Tuesday, July 29, 2014

Buy a High Yield Portfolio and Hold Forever

In a October 2008 article, Todd Wenning described the High Yield Portfolio approach this way - "Buy 10 to 15 high-yielding large-cap stocks today and hold them -- forever."

Todd Wenning used a ruleset from Stephen Bland writing at the Motley Fool UK back in 2000 to select a basket of high yielding companies. The ruleset is as follows:
  • Large-cap stocks,
  • With a history of increasing dividends,
  • Relatively low debt levels, and
  • Sufficient dividend coverage,
  • That hail from diverse industries.
These are to held, basically forever, "the only permissible reasons to sell or remove a stock from the HYP portfolio are (1) the dividend is halted or cut, or (2) the company is acquired."

In the research article, Todd Wenning highlighted seven stocks:

Original dividend yield
Nucor 3.5%
Sysco 3.4%
Eli Lilly 5.5%
Caterpillar 4.1%
UPS 3.5%
Northrop Grumman 3.4%
Reynolds American 7.3%

The blended portfolio came in around 4.5% yield at time of purchase, so an investor who put in $1,500 in each company could realize over $450 in annual income. 

Fast forward to today, we are in a global yield famine. Its actually somewhat painful to look at the yields available circa 2008, but moving along how would an investor have done buying this HYP? I ran some numbers over on Longrundata.com.

Value of $1,500
is now worth
Annualized Total Return
Nucor $2,662.28 10.5%
Sysco 2,917.15 12.2
Eli Lilly 3,958.58 18.3
Caterpillar 5,466.24 25.2
UPS 3,939.37 18.2
Northrop Grumman 5,885.32 26.8
Reynolds American 5,202.26 24.1

The net result here is that from the time that Todd Wenning wrote this article on HYP to now, the value of those seven stocks with $1,500 in original (For a total of 10,500) plus dividends reinvested is worth $30,031.20 today. The average annualized return is 17.8%. 

Those are stellar results, but that's not the best part. The High Yield Portfolio concept is about Yield. Otherwise why hold forever? Turning to the current yield in those companies

Value of $1,500
is now worth
Current Yield Current Income
Nucor $2,662.28 2.9%$77.21
Sysco 2,917.15 3.1 90.43
Eli Lilly 3,958.58 3.2 126.67
Caterpillar 5,466.24 2.6 142.12
UPS 3,939.37 2.6 102.42
Northrop Grumman 5,885.32 2.3 135.36
Reynolds American 5,202.26 4.3 223.70

So with an initial investment in the fictional HYP in October 2008 of $10,500, this group of companies not only delivered capital gains; it now yields $897.92. This equates to a 8.6% yield on original cost, closing in on a holy grail of income investors - a double digit yield on cost. This where a very good return goes to great.

Notice that there was no massive risk taking here, no ground breaking discoveries, no impossible to predict outcomes. Its as dowdy a group of companies as you are likely to find.. The idea of a HYP is sound in principle, and examples like Todd Wenning's show how well it can work in practice. 

1 comment:

  1. Kindly email me back at sarit@seekingalpha.com. Thanks!