[Jeffrey Beranek]

Warning, to subscribe to itpaysdividends after the free trial period costs £7.50 every 3 months. I’m not affiliated with them in any way, but I am a subscriber myself

[Jeffrey Beranek]

The other newsletters on Southbank Research are going to be complete rubbish to those loyal HYP followers. The only other decent letter they’ve had was the Lifetime Wealth letter, but that got swallowed up by another newsletter and then was promptly ignored.
For those looking for new HYP candidates, may I recommend itpaysdividends.co.uk. They send you an excel spreadsheet of all the FTSE350 companies and their current dividend yields, etc. You can then sort by size and sector to find the current top yielders in each sector. It doesn’t tell you everything you need to know (like importantly how indebted some companies are, or if the dividend has just been cut) but it does provide a shortlist of possible candidates to research. I notice that SB was not adverse to suggesting companies with quite low dividend cover or a high PE, so these fields are less useful if you are trying to replicate his thinking.

[Jeffrey Beranek]

Another thought. I assume you are probably not taking any actual income from your portfolio, but rather reinvesting it. However, if you did want to take income, instead of removing cash from the ISA you could first sell shares from the non-ISA. Then use the spare cash within the ISA to buy back the same company you just sold from the non-ISA.

[Jeffrey Beranek]

I have followed the DL now for about 6 years, so it is a shame thatit has come to an end. I have built up or migrated a large portion of my portfolio to follow the HYP fairly closely and to such an extend that with a few years it will form almost a third of my retirement income (hopefully) for life. Almost as important, it has helped teach me to have a more rational, calm, disciplined and dare I say “boring” approach to the market. It is the exact opposite to most financial advice/media that is apparently driven by fear, excitement and greed. I will have to do more of my own research now on final results, etc. But I know I can probably ignore most of it apart from bottom line earnings, dividends, debt and the growth or reduction of the same. Thank you for efforts and I will certainly miss the arrival of your newsletters.

[Jeffrey Beranek]

Stephen won’t be able to provide personal advice. I’ve had a similar situation in the past. As your non-ISA portfolio grows, you might eventually earn more than £2,000 in dividends and so have to pay income tax on them. If it doesn’t cost you too much to sell within the non-ISA, transfer to the ISA, then buy back (with stamp-duty paid a second time) then this might be a good long term solution, especially if you think you will max out your ISA contributions in future years. However, if you are not likely to breach the ISA allowance any time soon and aren’t earning close to £2,000 outside the ISA, then you probably don’t need to move the shares. If you had to choose which ones to move first, I would suggest moving the highest income ones first. Make sure you look at all the shares as if they were in one big portfolio. It’s doesn’t matter if they are split across multiple accounts. So there shouldn’t be any issue of getting out of balance.

[Jeffrey Beranek]

I would suggest just calling Barclays and asking them to delete the shares and close the account. CLLN shares have been delisted and declared of negligible value by HMRC as of 15 Jan 2018. My shares eventually disappeared from my X-O account. If they won’t do it, then say you’ll take your compliant to the Financial Ombudsman Service.

[Jeffrey Beranek]

I believe BHP has the highest yield in that sector and is the share chosen in the letter released today. So the sum held in BHP, AAL and S32 should be the same as other sectors, unless you’ve started a new “portfolio” for HYP8.

[Jeffrey Beranek]

Thanks, that’s exactly what I’m doing already, but I just wasn’t doing a very good job of explaining it! 🙂

If all the shares in a sector are on HOLD, then I would obviously stop topping them up. I could then start bringing that sector back up to the sector average if a company in that sector moves to a BUY.

[Jeffrey Beranek]

What are your thoughts on topping up sectors in previous HYP portfolios? I have a number of essentially ‘full’ and well balanced HYP portfolios that I ‘unitise’ so that I know when a sector is underweight. However, some sectors do not appear in all my HYP portfolios (such as house-builders or advertisers) that might be currently considered ‘buys’. Might it be okay to add more to such an ‘old’ sector, so long as it never exceeds the average sector size across all HYP porfolios – if you see what I mean. I understand you treat each new HYP as a separate entity, but presumably most people have all the shares bundled together in a single account and not all HYPs might have the same amount saved in it. If all the sectors on a per-HYP basis are largely in balance, would you think it’s better to concentrate on adding more to the current HYP, even if that might mean overweighting a popular sector (e.g. banking)?

Jeff.

[Jeffrey Beranek]

Don’t forget to deduct the charges for the tracker, including hidden ones. Also, you’ll probably find a lot of the shares in the tracker have yields a lot less than 4%, given that it’s a weighted average. Also, it will be a lot more disproportionately weighted towards a handful of high-yield shares. Having said all that, I’m also skipping TUI, but for tax reasons. As a US/UK citizen living in the UK, it’s already complicated enough doing my tax forms in both countries! And besides, US citizens in the UK shouldn’t be holding funds/ETFs (outside a SIPP), so the HYP with direct share holdings works well for me.

