HYP1 is 22 - thread discussing income and capital diversification

[moorfield]

Well, we already do have a example, if I may be so immodest : ArbIT, which contains several ITs dealing with ex-UK shares.

So why do folk bother with HYPs ?

[Gersemi]

So why do folk bother with HYPs ?

Well personally I read about the concept on TMF at a time when I had inherited a lump sum. I had invested in a small way via unit trusts previously, but I liked the idea of chosing my own stocks and generating an income stream, as my long term plan was to use the money to finance early retirement. Over a few years I built up a portifolio of the usual suspects. I have continued to do so, but it sits within a larger portifolio with collective holdings.

I have found that the performance of the HYP section compares well with the other components. I have indeed retired early and the income from my 'HYP' is providing a useful income - at the moment I have no pension income, I am 56 and won't draw my pension until I'm 60, so otherwise I am living off savings. Quite simply it has performed as I hoped it would.

[Arborbridge]

Well, we already do have a example, if I may be so immodest : ArbIT, which contains several ITs dealing with ex-UK shares.

So why do folk bother with HYPs ?

I achieved a higher starting income with my HYP than with my ITs. You mentioned the idea of having an IT bundle might be the inverse of than, but in my experience, ITs usually yield less (at least, the safe-ish ones I chose did) - though I daresay you could pick ITs like HFEL just to prove me wrong

[moorfield]

though I daresay you could pick ITs like HFEL just to prove me wrong

Yes HFEL in particular does seem to attract a lot of moaning in these parts. Maybe I will select it into my new IT income portfolio after all.

[88V8]

though I daresay you could pick ITs like HFEL just to prove me wrong

Yes HFEL in particular does seem to attract a lot of moaning in these parts. Maybe I will select it into my new IT income portfolio after all.

You want HFEL? You can have mine, provided you pay me what it cost

V8

[Charlottesquare]

though I daresay you could pick ITs like HFEL just to prove me wrong

Yes HFEL in particular does seem to attract a lot of moaning in these parts. Maybe I will select it into my new IT income portfolio after all.

You want HFEL? You can have mine, provided you pay me what it cost

V8

Mine are only down 1.61% last time I bothered to look, less than 3 months dividends, but I do not want any more.

[Itsallaguess]

I have also no issue with a claim that HYP1 shows it can work (although the fact the income is volatile, can go down, and suffers a large degree of reliance on so few income sources in the portfolio stretches what I might consider to be a reasonable description of "work").

But a sample size of "1" is hardly statistically significant - and begs the question what might be the position were HYP1 to have underperformed.

I wanted to revisit the above comment, because I've run some portfolio-concentration numbers on a separate non-tinker HYP portfolio, and it's interesting to see that it's displaying the same tendency to verge towards a highly concentrated position in terms of income and capital delivery -

https://www.lemonfool.co.uk/viewtopic.php?p=557563#p557507

The reason I'm posting this link in reply to the above quote is that whilst HYP1 also clearly now displays a highly-concentrated portfolio, it's delivered results in terms of income and capital are really quite impressive once that carried-risk is acknowledged, but it's not clear to me if this newly-linked HYP is compensating the holder in quite the same results-driven way, which might then lend itself to start answering your second question above...

For completeness, here's a link to the overall 2022 HYP review of the above portfolio -

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=37267

Cheers,

Itsallaguess

[vand]

Haven't read past the first page, but just jumping in here to point out that diversification isn't a difficult concept to grasp nor to implement; just increase your number of holdings. IMO there is no reason to hold a very concentrated portfolio if stable income is your main goal - there are plenty of good high yielding bluechip stocks available.

The woes of PSN this year show the dangers of overconcentration in something that seems too much of a good thing, but there have been plenty of other such examples.

The number of publically listed companies that can say they have never cut their dividend is vanishingly small - dividend cuts go hand in hand with this type of strategy, I'm afraid. That's not to say it isn't still worth pursuing - it just makes a stronger case for not overconcentrating in any particular stock.

Also not a particular fan of UK income ITs - look at their holdings and their performance they are not doing anything that a reasonably well equipped HYPer here couldn't also do. If they have a 1% fund charge it's like a 15% handling free taken from the the income stream.

[Alaric]

IMO there is no reason to hold a very concentrated portfolio if stable income is your main goal

It's by no means clear that stable income is a main goal of HYP 1 purists, given its track record of jumping all over the place. For stable income from shares you could have a portfolio of Income generating ITs, or emulate their methods by holding back safety margins and reinvesting part of the dividend income as a buffer against cuts.

[Lootman]

IMO there is no reason to hold a very concentrated portfolio if stable income is your main goal

It's by no means clear that stable income is a main goal of HYP 1 purists, given its track record of jumping all over the place. For stable income from shares you could have a portfolio of Income generating ITs, or emulate their methods by holding back safety margins and reinvesting part of the dividend income as a buffer against cuts.

Indeed. I seem to recall that way back HYP was touted as providing a stable and increasing income, on the basis that dividends are (supposedly) more secure than capital gains. But then we had 2008 and 2020 and the goalposts got moved. I cannot really say it any better than I did on the first page of this long topic:

"for me the problem would be that for 9 of the 22 years, almost half the time, the annual income from HYP1 was lower than in a previous year.

Compare with CTY, for which that never happened.

Now of course that HYP1 income volatility could be reduced by using some of its income to gradually build up an income reserve, as CTY does. But then the capital return of HYP1 and its ability to generate future income would be lower of course.

And given that 2 of those 9 years were in years 3 and 4, any HYP1 income reserve would not have been fully built up at that early point anyway. So for me it is interesting as a thought experiment, not least because it shows the riskiness and lumpiness of such an approach longer term. But I do not believe that anyone in their right mind would invest 100% that way."

