Mechanical HYP (high-income) strategies were discussed in March 2012 on a Motley Fool post (http://goo.gl/eN7myr) by a user called F958B. I don’t think he has posted for a long time on account of the negative criticisms he attracted sometimes. In my eyes, and in the eyes of many, he is worthy of respect for the insights that he bought to the boards.
His thoughts on HYP strategies are worth a re-airing. Click the link above to read the full article. I will just present a summary here.
He found the best strategy (“strategy E”) was:
- Select only the non-cyclicals from the FTSE.
- Rank by yield.
- Select the ten highest yield non-cyclicals.
He did not present an exact method for identifying cyclicals; but I would have thought that a company that has not cut its dividend in a decade is likely to be a suitable candidate. You might also add debt safety factors. It seems that when he says FTSE he is referring to the FTSE100. I suspect you will get a better return if you use the FTSE350, or some other similar criteria like the market cap being at least £200m.
Here’s his conclusion on the strategy:
Exceptional outperformance with any portfolio size and any time period.
No great correlation between number of holdings and performance on a one-year period, but portfolios of five or more shares (little difference in performance of five shares vs a larger number of holdings) showed significantly superior performance on a two year holding period cmpared to portfolios of 1-4 shares.
Here are his overall conclusions:
Non-cyclicals need less portfolio diversification.
Non-cyclicals are more resilient.
Non-cyclicals are more predictable.
The very highest yielding cyclicals are very likely to underperform.