High Vield Portfolio - the dark side!

dunstonh wrote:

Negatives can be that if the yield is too high or a company moves that way and a stockmarket crash occurs, the share price could take years (decades) to recover.

There are various "safety" features with the HYP which will weed out most companies with high yields because they are not safe..

Also, you have a limited number of holdings. If you get a Marconi or Polly Peck in there (or a number of other examples could be given) then you are going to be hit harder than with a larger diversifed fund spread.

Not really.If betlarge looks at "HYP1", during the crash in 2002-03 two companies slashed their dividends and one nearly went bust, but the portfolio's income was barely affected and the capital value soon recovered.

HYP income is all income.

Yes, it's real income, not partly taken from your capital as with other strategies. Much less risky especially in a downturn.

If you are over 65 and earning more than £20,100, then you face an increase in your tax as your age allowance gets reduced/removed.

The best thing to do to solve this ( not a problem for betlarge of course) is to put your shares with higher divis ( eg LLOY, UU ) into your maxi ISA every year.Same applies to people on HRT.Of course even if you do have to pay some HRT on your divis, the rate is much lower than the 40% tax on cash, bonds or property at only 25%.

Divis come with a 10% tax credit, which means there is no further tax to pay for those on basic rate - except in the case DH mentions re age allowance from aged 65, which doesn't affect you. So you can "earn" up to the higher rate band from divis free of tax.

Anyone using an HYP does need to be comfortable taking equity risk of course, but the HYP filters do work in protecting the downside IME.

I've also found the volatility ( share prices wobbling up and down) usually seems less than the FTSE on any given day. Not that you're actually required to be checking every day, of course, quite the opposite.;)

First post did say negatives only. Ed loves HYP. We all know that.

I prefer sector allocated portfolios built for income but didnt "promote" that option because the OP said negatives on HYP only.

Not that you're actually required to be checking every day, of course, quite the opposite.;)

It is wrong to let any investment go without review. An HYP needs just as much reviewing as any other investment portfolio. Otherwise the risk will change over time and the companies you use may alter their dividends.

Another potential negative is frequency of income and amount. Natural income will be variable and come in on different dates. Those that prefer a fixed monthly amount could find the variable income and dates uncomfortable.

cheerfulcat wrote:

BTW, I think that you would be better off asking this question on TMF where you will get replies from people who know the HYP - somewhere like the Investment Strategies board or the Retirement Investing board.

Or even the HYP board itself

A recent HYP favourite FCAM fell 20% two weeks ago on news of... plans to slash the dividend. A triple whammy for HYPers since it meant: 1. a capital (paper) loss, 2. a large drop in income and 3. that any improvement in yield would have to mean tinkering with the portfolio and incurring transaction costs. The latter of these being blasphemy for many of the hardcore HYP cultists

In good times you aren't going to get the outperformance of smaller companies, in bad times there'll be no smoothing effects of asset classes such as fixed interest and commercial property. While many large-caps are truly global businesses you don't get the full effects of emerging markets (can be good or bad). There is a lot of exposure to the performance of Sterling if you go with the particularly large-cap oil, banks or mining. On the flipside HSBC and BP value dividends in dollars which doesn't help the sometimes lumpy income.

Having said the above I do like the strategy, for anyone with £10K+ (so risk can be spread around 10 shares with acceptable dealing costs) its a good and relatively safer way to to dip into individual share purchasing.

Small amounts or regular saving is a problem with a HYP though. Building up a portfolio one share at a time is an option but increases risk (see the FCAM example). Sharebuilder is the other low-cost to gradually building up a HYP but could get messy if you have buyouts and rights issues when you've only got a few hundred quid in a share.

For those without a largish lump sum a UK high income of growth and income fund can offer similar characteristics, personally I like a handful of the Investment Trusts in the growth and income sector since historically you can get good outperformance of the all-share with a yield around 3% and a TER of 0.4%-0.8%. Yield perhaps is a little low for the HYPer but any investor should be taking a holistic outlook. Laser focusing on just the yield, no matter how many good aspects of a shares value this instils, isn't looking at the complete picture.