With Profit Bond

EdInvestor

Hi Missile

You might like the High Yield Portfolio idea for part of your money.It's very suited for people who have a lump sum, need income and are looking for low-medium risk.Divis tax free for basic rate taxpayers and very low charges as you rarely trade the shares (Pick a broker with no annual fee).

Details here

Have a look at "HYP1" which was started in late 2000 so got hit by the crash. Steady divis throughout and excellent capital growth on top

I like commercial property funds as well, the bricks and mortar investment trusts run by the big lifecos are worth a look IMHO.

dunstonh

You might like the High Yield Portfolio idea for part of your money.It's very suited for people who have a lump sum, need income and are looking for low-medium risk.Divis tax free for basic rate taxpayers and very low charges as you rarely trade the shares (Pick a broker with no annual fee).

It isnt low/medium risk. It is medium to medium/high risk. Dividends are not tax free to basic rate taxpayers.

On that 1-10 scale a UK equity income fund (which is basically the funds version of HYP) would be rated between 6 and 7. That puts it in equal risk to your with profits fund and is certainly a better option than with profits (accepting that with profits is capital guaranteed without penalty on death unlike HYP).

Single sector/fund investing is old fashioned and tends to lead to lower returns over the long term. Certainly UK Equity Income or HYP should form part of your portfolio but you wouldnt put all your eggs in that one basket.

missile

I appreciate your advice.

I am not adverse to HYP but have little experience of buying shares directly. The idea of selecting a diverse group of blue chip companies which offer the best yield seems far too easy? I shall have to some research.

The Fool.co.uk site has many references to $ so I assume it is a sister to some USA site?

I hold substantial investment in property in UK and Spain and do not think it wise for me to invest more. I feel there a too many getting into property rental and have recently moved out of this business.

I will need to consider the effect of tax on dividends and CGT on trading.

Chrismaths

I will need to consider the effect of tax on dividends and CGT on trading.

If you invested £100k in a HYP yielding 5%, that would add £5555.56 to your income. You'd need to check if this would have an effect on your tax position. If you stay within basic rate tax, then you wouldn't have any more income tax to pay, as the dividend comes with a 10% tax credit which satisfies the liability to basic rate tax.

As to CGT, you get an annual exemption of £8800, So that represents a c. 9% gain (in capital terms) before it becomes a problem.

That's the tax treatment - we don't know your income etc so you'll have to fill in the blanks yourself.

But Dh's caveats about a HYP being more risky than your current investments, and the need for more diversification than a HYP alone can give you will probably outweigh any tax considerations

missile

Thanks for the info re tax situation. If I understand it correctly the theory behind HYP is to invest in circa 15 blue chip high yielding companies in a variety of sectors to spread the risk. Thus there ought to be no more risk than any other stock based investment but one avoids the costs assosciated e.g. with a unit trust. I guess one should also factor in the dealing costs. The dividend would be a bonus?

I am not altogether convinced, if it were that easy why are fund managers paid so much?

EdInvestor

missile wrote:

Thanks for the info re tax situation. If I understand it correctly the theory behind HYP is to invest in circa 15 blue chip high yielding companies in a variety of sectors to spread the risk.

Correct (and the tax description above is also correct).

Thus there ought to be no more risk than any other stock based investment but one avoids the costs assosciated e.g. with a unit trust.

That's so. 15 diversified shares will cover the vast majority of the risk.If you invest quite a large amount you may like to purchase a few more - but there's virtually no improvement in risk protection beyond 25 shares.(There are other risk related filters built into the HYP as well as diversification, see the article on how to choose shares).

I guess one should also factor in the dealing costs.

These will be extremely low after the first year (usually about 1% in the first year) if you use a broker which charges no annual fee, as there is no need to do any trading.It's a very low maintenance strategy.I see you are an expat: This broker takes expats with a UK bank account and is well regarded by HYPers:

https://www.selftrade.co.uk

The dividend would be a bonus?

The dividend is the basis of the strategy.It's your income.The capital growth is the bonus.

I am not altogether convinced, if it were that easy why are fund managers paid so much?

It is that easy, but only really since the advent of the internet.Before, holding shares directly ( in certificate form) and dealing with stockbrokers was expensive and intimidating for many people. It was easier to go through the local salesman/IFA, who would of course always warn of the perils of DIY for obvious reasons. :rolleyes:

Now things have changed.We have online nominee accounts (no certificates), discount brokers and IFAs (no annual fees and much lower trading costs).The tax environment is also benign.It is inexpensive and easy to invest directly online - and to communicate with other investors in forums, wherever you are.

