectors and getting rid of other in single share sectors.

Many thanks. Much better than my guessing at it. But also shows for a mature HYP you're currently averaging 4.3% yield, we're currently at 4.7% (from HYPTUSS) and the OP is pondering his 5.2%.

Other than topping up all/some remaining holdings (with the diversity risk you note), the OP will be left looking around for other suitable HY candidates to replace the three sold. There's nothing to say it can't be done.

[kempiejon]

For another data point, my mature, large and mostly untinkered HYP is offering me 4.3% from the last update of the HYPTUSS, this is the forecast dividend yield. My first instinct was to say 5% plus looks a bit ambitious but if I was buying today perhaps I could manage that with a concentrated portfolio. As TJH has demonstrated his top 20 would give 5.7%. Perhaps I should sell up and buy that portfolio instead.
I have, when thinking about tinkering, looked at how much I could increase my portfolio yield by tidying up my holdings and selling very low/no yielders (selling below 2% yield) into the best of the rest, from previous workings this could increase the yield by about 10%. If one was more drastic and trimmed everything below 4% I could probably get above 5%.

[77ss]

I have, when thinking about tinkering, looked at how much I could increase my portfolio yield by tidying up my holdings and selling very low/no yielders (selling below 2% yield) into the best of the rest, from previous workings this could increase the yield by about 10%. If one was more drastic and trimmed everything below 4% I could probably get above 5%.

I would have thought that, irrespective of ones general outlook on tinkering, the occasional bout of tidying up makes a lot of sense. If you can safely increase increase your income and reduce your admin overhead then why don't you do it?

I get rid of sub-2% ers (only one, so far - RB) and those trivial holdings that corporate activity lumbers us with (INDV, S32) and that I don't wish to increase to a sensible level.

I wouldn't even consider selling everything below 4%.

[spiderbill]

My total portfolio running yield from Hyptus is currently 4.67% - that's with around 9% of the shares being non-HYP plus my overweight holding of Sun Life returning about 2.5% after withholding taxes. While doing my projections described in my thread about adding the contents of a cash ISA, I got that up to around 4.8 or 4.9% just by buying more of the top yielders or by bringing my lower holdings up to match the higher ones. If I cut out the minnows and leave only a couple of growth shares I can get it up just over 5% and if I were to sell Sun Life completely I managed 5.6% in one scenario.

So it's certainly possible but there are certainly risks involved. e.g is Carillion's dividend sustainable - seems unlikely; will housebuilders continue their current run - maybe in the short term but they are cyclicals after all; will the current oil price hold. Personally I feel happier with a bit of alternative strategy and some "safe and secure" mixed into a mainly HYP set of holdings. If I can sustain around 4.8% I'll be more than happy. I certainly don't think that the OP is being overly defensive and is doing well to get 5.2%

[kempiejon]

I would have thought that, irrespective of ones general outlook on tinkering, the occasional bout of tidying up makes a lot of sense. If you can safely increase increase your income and reduce your admin overhead then why don't you do it?

I get rid of sub-2% ers (only one, so far - RB) and those trivial holdings that corporate activity lumbers us with (INDV, S32) and that I don't wish to increase to a sensible level.

Quite right, but as I prefer not to tinker, neatness is not a driver and I don't see how it costs me any more to have a few stragglers in the HYP I don't usually bother for the sake of it. In fact there is the extra admin and costs of sales, purchase and stamp. Like you I have example sales - RB. S32 and INDV, I also annually harvest capital gains in my unsheltered accounts and move cash into the ISA so I'm not a never sell and I do tidy a bit but there is now and I expect continue to be rogue low or no yielders dragging on my income.

[baldchap]

Gents, thank you very much for the comments, and the food for thought.

I don't think I am over concentrated, although I will keep an eye on housebuilders currently running at 9% of the portfolio.

I am not a purist and am quite happy to eject non performers if it is cost effective. Last year STAN & BLT were both good examples of this.

My current lowest three performers are DGE 2.8%, PZC 2.8%, and GRG 3.0%, and whilst it may not be earth shattering, they are still sound enough companies that I would be foolish to eject at this time. As has been said, 5.2% for the portfolio is pretty good, and I would be happy with anything north of 4% to be honest.

Thanks again for the words of wisdom.
BC

[SalvorHardin]

My vote goes to Unilever. Not a HYP share for the purists, but it does have the best defensive qualities; super-strong Warren Buffett-style moats (global distribution network, strong brands, consumer goods) covering multiple product lines. Next up would be the utilities, especially National Grid.

Most HYP shares are not what I'd call defensive, hence their relatively high yields. Builders are highly cyclical, oils are subject to the vagaries of the oil price and increasingly political interference whilst pharmaceuticals' increasing promotion of "core earnings" (made up eps ignoring many costs) makes me nervous.

As for banking, this is a sector that in the last couple of decades has been amazingly cavalier with shareholders' interests. The sheer scale and regularity of banking crises and the systemic risk are bad enough. Then there are the provisions for mis-selling such as pensions then PPI, which happen with such regularity that to me they don't look like exceptional items. Then there's the criminality (money laundering, fraudulent selling, bogus repossessions, pulling the plug on clients so the bank can buy their assets at fire-sale prices, etc.) which has led to so many whopping fines.

Many people whose HYPs were stuffed with banks back in 2007 vanished from TMF within two years.

I'd be pretty sure that Unilever will be around in thirty years with much higher sales, eps and dividend. There aren't too many shares for which that can be said.

[MDW1954]

My vote goes to Unilever. Not a HYP share for the purists, but it does have the best defensive qualities; super-strong Warren Buffett-style moats (global distribution network, strong brands, consumer goods) covering multiple product lines..... I'd be pretty sure that Unilever will be around in thirty years with much higher sales, eps and dividend. There aren't too many shares for which that can be said.

Quite so. And I do miss the ability to "rec" a post!

MDW1954

[tramrider]

Gents, thank you very much for the comments, and the food for thought.

I am not a purist and am quite happy to eject non performers if it is cost effective. Last year STAN & BLT were both good examples of this.

BC

I am not convinced that non-performers always should be ejected. Both STAN and BLT have staged major price recoveries over the past year. You may like to compare your selling prices with the current prices. Although they do not yet have decent dividends, the share price recoveries probably give better total returns for this year than most of your defensive stalwarts. For example, STAN was 432.7 on 5/4/2016 and is around 817.9 today, a rise of nearly 90%, which beats several years of accumulated dividends.

Tramrider