[Jeffrey Beranek]

The same could be said about my own demise and the passing of our portfolio(s) onto my wife and/or children, who may or may not have the same level of interest in maintaining the portfolio.

However, I like to think that Stephen is not just a stock picker, but a teacher. I’m fairly confident that I could continue my portfolio indefinitely following the same basic principles. Shares already held don’t need much or any looking after. Sure I’d make a few mistakes, that’s for sure. But I’m not adding nearly as much new money as I used to, and I hope to start drawing the income soon instead of reinvesting. Initially any new money can go to topping up existing sector underweights, assuming they still appear to have a good yield. My biggest concern is company debt and how much is “acceptable” given it’s prevalence in so many sectors…

[Jeffrey Beranek]

You are probably thinking about the Financial Services Compensation Scheme (FSCS) which covers various financial products if the relevant institution becomes insolvent, e.g. up to £85,000 currently for banks (per person, per bank) or up to £50,000 for claims against investment firms that are in default. But remember, even if you hold shares in nominee form, they should not be held by the investment platform as their assets, but are held on your behalf by a trustee. True, who is trusting the trustee, but in either case you would be concerned more about outright fraud rather than a platform going bust. The only money of yours they might hold will be your trading cash, which will be minimal and should be covered by the FSCS. But the shareholdings are yours. For more information, see the links below or just google FSCS:

https://www.fscs.org.uk/what-we-cover/compensation-limits/
http://monevator.com/investor-compensation-scheme/ (slightly out of date, but most still holds true)

Jeff.

[Jeffrey Beranek]

The main thing I want from a broker is a low-cost way to purchase and hold shares for the long term. The Monevator website has a good listing of the cheapest brokers. I use iWeb for my ISA and AJ Bell Youinvest for my SIPP.

[Jeffrey Beranek]

Just for for readers’ information, I manage investments for my children (7 & 9), myself and my wife (mid 40s) and my father (mid 70s). We all have a portion of our investments held using the TDL strategy. I’ve been investing in individual shares for about 6 years and TDL for about 4 years. I’ve also been investing in funds for about 20 years. I have a special reason for preferring individual shares. We are dual US/UK citizens and therefore holding collective investment funds outside a pension is complicated and tax inefficient. I am strongly in favour of low-cost global index trackers, but I reserve these for pensions (SIPPs). I personally feel the TDL strategy works well for all age groups as an income, or future income, strategy. I think if you feel you may need to draw on capital in the future (5+ years) you should probably use index trackers and not TDL. Any less than 5 years and you should stick with cash, or perhaps a portfolio of individual short-term corporate bonds (although these are certain not risk free). I guess the issue is, that not everyone will be lucky enough to be able to put away enough money to use the TDL strategy to exclusively fund their retirement needs (even after taking any state benefits into account). And even if they did, then it would entail leaving a serious chunk of change to their heirs (or charity) when they die, which may or may not be what they want to do.

One consolation is that the TDL, over time, does look a lot like a low-cost index tracker. Yes, it has a high-dividend focus, which you might zrgue increases the risk. But the ‘large cap’, ‘cash/profit rich’, ‘industry diversity’, ‘value’, ‘strategic ignorance’, and ‘hold for eternity’ characteristics could arguably make TDL less risky than just holding the whole market. If you limit the size of your trades (whilst including the cost of TDL) it could even end up cheaper to run than an income tracker fund. I also fundamentally believe in the principle of owning equity in companies that are willing to pay you dividends, rather than companies that just push for growth on the assumption that you might find someone to sell the shares to in the future at a higher price than you bought them. Look at the companies that are in TDL. They own, operate and employ a significant portion of everything you see around you as you walk down the street. Yes, they mostly big and boring, and don’t generate much excitement in the press – unless perhaps when one appears to misstep and their price gets hammered. You’ll also notice that most well-regarded income funds hold many of the same shares…

Back on topic, the generally recommended withdrawal rate for a defined benefit pension pot is actually less than what the TDL yield historically appears to have delivered anyway. That doesn’t mean TDL will always deliver, but personally I think the income strategy is likely to be less volatile then relying on capital growth to cover future withdrawal needs. You should always have an emergency cash buffer to smooth out (many) fluctuating income or spending needs. It may not be enough to deal with every crisis, but what are the alternatives? You could buy an annuity, but when and with what? You would still need a pot of cash, but the income would be much lower than the TDL and what if you need to buy an annuity just after a major market fall?

No one ever said the TDL was going to be easy. I still find it very challenging, especially when an individual share price take a hit. But I try to take enjoyment from getting a chance to buy a new allocation to a high-yielding sector that needs topping up and try to ignore price fluctuations. I also do my best to calculate the effective on-going yield as well as the after-inflation internal rate of return (where all dividends are currently reinvested). I am satisfied with where they are and I don’t currently have a better plan! It’s all part of what I call “the loneliness of the long-term investor”…

[Author]

Posts