Chrismaths

I sense impending doom in this thread - I see a HYP vs everything else arriving soon.

The idea behing a HYP (as described on the fool) is to buy a number of high yielding stocks and hold them come hell or high water. The dividends aren't really the bonus, they are the main driver of returns. The theory is that if you buy high yielding stocks (which are therefore unloved by the market), these companies will produce good long term returns as all the bad news is priced in, and dividend payments have historically been pretty stable (and growing) in the UK. Essentially, it's a contrarian investment strategy, and is lower risk than buying say a FTSE tracker.

That said, the idea of simply "buy and hold" doesn't seem sensible, as some stocks in the HYP will rise relative to the rest of the portfolio, and some will fall. This will mean that in a say 10 stock portfolio, a stock that represented 10% of your portfolio initially (and therefore 10% of the risk), could easily end up being 20% - which means the character of your portfolio will change over time, ending up more risky than it started.

The idea of the HYP is not to beat a fund manager, but to beat him net of costs. But a HYP is only low cost if you don't need access to your money, and you have a large enough amount of money to justify the dealing costs. If you need to sell some of your capital, you will pay £12.50. If this is likely to happen regularly, then a HYP is not for you.

As part of an overall strategy, the HYP has its place in a portfolio, but shouldn't BE the portfolio.

EdInvestor

Chrismaths wrote:

..... dividend payments have historically been pretty stable (and growing) in the UK. Essentially, it's a contrarian investment strategy, and is lower risk than buying say a FTSE tracker.

Correct.

This will mean that in a say 10 stock portfolio...

Less than 15 shares is not a proper HYP so ignore the rest of this para.

The idea of the HYP is not to beat a fund manager, but to beat him net of costs.

The idea of the HYP is to produce a stable and rising income.Long term capital growth is a bonus.Benchmarks are the FTSE100 and cash.

But a HYP is only low cost if you don't need access to your money, and you have a large enough amount of money to justify the dealing costs.

There are no dealing costs once you've bought the shares. There is no cost or charge attached to obtaining the dividend income from the portfolio, it is credited in the same way as bank interest.

As part of an overall strategy, the HYP has its place in a portfolio, but shouldn't BE the portfolio.

Well that's an advance

cheerfulcat

Chrismaths wrote:

The dividends aren't really the bonus, they are the main driver of returns. The theory is that if you buy high yielding stocks (which are therefore unloved by the market), these companies will produce good long term returns as all the bad news is priced in, and dividend payments have historically been pretty stable (and growing) in the UK. Essentially, it's a contrarian investment strategy, and is lower risk than buying say a FTSE tracker.

Not quite. The MF HYP was designed as a low-cost way to provide an income for retired people, with some modest ( inflation-beating ) capital growth. As it happens, many of the same stocks which are suitable for the HYP would be considered Value or contrarian stocks, and as a result the MF HYPs have performed pretty well. It can of course be used a growth strategy by re-investing dividends but the income was the target initially.

That said, the idea of simply "buy and hold" doesn't seem sensible, as some stocks in the HYP will rise relative to the rest of the portfolio, and some will fall. This will mean that in a say 10 stock portfolio, a stock that represented 10% of your portfolio initially (and therefore 10% of the risk), could easily end up being 20% - which means the character of your portfolio will change over time, ending up more risky than it started.

Which is why you have the " tinkering " HYP, and a sensible minimum of 15 stocks. Don't forget that the MF HYP is essentially an experiment.

The idea of the HYP is not to beat a fund manager, but to beat him net of costs. But a HYP is only low cost if you don't need access to your money, and you have a large enough amount of money to justify the dealing costs. If you need to sell some of your capital, you will pay £12.50. If this is likely to happen regularly, then a HYP is not for you.

Nonsense. It is low cost because you don't deal a lot; if you need access to cash, you take the income. If not, you re-invest it as soon as you have enough to make this practical. Selling capital to provide an income is anathema to the HYP holder.

As part of an overall strategy, the HYP has its place in a portfolio, but shouldn't BE the portfolio.

I'd say that that depends very much on who is doing the investing and what the objective is. If it's a rising income with some capital protection the HYP is not a bad way to do things and I would be happy to have my entire portfolio in one, if that was all I wanted; though as it happens some HYPs will have also produced tremendous growth over the last few years - Tate & Lyle, Pilkington, Body Shop, Gallaher, Viridian, Legal & General...anyone who had a HYP would have had one or more of these.

missile wrote:

Please note I want a LOW risk for this portion of my portfolio.

