Why High Yield?

[Alaric]

A question asked on another board.

Why "high yield"? Do you need the income, or genuinely believe these will give you the best total return?

Wetherspoons for example. It pays a dividend, but that hasn't been increased for years, so the current yield is under 1%.

Total return per annum according to Morningstar, 14.2% over 10 years, 15.2% over 5 and 18.27% over 3.


https://tools.morningstar.co.uk/uk/stoc ... 0P00007P2K]3]0]E0WWE$$ALL

[fca2019]

A growth stocks strategy is great in a bull run but what about when markets get choppy? In 1999 dot coms were growth stocks, as were the banks in 2007, shortly followed by the crash. Blue chips with high return on capital are traditionally a safe haven so you'd expect to fare better then. So depends on your attitude to risk. I work with a guy buying and selling tesla and us tech stocks on his phone. Great when the going is good. But he's not experienced the bad times.

[dealtn]

Well for me the focus has to be on total return. I am far from alone in this, it won't take much google gymnastics to find articles by Terry Smith on this I'm sure.

Regardless of how shares are categorised I can't see the benefit of limiting one's investment strategy to a subset of the universe, other than perhaps on the grounds of simplicity, or familiarity, neither of which strike me as particularly persuasive arguments. Moreso, I find it odd that some seem keen, almost religious, in the restriction of the investable universe to a small subset, particularly when many within it might be described as "higher risk".

Now I have a high risk threshold, a contrarian by nature, and not just a theoretical but a practical belief that high risk is correlated to high return, and thus in some senses desirable. Of course diversification theory means that at a portfolio level some of these higher risks are dissipated, but even so I can't comprehend the attraction of a strategy that targets a small subset, particularly amongst those who are in the "building" or "investing" stage of an investment cycle, as opposed to the "income" or "drawdown" phases (although my belief is that even in such phases Total Return is the appropriate and efficient metric too, but arguably less practical.)

That's not to say I think "High Yield", or any other limiting strategy, is worse than doing nothing, or only "saving cash", quite the reverse. It is clearly the case that many are successful, and it works for them, in both building up Investment Portfolios, and the Income associated with that, which clearly exceed the "do nothing", or rely on the state for retirement alternatives. It strikes me as limiting, and inefficient however, which is odd given the significant number of posts, and threads across this particular site at least, if not as a "mainstream" view.

[spiderbill]

I think there is more to it than the original question assumes, and it runs into areas of psychology, and of how an individual's mind works, and how much time they have to study investing.

There are a number of accepted styles of investing, (e.g income, value, growth, momentum, etc) and many people will find some of them difficult to understand while they naturally gravitate towards others.

I compare it to the different styles of chess, where you have tacticians, positional players, and strategists. Most chess players tend towards one of those styles - while grandmasters who have much more time for study try to be good at all of them (though even they usually have a leaning one way or the other). I'm a tactician and find it hard to think as a positional or strategist as that doesn't come naturally to me - my brain sees combinations rather than setups or grand plans. If I had unlimited time to read and study then I might get better at them but I don't, so I stick with what I know best.

Investment isn't just about maximising returns, it's also about being sufficiently comfortable while doing it. Even if I know that I should be looking at total return - whether by balancing my strategies or plunging into the one promising highest returns - I may not feel safe in venturing into areas I don't really understand and where I may be more prone to error.

To some the idea of stable and mostly large solid companies generating income through dividends is a solid and easy to understand idea, while they may feel completely at sea trying to understand something like momentum, which may also require more of their time to monitor, or growth, where they may wonder if what goes up must come down rather than continue to rise.

And just like the chess players, a tactician will always look for a tactical solution while a positional player will look for a positional solution, and they may become vehement adherents of their own way.

cheers
Spiderbill

[Alaric]

Blue chips with high return on capital are traditionally a safe haven so you'd expect to fare better then.

Why favour those with a policy of making higher distributions to shareholders than their peers?

[Alaric]

And just like the chess players, a tactician will always look for a tactical solution while a positional player will look for a positional solution, and they may become vehement adherents of their own way.

Sometimes a Bishop or Knight is worth more than a Rook, but anyone basing an entire strategy on that belief would not get very good results.

[dealtn]

Blue chips with high return on capital are traditionally a safe haven so you'd expect to fare better then.

Why favour those with a policy of making higher distributions to shareholders than their peers?

A high return on capital, and a high distribution to shareholders, are (very much) not the same thing.

