High Yield Revisited

Published in Investing on 22 March 2012

Stephen Bland reflects on his long-running income strategy.

For a change, because I very rarely write about it here these days, I thought it might be useful to reiterate my thoughts on the High Yield Portfolio (HYP) strategy that I launched here on the Fool all those years ago. Back in 2000 to be exact.

The basic version of the strategy I put forward then, and continue to advocate, is very simple. A sector diversified portfolio of high yielding big caps, minimum fifteen, held for income forever. Holding forever means that shares are sold only when compulsory to do so, such as in a bid or in rare other circumstances when it may be advisable for technical reasons. There is no voluntary trading.

Originally the idea was aimed at income investors, but shortly after it became clear that it could just as well be used by those reinvesting dividends to grow the portfolio for future income.

Why hold forever? This is perhaps the most controversial aspect of my scheme. I know some people are not happy with the rule, because it strikes them as somewhat illogical. As they see it, circumstances change so that the shares should be reviewed regularly and in certain situations, possibly wholly or partly sold and replaced with another.

Circumstances do indeed change, but to explain the reasoning behind this, you need to be aware that my experience of investing includes not only my own lengthy period of following the market, but also an earlier existence of advising others. Consequently, I have been in a position to see a lot of investors over the years and that contrasts with the position of almost all other HYP investors, who can voice only their own opinion or experience on the matter.

The beauty of doing nothing

It struck me quite forcibly that those investors who did nothing over the years performed far better than those who traded. There was a clear inverse relationship between trading frequency and success. The greater the trading, the poorer the results. Later, I saw this confirmed by some brokers. 

Now this is not an infallible relationship. A tiny minority of traders do alright, while a small number of long-term holders do poorly. But it is a strong general trend. It says that the typical private investor is poor at making trading decisions, and that is why the typical private investor does not make decent money from the stock market, either from capital or income.

How do you know if you are in the small minority who can win, or the large majority who will make poor decisions? Well sheer math from what I've heard says that you are probably worse than ten to one against winning with trading than eternity holding. But apart from the math, be honest with yourself. Do you have a history of successful trading of anything? Do you have a nose for what works? If you are that good a trader, why bother with such a pedestrian strategy like HYPs which are for income? Trade derivatives and quickly make a fortune.

The other reason I went for a no-trading approach is that that the whole strategy is designed to be left alone for long periods. A HYPer does not need to know their portfolio value constantly, because capital is almost irrelevant, or follow every bit of news, almost all of which will be inconsequential in the long run. If though you are concerned with trading, it needs following. Doing nothing is the best advice for the HYP strategy, but that's hard for a lot of investors to take, especially men it seems.

The test of time

A lot has happened in the period of over eleven years since I began, the most serious being the credit crunch and ensuing recession. A baptism of fire. This had a major negative effect on a lot of shares, especially those of a financial nature or connected with property, but also on a number of others, too.

Such events are pretty rare. The last one I recall of this magnitude, with property collapses and leading banks going bust etc. was in the early 1970s so we're talking 35-40 years ago. I'm not saying there is a regular cycle of that length, but I am saying that these really serious crashes have happened before. I am certain they will happen again, though I can't know when. They are, however, infrequent.

Do these events invalidate the HYP approach? Definitely not. My insistence on wide sector diversification is the defence. HYPers will suffer during these really bad times from widespread dividend cutting and suspension. Maybe they will even lose a share permanently to going bust. So total portfolio income will fall and that is unavoidable in the poorest years. The strategy is not for people who cannot live with that possibility.

A lack of interest

But note that income from variable interest sources will also fall, because interest rates collapse in a recession. Investors relying on bank interest have seen their income fall dramatically over last few years, by a much greater proportion than the income from HYPs. In my experience, bank interest is a major source of income for a lot of people. Understandably they like it for the reason that there is no risk of capital fluctuation. It's a powerful argument for many.

However, interest rates are a lot more volatile than HYP income, which has proven far more stable, even with the sort of falls we've seen. There are times when interest rates are higher, and times, like now, when they are lower than HYP income. But the fluctuations are much greater and must be hard to take for someone dependent on that interest.

I'm getting on in years myself now. Alright forget the euphemisms, I'm ancient. And I have no hesitation about sticking the great majority of my investment capital in my HYP, out of all the income choices I could make. A money and mouth job. I never believed that view of some advisers about the older you are, the less you should be in equities for income. I find the opposite to be preferable, with the HYP structured approach to equity designed to lower the risks.

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mull1 22 Mar 2012 , 5:41pm

I believe you have hit on an easy way for private investors to enter share investment. Three points though:

1) Surely there is a minimum amount you need to invest, in order to make dealing charges insignificant. My view would be that currently this is a minimum of £1000 per share. With 15 shares, a new entrant would need at least £15K. Not everybody has that. Indeed, a lot of people are in debt.

2) Not everybody can invest that and then not have life crises that mean they need money urgently. This means everybody following the HYP should have other assets/cash that they can use during these times.

3) It seems that an investment must earn money and also, after tax, beat inflation as well. In your view, does the HYP do that?


jaizan 22 Mar 2012 , 7:12pm

I would advocate people STARTING with only £5k can accept higher short term risk and maybe split the money about 3~5 ways. Providing the intention is to invest regularly and build up a large portfolio, then the portfolio will soon become more diversified.

goodlifer 22 Mar 2012 , 8:26pm

I've only been playing the Game seriously for three or four years but, FWIW, I've come to very much the same, not very original, conclusion.

A bit of a no brainer?

