Strategy: HYP

Just saw a video which talks about a Stephen Bland’s HYP stragety (quite popular supposedly):

http://www.fsponline-recommends.co.uk/page.aspx?u=dvlvid1&tc=LDVLLC01&PromotionID=2147067369&
While everybody today is talking about churning out million trades a minute through their high frequency low latency systems, the author reiterates a long term approach to investments which focuses not on capital appreciation but on income yield, sort of creating your own pension stream. He bascially says don’t worry about capital appreciation, invest in stocks focusing on the yield, any capital growth that happens is an icing on top. Stocks with good dividend yields not only provide an income stream, but are also less volatile and less suseptible to crash in bear markets, and for these same reasons, do even better in bul markets.

I found the HYP strategy even more interesting given how low the yield environment is currently. It’s also obvious how a strategy like this will not be recommended usually by brokers, because HYP means very little churn, translating into very little brokerage for the broker. Makes sense.

Here is the stagey in a nutshell – Create a diversified portfolio of 15-20 shares over a period of time (say adding one per month, jus to make sure you don’t catch the market at any peak valuation) with no intention to sell and primary focus on income. While selecting the stocks, observe these points:

• See if they can sustain the dividend through various businesses
• If they are not paying dividend to mask deeper problems
• Can sustain market conditions - diversify

A simple way to observe the above points is as follows:

• Buy big caps - they are safer
• Check the dividend history – has to be a good track record for many years over
• No debt – stay away from companies with high leverage
• Sector diversification – diversify, because if this portfolio is your source of income, then it has to withstand different market cycles
• Strategic ignorance - something am missing here.
• Reinvest the dividends – while the dividend is the really an auxiliary income, part of it reinvested can only add to the yield

Clearly this is not for kicks, idea is to put in the money and forget it. Ignore the news, ignore the prices and ignore the temptation to sell unless there is a very strong reason (need cash, there is a better investment, etc)