On the subject of risk; I would say that the HYP is neither as risky as the industry might have you believe, nor as risk-free as Ed suggests. The dividends give it a certain amount of stability but it is still direct equity investment and as such will fluctuate with the market. If you already have substantial equity investments then to be honest right here and now I would be inclined to keep in cash or near cash until you have a better idea of things.

Chrismaths

EdInvestor wrote:

Less than 15 shares is not a proper HYP so ignore the rest of this para.

Well actually, don't. Let's look at HYP1 from the fool, here

This was initially a 15 (now 16) stock portfolio, equally weighted, so started off with 6.7% in each stock. Now it has:

Company	             Holding
BT (LSE: BT.A)			13.6%
Land Securities (LSE: LAND)	10.8%
Gallaher (LSE: GLH)		10.3%
Anglo American (LSE: AAL)	9.4%
Rio Tinto (LSE: RIO)		8.5%
Ladbrokes (LSE: LAD)		7.2%
Alliance & Leic (LSE: AL)	6.7%
Intercon. Hotel (LSE: IHG)	5.7%
Alliance Boots (LSE: AB)	5.1%
United Utilities (LSE: UU.)	4.6%
Scottish & New (LSE: SCTN)	4.2%
Mitchells & Butlers (LSE: MAB)	3.6%
Royal Dutch Shell (LSE: RDSB)	3.2%
Lloyds TSB (LSE: LLOY)		3.1%
Resolution (LSE: RSL)		2.6%
Royal & Sun (LSE: RSA)		1.5%

So 34.6% of the portfolio is in 3 stocks and over half of it in 5 stocks. That changes the entire risk profile of the portfolio. That's why it's vital to rebalance such a beast. That incurs trading costs, which means that it has to be a reasonable size to absorb those costs.

cheerfulcat wrote:

Which is why you have the " tinkering " HYP, and a sensible minimum of 15 stocks.

I don't know the "tinkering" HYP, but if it rebalances I have less problems with it.

cheerfulcat wrote:

Don't forget that the MF HYP is essentially an experiment.

Well on this board it is often recommended as an investment strategy without such caveats. If it's real money, it's no longer an experiment.

cheerfulcat wrote:

Nonsense. It is low cost because you don't deal a lot; if you need access to cash, you take the income.

EdInvestor wrote:

There are no dealing costs once you've bought the shares. There is no cost or charge attached to obtaining the dividend income from the portfolio, it is credited in the same way as bank interest.

What if you need more than the natural income? You have to sell something. That incurs costs. Therefore if you regularly need to access the capital the HYP is not for you. It may be anathema to you, but in my business we try to fit the investment strategy to the person, not the other way round. I have several clients who are SKIers (spending kids inheritance), and withdraw 10% or more from the portfolio. My job is to make it last as long as possible.

cheerfulcat wrote:

I'd say that that depends very much on who is doing the investing and what the objective is. If it's a rising income with some capital protection the HYP is not a bad way to do things and I would be happy to have my entire portfolio in one, if that was all I wanted; though as it happens some HYPs will have also produced tremendous growth over the last few years - Tate & Lyle, Pilkington, Body Shop, Gallaher, Viridian, Legal & General...anyone who had a HYP would have had one or more of these.

You may be happy to have your entire portfolio in one, but the effect of that is to provide a higher level of risk for a given return. Diversification lowers the risk of a portfolio. 20 equally weighted stocks will only provide sufficient diversification if they are are all independent. Anglo American and Rio Tinto are driven by the same factors and can therefore be looked at as one stock. To provide true diversification, you need to add things that do not depend on the same factors to produce performance.

Then you've just quoted past performance.

CC wrote:

It can of course be used a growth strategy by re-investing dividends but the income was the target initially.

This is where it can get confusing. In investment parlance, a growth strategy is one where you look to invest in stocks that are growing earnings faster than the rest of the market. A value strategy is one where you are looking for stocks that are cheap, typified by a low p/e or high yield. A value strategy can produce capital growth, and a growth strategy can produce income. The HYP is a value (and contrarian) strategy. If you use it to achieve capital growth, that's fine, but it's not a "growth strategy". Confusing, I know.

Ed wrote:

Well that's an advance

I've never been against the HYP per se (apart from the rebalancing issue), more against the HYP as a magic bullet/panacea.

The OP in this thread said this portion of his portfolio should be low risk. A solitary HYP is not low risk. It's inappropriate.