[Alaric]

A high return on capital, and a high distribution to shareholders, are (very much) not the same thing.

I was thinking of the example of two Companies with similar returns on capital, but one makes high distributions and the other doesn't. If you were spending the dividend rather than reinvesting it, you might prefer the former to avoid selling costs. Equally though, a distribution that you reinvest incurs buying costs.

[fca2019]

why favour those with a policy of making higher distributions to shareholders than their peers?

My investments are mainly in trackers. But have added some income investments on the personal preference that I like an income stream. It's not on logic but based on liking cash hitting the account!

However I do like the idea of solid high yield companies with a long history of dividends. I'm wary of strong growth without strong cash. I've been at two listed companies doing smoke and mirrors, and hockey stick forecasts.

[Itsallaguess]

That's not to say I think "High Yield", or any other limiting strategy, is worse than doing nothing, or only "saving cash", quite the reverse. It is clearly the case that many are successful, and it works for them, in both building up Investment Portfolios, and the Income associated with that, which clearly exceed the "do nothing", or rely on the state for retirement alternatives.

It strikes me as limiting, and inefficient however, which is odd given the significant number of posts, and threads across this particular site at least, if not as a "mainstream" view.

I think the passages above more or less explains the situation, and does so with a level of generosity that's often missing from such comparisons...

Many income-investors on this board, whether that be via HYP-like single-shares, or income-related Investment Trusts, are content with both the returns from their strategy, the delivery of those returns (a very important point that's often missed in these conversations....), and the level of effort required to achieve them.

I've never once heard any income-investor, on either this board or back on TMF, suggest that such an income-strategy is the 'best one' to achieve the 'best return' - they simply deliver 'acceptable results' and are often enjoyable to carry them out, and on the whole that's it, end of story....

The issue with many 'high-yield vs total-return' conversations that I've seen over the years is that they almost always seem to start from a false position, which is where those that prefer and argue for the 'total return' approach assume that they have to argue and defend the fact that taking a more 'total return' approach might deliver better results.

This is a false position to take from the outset simply because no-one with an income-investment approach actually ever argues that this is untrue....

So the whole conversation almost always starts off with an argument that doesn't actually exist, and it only ever really 'exists' to enable the arguments to start in the first place....

I think it would be much better if more 'total return' advocates could take your view dealtn, and simply agree with that income-investing is 'better than many alternatives', as that's more or less exclusively what we think too - it's good enough, and it's better than not doing it....

I wrote a post a few weeks back comparing this 'income-investing vs total-return' argument with exercising...

Yes, there might be triathlon athletes who can argue that the much wider range of exercises that they do are likely promote a stronger and healthier body than the one I might achieve by just swimming and jogging, but you know what? I actually *enjoy* swimming and jogging, and I don't see a great deal of personal merit in many of the other exercises that might be available.

What I do with my exercises is better than nothing, and they deliver results that are much better than not exercising, and I rather enjoy doing them - a lot! They're good enough for me, and I won't ever shout from the rooftops that they are delivering more than they are doing, but they *are* delivering to my requirements...

And so it is with income-investing...

No-one says it's 'better' than any other strategy with regards to returns - not one single person that I've come across, but the debates around the strategy when it comes to the 'total return' comparison almost always start off with the assumption that people do say that....

That's wrong, and is the source of almost all anguish when it comes to this particular debate...

Cheers,

Itsallaguess

[Alaric]

No-one says it's 'better' than any other strategy with regards to returns

Why then, do some vociferous defenders of what they term the "HYP Strategy" attack those who suggest, for example, that not investing can be a sensible strategy if you believe the market is having one of its periodic meltdowns, or accuse those who criticise the almost blind selection of stocks by dividend yield approach of "not understanding" the STRATEGY?

[Itsallaguess]

No-one says it's 'better' than any other strategy with regards to returns

Why then, do some vociferous defenders of what they term the "HYP Strategy" attack those who suggest, for example, that not investing can be a sensible strategy if you believe the market is having one of its periodic meltdowns, or accuse those who criticise the almost blind selection of stocks by dividend yield approach of "not understanding" the STRATEGY?

I can't answer that Alaric - I'm afraid you'll have to ask the people who've said that to you....

As an income-investor who regularly varies the amount of un-invested capital that they might have available, depending on how I feel about general market and macro conditions at any given time, then you'll certainly not hear such criticism from me...

