So what is "high yield" now?

[funduffer]

Income seeking investors are not always bothered by share price considerations. A downside of chasing high dividend yield is that what you may gain on the dividend, you can lose on the share price, so the overall return is no better and may well be worse than a share with a yield close to the mean or median.

Very high yield shares are the most likely to be companies in trouble, even if their problems haven't hit the news yet. That can often result in further falls in their share price and risks to the dividend, hurting both capital and income.
So an income investor should be bothered about the higher than average risk to the too-good-to-be-true dividend.

Yes to this. Vodafone (VOD) is a good example over the last 10 years or so.

FD

[Charlottesquare]

Very high yield shares are the most likely to be companies in trouble, even if their problems haven't hit the news yet. That can often result in further falls in their share price and risks to the dividend, hurting both capital and income.
So an income investor should be bothered about the higher than average risk to the too-good-to-be-true dividend.

Yes to this. Vodafone (VOD) is a good example over the last 10 years or so.

FD

I differ slightly, if it is already in the yield (the risk premium) then it is already in the news (maybe not the popular news), unless we believe there are vast swathes of participants with secret knowledge pushing the price down and the yield up (I do not so believe re larger caps) if the market is pricing something that something is already public, the pricing may be an over reaction or an under reaction to the news, but the news is already out.

IMHO excess yield is a recognition of perceived risk (justified or not) , if it were not what is the excess yield, it would surely not endure and the market would settle and then correctly price the instrument. The fact it has not over sustained periods indicates the market believes there is a risk factor in play. (EXCESS YIELD = RISK, if not what does it equal, market mispricing?)

[88V8]

IMHO excess yield is a recognition of perceived risk (justified or not) , if it were not what is the excess yield, it would surely not endure and the market would settle and then correctly price the instrument. The fact it has not over sustained periods indicates the market believes there is a risk factor in play. (EXCESS YIELD = RISK, if not what does it equal, market mispricing?)

I'm heavily invested - if that is the word - in DEC Diversified Energy. Current yield >15%.
Theory is it's mispriced because its hedging strategy doesn't fit normal accounting protocols.
Hopefully it won't turn into a case study.

V8

[pyad]

There's no mystery here if we're talking HYPs. HY meant simply a yield above the FTSE100 at the time of selection, since HYP shares were selected primarily from that index. On the face of it this definition includes super high yielders but HYP selection was never a purely mechanical process; it required some fundie checks to try and ensure divs were sustainable in the near future of a year or two, as far as this could be done.

There is no "too high" and it was always incorrect imo to ignore super high yielders automatically, for that reason alone. Surely they are worth some examination so that even though many might well be junk, there could be some irrational HYs which market sentiment has valued wrongly. Anyone who has followed the market for more than five minutes must be aware that irrational valuations can last a long time and can be seriously extreme at times. This can deliver opportunity to the HYPer. The trick is to try and distinguish junk from irrational valuations which is not easy.

The classic case atm is LGEN on its monster yield. Is that too high and heading for trouble or an HYP bargain? You have to decide if considering buying, there are never any guarantees with shares, but it would be quite wrong to disregard it mechanically I think.

[Charlottesquare]

There's no mystery here if we're talking HYPs. HY meant simply a yield above the FTSE100 at the time of selection, since HYP shares were selected primarily from that index. On the face of it this definition includes super high yielders but HYP selection was never a purely mechanical process; it required some fundie checks to try and ensure divs were sustainable in the near future of a year or two, as far as this could be done.

There is no "too high" and it was always incorrect imo to ignore super high yielders automatically, for that reason alone. Surely they are worth some examination so that even though many might well be junk, there could be some irrational HYs which market sentiment has valued wrongly. Anyone who has followed the market for more than five minutes must be aware that irrational valuations can last a long time and can be seriously extreme at times. This can deliver opportunity to the HYPer. The trick is to try and distinguish junk from irrational valuations which is not easy.

The classic case atm is LGEN on its monster yield. Is that too high and heading for trouble or an HYP bargain? You have to decide if considering buying, there are never any guarantees with shares, but it would be quite wrong to disregard it mechanically I think.

All fair comment- basically there is unlikely to be (but not impossible) a free lunch so caveat emptor, a high yield is possibly saying something , listing possible options by say yield and other selection priorities is all well and good but not everything within share selection is capable of measurement to the nth degree.(A bit like selecting from the fridge, best before dates are helpful but sense of smell may well trump.)

[Itsallaguess]

There's no mystery here if we're talking HYPs.

HY meant simply a yield above the FTSE100 at the time of selection, since HYP shares were selected primarily from that index.

On the face of it this definition includes super high yielders but HYP selection was never a purely mechanical process; it required some fundie checks to try and ensure divs were sustainable in the near future of a year or two, as far as this could be done.

There is no "too high" and it was always incorrect imo to ignore super high yielders automatically, for that reason alone. Surely they are worth some examination so that even though many might well be junk, there could be some irrational HYs which market sentiment has valued wrongly. Anyone who has followed the market for more than five minutes must be aware that irrational valuations can last a long time and can be seriously extreme at times. This can deliver opportunity to the HYPer.

The trick is to try and distinguish junk from irrational valuations which is not easy.

One aspect of your push-back against the idea of a 'mechanical process' that might try to avoid ultra-high-yield junk is that it doesn't seem to recognise that the HYP process already has two default 'mechanical processes' that many income-investors might actually question ahead of the one that might potentially avoid most of that junk...