Of course I can't be sure, but I think Ben Graham's probably right when he says that most people who trade in the market (but not quite all of them) lose money at it in the end.

goodlifer 22 Mar 2012 , 9:32pm

"Not everybody has that (£15K). Indeed, a lot of people are in debt."
If you're really skint you need to realise you can't play around in the market, or not yet anyway, and you'ld better not try.

First, you need a "lifeboat fund" of readily available cash to deal with
the more or less inevitable emergencies that crop up in most people's lives from time to time; otherwise you may find yourself forced to sell when Mr Market is having one of his pretty regular sulks.

If you've got just a little bit of cash to spare you might consider opening a "regular investment" account, which some brokers now offer.
I hold one of these to reinvest my dividends..
Basically, provided you invest a minimum of £25 a month you can add on as much as you like for £1.50 per deal on one specific day per month.
I normally do one deal per month for around £500.

So you could build up a decent portfolio over time.
All you need is patience, a bit of consistent effort and a strong stomach.

Good luck!

Gengulphus 23 Mar 2012 , 5:51am


As back-up for what goodlifer says, I've been running a 'demonstration HYP' on the High Yield - HYP Practical board for getting on for 4 years now. I present it as a portfolio owned by someone saving £600 per month and making a share purchase every three months with the resulting £1800 plus whatever dividends have accumulated, with a £12 commission. But to keep it accurate, I actually run it as a real-life portfolio in "1/8th scale model" form - a Halifax ShareBuilder account that I save £75 per month into and make a purchase every three months with the resulting £225 plus whatever dividends have accumulated, with a £1.50 commission.

Obviously it took a while to build up to 15 shares, getting there last January. But it's done OK so far, despite choosing Lloyds as its first share just months before it and other banks really got into trouble... The key to that is diversifying between different types of company - although that investment in Lloyds has done pretty badly and is the portfolio's worst selection to date, its best selection to date (Tate & Lyle, chosen about a year later) has done brilliantly and more than compensates. Overall, it's mildly up on the cash saved into it - nothing brilliant, but that's not at all bad considering what the investment climate has been like since 2008!

And I'm quite certain it can be run in practice on a relatively low level of savings, because that's what I've actually done with the Halifax ShareBuilder account. Obviously that does require the ability to make those savings - don't prioritise it ahead of paying off debts or building up a "lifeboat fund" - and equally obviously the less you save, the longer it will take to build up a significant sum. But as long as you've got the ability to make a reasonable level of savings, it can be done.

If you want to take a look at it, my most recent brief report on it, at the end of the process of selecting its 15th share, is at the end of http://boards.fool.co.uk/poll-my-demo-hyp-15th-buy-final-run-off-poll-12443843.aspx?sort=whole . Its entire history can be found by chasing links from there, and the next share selection will be done in a few weeks' time.


equitybore 23 Mar 2012 , 7:05am

My take on the "percentage of bonds as a reflection of your age" argument is to use investment trusts with good yields as their surrogate. This has worked well for the last decade with yields rising as well as capital (in many cases, alas not all)

thebuffoon 23 Mar 2012 , 7:52am

Do you have a nose for what works? If you are that good a trader, why bother with such a pedestrian strategy like HYPs which are for income? Trade derivatives and quickly make a fortune.

It's such a shame there aren't any options between 'no tinker' HYPs and derivative trading.

How did your bet the farm strategy go; and do you still use it personally?


Hannibalis 23 Mar 2012 , 8:35am

Stephen - thank you so much for your HYP concept, which set me on the road to income investing.

However, I believe it should be blended with fixed-rate investments, which can offer higher, safer (in my experience) and more stable returns. The ratio between shares and bonds/prefs etc. is probably cyclical - in any case it is easy to use yield to compare the two investment types. Currently I am mainly investing in fixed-interest:


AleisterCrowley 23 Mar 2012 , 10:22am

fixed-rate investments, which can offer higher,...returns
Such as ? Assume you don't mean Gilts.

kempiejon 23 Mar 2012 , 11:04am

While I understand the americanism "Do the math" for grown ups writing it's maths.

AleisterCrowley 23 Mar 2012 , 1:10pm
Tortoise1000 24 Mar 2012 , 12:23pm

Mull, we have to remember that the Fool was founded by young professional men with many high earning years ahead of them. It was very much aimed at that demographic, teaching them how to dam some of this generous flow of income, dont waste it on lattes and debt interest, and put it to good use. It has also attracted older folk with savings who are looking to invest them wisely. For neither of these groups is £15k a problem. They could afford to put that in the market either all at once or in installments, and if the value halved for a while, or even permanently, it wouldnt do them any real harm.

(Actually what I like about the HYP articles is they encourage people to get in there and buy 15 shares without agonising too much about what happens to the first one . Once you have done that you have insulated yourself from individual share volatlility, so you have only the overall market ups and downs to cope with. If we cant cope with even that, then we'd better not buy anything share-related. )

I dont think the Fool's investment advice is aimed at those on very low incomes or with tiny savings, for whom say half of £15k would a serious sum to lose.

As for life crises, I think one has to examine what one means by a crisis. For some people its a crisis when they write the car off. I find it helpful to think of three kinds of crisis. The first is probable at some stage, such as the car, or a funeral to pay for, or a short period of no earnings. So you need a wodge of cash for things like that. The second is possible ; thihgs like long term illness or divorce. For those you need a contingency plan, this could include a combination of more savings, not being overcommitted, an understanding of the benefits system. and insurance. The third is something very rare out of the blue that you had never thought of; like a massively expensive medical operation in the US being needed or a pirates' ransom to be paid.

Id say for the first two kinds of crisis, be provisioned before you invest. For the third, most of us cant afford to be prepared. If we wait until we are, we might not get round to investing at all. So we might as well not worry, get started and accept the possibility of selling up in some circumstances. At least we shall have something to sell!

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