And that sort of raises the point I made earlier about a lot of these discussions and arguments starting off from a really quite false premise...

I think it's likely that you'd find proponents of the 'time to buy is now' approach across a really quite large set of investment-strategies, but you're choosing to only single out HYP investors who might take that view.

Do you think that's fair?

I don't think it's a 'strategy vs strategy' argument, personally - I think it's an individual-investor argument, and many income-investors are likely to take a different view on this point to others within the same strategy, and I can tell you that this is the case because I'm one of those that doesn't agree that the 'time to buy is always now' approach should ignore the needs and preferences of each individual investor, and I'd always prefer to carefully match such an approach in this area to their individual investment-personalities...

As to your point regarding 'the almost blind selection of stocks by dividend yield', then, again, I'll refer you to my earlier point about arguments starting off from a false premise...

It suits you to believe this is the case, as it's easier to argue against, but it's simply not true for many, many income-investors, including many people who use the HYP strategy.

Lots of other metrics are also considered by many of those income-investors, such as market-cap, dividend-cover, dividend-history, levels of debt, free-cash-flow, etc., but it suits your own arguments to ignore this, and to tilt at windmills from a false position whilst frantically waving that 'single metric dividend yield' flag.....

Can you see the patterns developing here Alaric?

Cheers,

Itsallaguess

[Alaric]

Lots of other metrics are also considered by many of those income-investors, such as market-cap, dividend-cover, dividend-history, levels of debt, free-cash-flow, etc., but it suits your own arguments to ignore this, and to tilt at windmills from a false position whilst frantically waving that 'single metric dividend yield' flag.....

I'm thinking specifically of the advocacy on the HYP-Practical Board where these other factors are ignored or at least discounted. There was discussion last year about Vodafone. Many posters believed that it was about to cut its dividend, and they were right. It didn't stop the dividend obsessives from ignoring and even disparaging their fears.


I've been accused of failing to understand the "STRATEGY" when noting that selecting by yield will fish out at least some failing Companies and thus an understanding of why Companies have a high dividend yield is necessary. One thing to look at being the recent price history.

[TUK020]

A question asked on another board.

Why "high yield"? Do you need the income, or genuinely believe these will give you the best total return?

The question was asked on my post on the HYP board.

I do not yet need the income, but want to be in a position to take it in a couple of years. I do understand all of the points about "It's Total Return", but I want to have proven a high yield/dividend growth portfolio strategy to my satisfaction before I am dependent on it for income.

I do not follow an absolutist "Bland Annuity Replacement" (aka "HYP" in capitals), as I do topslice/tinker, have some growth stocks, and also have about a quarter of my portfolio in ITs.

This latter point is to help provide additional diversity, both geographically and in sectors (e.g. HFEL for Far East, HICL for infrastructure etc). I also plan to migrate towards ITs in the longer term if I start losing my interest in hyp detail.........I semi jokingly refer to this as my 'long term gaga plan'

tuk020

[Itsallaguess]

Lots of other metrics are also considered by many of those income-investors, such as market-cap, dividend-cover, dividend-history, levels of debt, free-cash-flow, etc., but it suits your own arguments to ignore this, and to tilt at windmills from a false position whilst frantically waving that 'single metric dividend yield' flag.....

I'm thinking specifically of the advocacy on the HYP-Practical Board where these other factors are ignored or at least discounted.

There was discussion last year about Vodafone. Many posters believed that it was about to cut its dividend, and they were right.

It didn't stop the dividend obsessives from ignoring and even disparaging their fears.

Again though, I think you're allowing the personal views of a small number of income-investors to represent the whole HYP strategy.

The fact that you've stated that there was disagreement on the HYP board around the Vodafone dividend means that you're either making a mistake in allowing yourself to do so, because their were clearly income-investors on the other side of the dividend-debate from the off-set, or you're allowing yourself to do so because it suits the particular argument you're wishing to make.

Either way, you're again starting your argument from a false position...

Alaric, every single investment strategy on the planet will have vociferous advocates that get investment decisions wrong in many instances...

Your position is not to seek out examples of those other strategy-advocates, and decry their particular strategy on the back of those bad choices, and yet for some reason you feel the need to continually seek out HYP examples, and seek to use those examples to represent the whole strategy, and the whole set of income-investors that follow it...