Here, of course, I'm talking about the two existing 'mechanical processes' that tell HYP investors that they should only look for investments in UK markets, and then the additional mechanical process of discounting even some of those limited options, based on an additional 'large market-cap requirement'...

One thing I'm struggling to square a little based on the related HYP Practical discussion around the idea of 'ultra high yield junk' issues, is that there seems to be a common theme where the lack of a requirement for a mechanical-screen for 'ultra high yield junk' is being made by suggesting that all income-investments need a good level of understanding in terms of their underlying Company Accounts, with the suggestion that income-investors should have a good feel for any potential investments before committing any funds in the first place...

If that's always been the case though, why then is there a need for a UK-only 'mechanical filter', and then underlying that, an additional 'Market-Cap' filter for the HYP process?

Surely, as income-investors, if we're always having to rely on a very good understanding of all income-investment Company Accounts, then no further restrictions of those types would be needed, would they?

Cheers,

Itsallaguess

[Wuffle]

Dorris appears to have left the building.
I thought the basis for this was i) clueless Doris, ii) don't buy annuity 'cos the money has gone.

All roads lead to CTY (or similar) who are filtering out the utter crap for you.
Yes, yes at a price but the comparison is to the annuity where all of it goes up front, not some idealist panacea.

W.

[moorfield]

If that's always been the case though, why then is there a need for a UK-only 'mechanical filter', and then underlying that, an additional 'Market-Cap' filter for the HYP process?

Off topic slightly but I think the common answer to this is firstly you are buying UK listed companies that operate internationally, secondly holding foreign listed shares in UK nominee accounts can incur a withholding tax of some sort on your income.

[moorfield]

Dorris appears to have left the building.
I thought the basis for this was i) clueless Doris, ii) don't buy annuity 'cos the money has gone.

All roads lead to CTY (or similar) who are filtering out the utter crap for you.
Yes, yes at a price but the comparison is to the annuity where all of it goes up front, not some idealist panacea.

W.

I don't recall the Stone Tablets ever explaining why income ITs would be unsuitable for someone like a Doris. They seem an obvious thing for someone like her to invest in. Many of the HYPsters here use them too - are they hedging their bets because they don't really buy into driving all their income from HYP, or is it just a hobby, I wonder.

CTY - I have long considered it a benchmark for the minimum acceptable performance of an HYP, in terms of overall portfolio yield and overall income volatility. In other words, if you can't or aren't beating CTY, you might as well give up and buy it.

Later, following the CLLN implosion, I started thinking about simple steps I could take to curb my penchant for chasing what I now call too high yields, which again I express relative to CTY. 2*CTY, as you know. My conjecture here, and it is just that, is that the second derivative of risk (of a dividend cut) wrt. yield is at it greatest there or thereabouts. Keep up at the back.

Vodafone is next above that ceiling, and has been for some time now. Anyone want to express a view on why they think its dividend is sustainable at the current yield on offer?

[NeilW]

Vodafone is next above that ceiling, and has been for some time now. Anyone want to express a view on why they think its dividend is sustainable at the current yield on offer?

Cash flow.

Vodafone generates a lot of cashflow and an awful lot of accounting noise as it writes off goodwill it overpaid for in the distant past.

From what I can tell Vodafone easily generates the cash flow to cover the dividend.

Then it is down to whether you think the depreciation schedule is accounting based or business based. And therefore whether it is aggressive or conservative - which will determine whether you think the capital additions could be trimmed back if necessary.

Firms that continue to generate cash from depreciated assets can be a little gold mine.

That's the counterargument. We shall see if Vodafone has drifted over the line from cash cow to dog in due course.

[Alaric]

That's the counterargument. We shall see if Vodafone has drifted over the line from cash cow to dog in due course.

The dividend is expressed in Eutos and has been the same for several years. It would fluctuate in sterling terms. So the high yield is mostly a function of a depressed share price.

You suggest the balance sheet is full of goodwill and expensive goodwill at that, having overpaid for acquisitions. So it may be difficult to determine what it's really worth. As far as the dividend is concerned, is there a suspicion that part of the cash represents a return of capital to shareholders?

In any event for a purchaser who even when seeking income would measure success or failure by total return may well find that what they gain on the dividend, they lose on the share price.

[Lootman]

If that's always been the case though, why then is there a need for a UK-only 'mechanical filter', and then underlying that, an additional 'Market-Cap' filter for the HYP process?

Off topic slightly but I think the common answer to this is firstly you are buying UK listed companies that operate internationally, secondly holding foreign listed shares in UK nominee accounts can incur a withholding tax of some sort on your income.

Just because many UK companies derive much of their earnings overseas does not imply that they are fully equivalent to holding overseas shares. There is still single country political, tax and regulatory risk in the UK. If a UK energy or financial company is competing with an American one, but the UK company has a windfall tax slapped on it and the US one does not, then the UK companies should lag, other things being equal. And of course Corbyn was threatening to do all kinds of things to UK businesses, like confiscate 10% of their share capital and give it away to workers.

As for withholding tax, individual investors can claim a credit for that in certain circumstances.

Again, UK companies are not well represented in some very important sectors like tech.

Avoiding 96% of global market cap out of a sense of patriotism is not a good idea for many investors, in my view.

[daveh]

And the interesting thing about Vod is that it overpaid for most of its overpriced takeovers with its (at the time) overpriced shares and not with cash or debt. However it still has a lot of debt be which it goes seem to be paying down as it rationalised some of its overseas holdings. Actually at the moment with its very depressed share price share purchases might be a better bet than the divi.