Retirement Investing Today: 2018 HYP Review

A little over 7 years ago (late 2011) I started to build a UK High Yield Portfolio (HYP).  It was a much talked about strategy back in the Motley Fool forum days and today still gets plenty of attention on the Lemon Fool forums.  I continued building the portfolio until July 2015 by which time I’d amassed 17 shares across multiple sectors.  That included a token amount of Royal Mail Group (ticker: RMG) during the initial public offering in 2013 and the spin-off of S32 by BHP in 2015.

Today the portfolio is down to 16 shares because of the forced Amlin sale in 2016.  It was set up to be close to a low tinker portfolio with only a few mechanical rules that would be triggered if there were big changes to a share.  For example if the actual value of a holding became 50% larger than the median share holding I would sell 25% or if the actual dividend yield dropped below 50% of the FTSE All Share (I’m looking at you Pearson, ticker: PSON, although I didn’t follow my own rules when they cut the dividend in late 2017 and the share price is up 27% since making me think my rules might actually be rubbish).

There were no buys (or sells) in 2018 (making the maths pretty easy this year).  The complete HYP and the respective values of each share are shown in the chart below.  The purchasing rule that I followed was the amount of the next purchase was the median share value of the current portfolio (with the exception of RMG and S32).

Click to enlarge, Retirement Investing Today High Yield Portfolio

Sainsbury’s, Astra Zeneca and SSE were all bought on the same day back in late 2011.  The big divergence in values nicely demonstrates why I no longer actively trade or invest.  I’m rubbish at it…  The annualised capital gains/losses of my complete HYP shown in the chart below further demonstrate this.

Click to enlarge, Retirement Investing Today HYP Annualised Gains/Losses

I stopped adding to the HYP in 2015 with my overall investment strategy, as my wealth grew, simply moving on to be a mechanically diversified collection of low expense, physical (as opposed to synthetic), income based (as opposed to accumulation) ETFs tracking enough indices to give me diversification across asset classes and countries held within low expense SIPP/ISA/Trading Account wrappers.  That said I never sold the HYP as it now forms an important part of my overall portfolio because while it’s only 5.1% of my wealth in 2018 it delivered 13.1% of my total dividend income.  In investing total return (dividends plus capital gains) is what matters but this over performance in dividend yield is very useful to me for a couple of reasons:

• One of the aims of a HYP was as a substitute for an annuity in retirement and I want to use it similarly to help me live off dividends only in FIRE and in that regard it’s still punching above its weight.  In 2018 it spun off £3,587 in dividends.
• When we come to register in Cyprus as self sufficient in a few weeks we need to demonstrate unspecified (yes I know….) sufficient income to prove we’re not a potential burden on the state.  Those dividends are a good chunk of income to help with that.

Along the lines of replacing an annuity I also want to see the dividends spun off by the HYP to increase at a rate which is equal to or greater than inflation if it is to be called a successful investment strategy.  I unitised my HYP a long time ago so I know in 2018 that goal was not achieved with dividends actually falling by -9.0%.  There were some mitigating factors (excuses?) causing this.  The main one was National Grid’s (NG.) special dividend and share consolidation in 2017 which boosted 2017 dividends.  This was partly offset in 2018 by Sainsbury’s dividend payment timings resulting in dividends for 3 half years.  Netting both of those off and the dividends still only rose a miserly 1.1% which is well below the current inflation rate (RPI) of 3.2% so not a great year in this regard.

That said, while ever the HYP comes close to matching the total return (dividends + capital gains) of a simple FTSE tracker over the long term I’m still happy to stay with it.  If it can’t I’d be better off selling up, buying an ETF tracker, accepting I’ll need to sell down capital to eat and then going fishing.

So looking at portfolio performance:

• Dividends.  The trailing dividend yield of the HYP for 2018 was 5.5%.  In contrast the FTSE100 was 4.8% (now using dividend yield information from www.dividenddata.co.uk because of the Financial Times pay wall on their market data) and the FTSE250 is 3.1%.  The FTSE100 most closely resembles the type of companies held within the HYP.  So far so good.
• Capital Gains.  Over 2018 the HYP has seen a capital loss of -4.9%.  In contrast the FTSE100 lost -12.5% and the FTSE250 -15.6%.  Of course short term share price fluctuations are in the noise so if I look back since inception the HYP gains are 42.4% compared with the FTSE100 at 26.6% and the FTSE250’s far more healthy 76.6%.
• Total Return.  For 2018 my HYP total return is therefore 0.6% while the FTSE100 has total returns of -7.7% and the FTSE250 -12.5%.

A poor year for my HYP although at least it outperformed its 2 main competitive indices on a total return basis.  Looking longer term and knowing that every year since inception the HYP has paid more dividends than the tracked indices it’s still outperforming the FTSE100 but under performing the FTSE250.

The 2019 plan is to sit on my hands and just continue to collect the HYP dividends.

As always DYOR.