The popularity of income-investing on these boards, and the many and regular examples of people discussing the income-investment choices they make and the reasons that they make them will of course regularly present you with opportunities to knock the HYP strategy, but the fact is that every investment strategy allows individuals to make relatively poor choices, and they *do* - it's just that around here you don't get to point your finger at too many other examples, simply because those other strategy examples have far fewer discussions around them...

Cheers,

Itsallaguess

[TUK020]

That's not to say I think "High Yield", or any other limiting strategy, is worse than doing nothing, or only "saving cash", quite the reverse. It is clearly the case that many are successful, and it works for them, in both building up Investment Portfolios, and the Income associated with that, which clearly exceed the "do nothing", or rely on the state for retirement alternatives.

It strikes me as limiting, and inefficient however, which is odd given the significant number of posts, and threads across this particular site at least, if not as a "mainstream" view.

One other point that niggles me about "growth/total return" strategies versus "high yield" is a feeling that there is a strong survivership bias in the rearview assessment of total return approach.

I have owned/still have stakes in companies that are billed as "Growth companies", and therefore justify a high rating (i.e. low yield). These do fine, until they stop growing, and then get their rating reduced.
Examples are Cobham, RB.
I'm then sat there, thinking I don't have a decent dividend, and I haven't had capital growth (well it was there, but fleeting, and I didn't trade out at the right point).

High yield feels like a better strategy for a largely hands off approach.
A hands off approach is better for lower trading costs, which is what makes the delta from market return to most private investors' return.

Not saying that a growth strategy is a bad way to go, but that I don't have the skill to do it right.
I do have some 'growth' ITs, where I am paying for someone else's skill

[Itsallaguess]

I do understand all of the points about "It's Total Return", but I want to have proven a high yield/dividend growth portfolio strategy to my satisfaction before I am dependent on it for income.

This is a key point for me too.

I was never particularly comfortable with the idea of a lifetime of 'total-return' investing, where getting used to the idea of selling something to generate future income only really became part of the real-world investment process quite late in the day, when capital needed to be released from that approach to provide income.

What I was very comfortable with was the idea that we could learn and adapt a single investment strategy that didn't require that late change in mind-set, and which provided a very neat 'diverter-valve' right through the life of the investment strategy. That's the benefit that income-investment provides for me....

During the working years, when the income-portfolio is being built up, that 'diverter-valve' is set to the 're-invest' position, where the incoming dividends will pool up, often alongside additional spare capital from our wages, and then become available for more income-investment.

Whilst in the 're-invest' position, the dividend-flow through the diverter-valve can be monitored and judged against expected returns, and set against medium and long-term trends so as to make a judgement on the level and robustness of that dividend-stream, all during a period where we don't *actually* need to use it to live off, but where such monitoring can provide a very important gauge as to the reliability of it to do so once it is actually needed...

Then, when we come to a point where such investment and dividend-monitoring has allowed us to turn our thoughts to retirement, and we're happy that the long-term trends of the dividend-stream through the 're-investment' setting of the diverter-valve could actually provide us with a good enough level of income if we were to choose to take it, then one simple flick of that diverter-valve from the 're-investment' position and onto the 'pay-out' position is all that's needed for us to transition from one state to the next, and begin taking that monitored dividend-stream as actual income for retirement....

As I've said many times before with regards to a long-term income-investment approach, I'm personally very happy to give up a potential 'amount' of total-return over my investment-lifetime if the act of doing so gives me other benefits.

If one of those benefits is taking advantage of the simplicity of the above 'diverter-valve' approach, and also allowing me to monitor that dividend-stream as it grows over the years, and giving me an opportunity to make a call on the long-term robustness and growth-trends of it as well, then that to me seems like a very fair set of benefits on any 'given-up' total-return that I might be costing myself by doing so.

In no other walk of like does 'comfort' come for free, and nor should we expect investing to be any different.

Comfort comes at a cost, and the above long-term personal benefits of an income-investment approach is my return on any potential 'total-return' cost that I might give up to receive that comfort...

Cheers,

Itsallaguess

[tjh290633]

No-one says it's 'better' than any other strategy with regards to returns

Why then, do some vociferous defenders of what they term the "HYP Strategy" attack those who suggest, for example, that not investing can be a sensible strategy if you believe the market is having one of its periodic meltdowns, or accuse those who criticise the almost blind selection of stocks by dividend yield approach of "not understanding" the STRATEGY?

The argument, as I see it, is that, by not investing, you deprive yourself of the income which would accrue and which can be reinvested profitably to provide yet more income.

