High Yield Investing
I intend to invest a sizeable chunk of my portfolio in a selection of High Yield shares spread across several sectors. The idea behind creating High Yield Portfolio (HYP) is documented on the www.fool.co.uk web site (which also has an excellent HYP discussion board on the subject).
The idea behind the HYP is that a shares are bought on a basis of their yield, and a portfolio is constructed to cover the various sectors in your desired index. As dividends are received, they are reinvested in new high yielding shares and over time both the portfolio yield and capital invested will grow.
A key element to the HYP is that once share are selected, they are held forever regardless of their performance. This has the effect of minimising dealing costs and eliminates the temptation to trade to improve performance (which, knowing me, would result in costly mistakes).
The selection criteria are as follows:
- Market Capitalisation: Only select companies that have large capitalisations (say > £1bn). Large companies are less likely to go bust than smaller companies.
- Increasing dividends: Select only companies that have increased their dividends year on year. This will ensure income growth, and the effect of dividend growth is most surprising.
- Low Debt: Select companies that have low debt.
- Sector Diversification: Reduce risk by diversifying over several sectors. Preferably avoiding the latest fads and choosing dull sectors that are guaranteed to be around and making money in 20 years time.
- Start Yield: Select a shares yielding over 4%, this can be relaxed slightly especially if you wish to include some important sectors that otherwise wouldn’t qualify)
As time goes by the value of the portfolio will fluctuate, the HYP investor should remain impassive as the increasing yield is the only thing that he cares about. Once time comes, the dividends can be taken instead of being reinvested possibly funding retirement or some other long term goal.
Some posts detailing pertinent HYP information: