Thursday 10 December 2015

In For A Penny (Portfolio Buy)

I won't try to deny it - 2015 has not been a good one for the DIY Income Investor portfolio, which is currently down about 6% since January.

However, one thing I have learned about investing is that sometimes there are bad years. So, while I'm ready to modify my investment approach, I'm not going to panic. I'm going to carry on using high yield as an indicator of potential value (as well as income). And the latest purchase is about as high a yield as you can find.

A major reason for the poor performance of the portfolio this year is the focus on mining and worldwide Exchange Traded Funds (ETFs), particularly those based in Emerging Markets.

The world economy seems to have fallen into a bit of a slump, with dramatic falls in the prices of raw materials, including oil, iron ore and coal. The big question is: will this be a temporary state of events or is it a New World Order?

I think it's temporary. With increased aspirations for better living standards around the world, I can't imagine that there won't be a recovery in due course. And that recovery will be predicated on raw materials.

That's not to say that the prices of raw materials will recover soon - it may take months or even years. Given that, the key secondary question for a DIY Income Investor is: in the meantime, how secure is the income (i.e. the dividend)?

The latest purchase is BHP Billiton (LSE:BLT), the mining giant formed by the merger of Australia's Broken Hill Proprietary with South African miner Billiton. BHP Billiton is the model for a modern geographically diversified resources company, producing iron ore, copper, diamonds, aluminium, oil and natural gas, though it is base metals that remain the core of the business.

Not only do they have the highest yield in the mining sector (around 10%!) but here's what they say (in their 2015 Annual Report) about the dividend, going forward: "We have a progressive dividend policy that seeks to steadilyincrease or at least to maintain the dividend in US dollars at each half-yearly payment." There's lots and lots more information in the Annual Report - enough to let me know that they probably know what they are doing.

Mr Market doesn't like them - hence the reduced share price and huge yield. Perhaps Mr Market thinks that the miners won't be able to afford their generous dividends. That's always possible, of course, so anyone thinking about buying any of the high-yield miners should think twice. On the other hand, Mr Market might be overly depressed at the moment.

[Purchase price: £8.11 - and yes, I've already taken a hit on these, unfortunately]

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. Hi DIY,

    Like you I purchased some (at a slightly higher price than you!) and its hurting my returns right now, but I figure the mining sector is the cheapest its been for sometime, so as and when I get some cash I will be buying some more, and maybe some RIO!
    Keep the faith for when they come good and you should also get some good capital appreciation as well!

  2. I think there is a real risk that the dividend will be cut in 2016 - this could lower the share price further.

    However it's not possible to 'time' entry at the absolute low point and as investments are for the medium to long term this seems to be a decent investment.

    As ever, Good luck and thanks for a great forum!

  3. Like you, my commodity ITs and EM ETFs are down, but so far, the divis keep coming in, the EM bond ETFs as well. After over 10 years reading TMF, the financial crisis and the recent disgraceful debacle at Lloyds, I have no faith whatsoever in the financial press, so use my own judgement. Diversification and a good healthy mistrust of the 'wise' is all that's needed.
    Oh yes, Thanks for a brilliant forum!

  4. Murmurings from their board that the dividend will be halved in 2016. Even so there is still a lot of upside, despite events at Samarco, which like Deepwater Horizon will drag on for years. I ditched BRWM a few weeks ago for BHP Billiton... It will be a while before I know whether this was a wise move!

  5. To be honest, I don't follow the UK markets as frequently as the US (where I'm based) but with a rate hike imminent and other central banks likely following suit, I'd probably wait for a few of these rate hikes to take effect before putting more money into high dividend stocks and ETFs. And yes, as a long term investor or trader, it's a good idea to hedge your bets and "diversify" your entries too: start buying some now but be prepared to buy more when rates go up.