Regarding the arguments about income or total return strategies, history tells us that at times the income strategy can provide a more than acceptable total return. For example, if you look at "World Markets at a Glance" on the FT web site you will see that the values of the Total return versions of the FTSE350HY and FTSE350LY indices are different, to wit: 7233.4 and 5309.4 respectively. They both started at the same value on the same day. The higher yield version has outperformed the lower yield index.

TJH

[IanTHughes]

No-one says it's 'better' than any other strategy with regards to returns

Why then, do some vociferous defenders of what they term the "HYP Strategy" attack those who suggest, for example, that not investing can be a sensible strategy if you believe the market is having one of its periodic meltdowns

As far as I am aware, no-one has done that. What has been pointed out, on numerous occasions, was firstly, HYP is not a trading strategy and secondly, such a strategy as you suggest, involves having an ability to correctly time the ups and downs of the market: a strategy that most people are simply incapable of following with any more than guesswork.

or accuse those who criticise the almost blind selection of stocks by dividend yield approach of "not understanding" the STRATEGY?

That is simply because anyone who thinks that the HYP Strategy involves the "blind selection of stocks by dividend yield", obviously does not understand the HYP Strategy.

Why do you persist with this strawman argument?

Lots of other metrics are also considered by many of those income-investors, such as market-cap, dividend-cover, dividend-history, levels of debt, free-cash-flow, etc., but it suits your own arguments to ignore this, and to tilt at windmills from a false position whilst frantically waving that 'single metric dividend yield' flag.....

I'm thinking specifically of the advocacy on the HYP-Practical Board where these other factors are ignored or at least discounted.

The HYP Strategy does not recommend ignoring any metric. On the contrary, it positively recommends a check of the company fundamentals to verify that the dividend is sustainable and even likely to grow, as best one can. Of course, each individual HYPer will do their own investigation and no doubt some investigations are more intensive than others. But stating that HYP is a strategy where factors other than the yield should be “ignored or at least discounted" is palpably false.

Strawman argument number two!

There was discussion last year about Vodafone. Many posters believed that it was about to cut its dividend, and they were right. It didn't stop the dividend obsessives from ignoring and even disparaging their fears.

Yes, I remember that discussion which was triggered I believe by the inclusion of Vodafone PLC (VOD) in the virtual portfolio then being constructed by pyad.

You were adamant that a purchase of VOD was wrong, based I believe solely on the basis that the share price had recently dropped – do please correct me if I am wrong and you were actually doing a deeper analysis. I on the other hand argued that, from my analysis of the then most recent accounts, there was a good chance that the dividend would be held and at a yield of over 9%, I bought – 4 purchases between February and May 2019 – at an average then historical yield of 9.50%. Obviously there was a disagreement as to the suitability of VOD between you and I but I am fairly certain there were other HYPers that agreed with you, as well as maybe some that agreed with me.

My point is that the HYP Strategy does not select shares for anyone’s HYP, rather it simply recommends checks one should make to assist in that selection. Are you really so surprised that different people will come out with a different decision?

By the way, since my 4 purchases at an historical yield of more than 9.5%, those purchases have increased in value by nearly 10% and I have already received more than 5.25% of the purchase price in the form of dividends! If only all my purchase decisions were that successful

I've been accused of failing to understand the "STRATEGY" when noting that selecting by yield will fish out at least some failing Companies and thus an understanding of why Companies have a high dividend yield is necessary. One thing to look at being the recent price history.

Another strawman argument, you do seem to love them!

Nobody has suggested that a high yield may not indicate a failing company, exactly the opposite in fact. What has been suggested is that it may also point to an undervalued company that pays out a significant amount as cash income to the shareholders. Once again, the high yield is merely the filter used to select possible HYP candidates. The final selection decision is only made after a further analysis as to the sustainability of the dividend.


Ian

[TahiPanasDua]

Just to reinforce arguments made above, I would suggest a rather simple example of those who can't even contemplate a total return strategy. They don't have the wherewithal to know which shares to sell for income or couldn't cope with the added tax horror of calculating CGT, etc.

I am 75 and have to provide for impending gagadom and my wife who has no knowledge of or interest in markets.

A joint dividend portfolio can be mostly "ignored" after I've gone and the tax returns are a bit simpler (but not simple).

That said, a total return strategy is a valid approach but it is surely not for everyone. The arguments don't have to be binary. There is enough of that going on in Westminster at the moment.

TP2.