[Alaric]

And given that 2 of those 9 years were in years 3 and 4, any HYP1 income reserve would not have been fully built up at that early point anyway.

The premise can be modified to supply an income reserve even from outset. If you presume a lump sum is kicking the whole thing off, then just invest 95% or 90% of the initial amount, depending on how many years of income reserve is required. It's a lower amount invested in shares so lower returns if the market performs.

[vand]

IMO there is no reason to hold a very concentrated portfolio if stable income is your main goal

It's by no means clear that stable income is a main goal of HYP 1 purists, given its track record of jumping all over the place. For stable income from shares you could have a portfolio of Income generating ITs, or emulate their methods by holding back safety margins and reinvesting part of the dividend income as a buffer against cuts.

Well sure, I mean is there anyone who actually spends 100% of their dividend income anyway? Its only prudent that some of it is set aside for purposes of smoothing and/or growing the capital base.

As has been extensively discussed elsewhere, a high yield strategy is far from infallable. When the time comes for me to start drawing from my own HYP I personally plan to spend 70-80% of the income and split the rest between reinvesting and cash buffer purposes. The 4% rule can't easily be cheated just because your starting dividend yield exceed that amount.

[Alaric]

I mean is there anyone who actually spends 100% of their dividend income anyway?

The hypothetical investors who put their money into HYP1 were deemed to do so, as is the hypothetical investor who may or may not be setting up a HYP in the near future (see other recent threads). These hypothetical investors are also seemingly uninterested in the longer term capital values of their holdings, there not being any real attempt to filter out those companies sustaining dividends by running down the net assets.

[Arborbridge]

I mean is there anyone who actually spends 100% of their dividend income anyway?

The hypothetical investors who put their money into HYP1 were deemed to do so, as is the hypothetical investor who may or may not be setting up a HYP in the near future (see other recent threads). These hypothetical investors are also seemingly uninterested in the longer term capital values of their holdings, there not being any real attempt to filter out those companies sustaining dividends by running down the net assets.

Yes, I think you have it about right. What a real investor does is probably different, however. In my case, I've never paid out 100% as it seems a silly thing to do and would suggest I have retied too soon. Actually, anyone who retires needing a high yield is unfortunate in that sense, compared with those with enough capital to achieve a good income by investing in low yields or gilts.
I'm too poor for gilts, so I need guilts

Arb.

[tjh290633]

I mean is there anyone who actually spends 100% of their dividend income anyway?

The hypothetical investors who put their money into HYP1 were deemed to do so, as is the hypothetical investor who may or may not be setting up a HYP in the near future (see other recent threads). These hypothetical investors are also seemingly uninterested in the longer term capital values of their holdings, there not being any real attempt to filter out those companies sustaining dividends by running down the net assets.

It has always been known that capital values can rise and fall, without affecting dividend income, but the converse is also true. Consequently the HYP investor pays less attention to the capital value than to the dividend income. The object is to find companies with a record of high and increasing dividends. High takes preference over increasing. A period of level dividends has often been acceptable, AstraZeneca is an example, but the price has risen so far that the yield is unacceptable for a new choice. At just under 2% it is at the level where consideration can be given to disposing of an existing holding, in favour of one with a higher yield. GSK yields 4%, for example, but its dividends are reducing because of the demerger of Haleon.

If one is desperate for more income then, with a portfolio of 37 holdings, I could sell all those with yields below 4% and reinvest in the remainder, which would increase the yield of the portfolio from 5.0% to 6.4%. It would reduce diversification and eliminate several sectors, some of which have increasing dividends after the Covid period.

TJH

[Alaric]

The object is to find companies with a record of high and increasing dividends. High takes preference over increasing.

That's well and good when the high and increasing dividends are a distribution of high and increasing profits. But what of when the high and increasing dividends are being financed by borrowing and running down the net assets of the Company? That might even be suitable for investors looking for annuity like returns, but provided the success of investments is measured by the conventional method of comparing the total return, high dividend yields can just be a trap or a con by directors.

[1nvest]

IMO there is no reason to hold a very concentrated portfolio if stable income is your main goal

It's by no means clear that stable income is a main goal of HYP 1 purists, given its track record of jumping all over the place. For stable income from shares you could have a portfolio of Income generating ITs, or emulate their methods by holding back safety margins and reinvesting part of the dividend income as a buffer against cuts.

Well sure, I mean is there anyone who actually spends 100% of their dividend income anyway? Its only prudent that some of it is set aside for purposes of smoothing and/or growing the capital base.

As has been extensively discussed elsewhere, a high yield strategy is far from infallable. When the time comes for me to start drawing from my own HYP I personally plan to spend 70-80% of the income and split the rest between reinvesting and cash buffer purposes. The 4% rule can't easily be cheated just because your starting dividend yield exceed that amount.

Start with a conventional 5% rule if you like. Still had a very high probability of success as the 4% is based on historic worst case outcome, in the median case higher SWR's could have comfortably been achieved.

Rather than trying to manage stability of income along with frequency/occurrence (date) of dividends, the SWR approach provides a regular inflation adjusted income, monthly perhaps. The original HYP opted for non-rebalanced that will naturally tend towards a number of individually stocks becoming relatively highly weighted over time, index/fund holdings instead of stocks and if/when one fund becomes relatively highly weighted it still is more broadly diversified than a single stock. Total rewards wise and there's inclination for similar average outcomes whether you HYP or combine multiple indexes/funds, HYP isn't some kind of assured better overall outcome, indeed if anything its more inclined to be comparable outcome but with greater risk. HYP income isn't like a annuity income at all, whereas SWR is.