Which Is Better: Value Or Yield? Part 2
This is the second part of a two-part transcript in which Fool.co.uk'sDavid Kuo chats with longtime Foolish writer Stephen Bland about his style of investing. Stephen, who is an exponent of both value and yield investing, explains why it is important to understand the difference between the two when a share can straddle both styles. They look at,, and (ISE: AV.L) in detail.
You can read the first part of the transcript here.You can listen to or download the full podcast here.
EDITOR'S NOTE: What follows is a lightly edited transcript of David Kuo's conversation with Stephen Bland.
David: So let's have a look at one share that you have in your portfolio, and this is one that causes a lot of consternation among people within The Motley Fool community, whenever we talk about it, and that is Aviva, and the reason why they feel very uncomfortable with Aviva isn't the fact that it's not a value share, but the fact that you've bet so heavily on Aviva -- you have 60% of your investment in Aviva. Out of four shares, this one controls 60% of your investment. First of all, would you recommend anyone betting such a large part of their portfolio on just one share?
Stephen: Yes, definitely -- I used to do it myself all the time. Obviously, it's very risky. I can't advise someone to do it, because that depends on the situation, their attitude to risk, whether they can afford to lose the money and so on, but yes -- if somebody wants to make serious money, the only way to do it is to bet big. Holding a large portfolio of value shares will do very well, but it can't possibly do as well as holding just one share, or one share that's seriously overweight. Equally, you could lose a lot more -- that's the risk you have to take, so yes, I would advise it. Or the person with the right attitude, and the right amount of money to risk -- yes, definitely -- it's the way to make serious money. If you look at any of the really famous big investors, I'm pretty sure, people like Jim Slater and I think even Warren Buffett in the early days, that's what they did -- they bet huge on one or a tiny handful of shares, because that's the only way ... if you really want to make big money in a hurry, you have to take big risks, and that's the way to do it.
David: OK, so in the case of Aviva, what makes it so attractive, so attractive in fact that you're willing to bet 60% of your portfolio on one share?
Stephen: It's trading below book -- not tangible book, but it's trading below insurance, so-called embedded value, which is an insurance business measurement, the value of its policies, and it's trading well below that. It's got a huge yield, and that really, the big yield is out of line with other insurance companies, and with the market. I think it's yielding around about 7% or 8% at the moment, something like that. That is unsustainable. There's no way a major blue chip, well-known company like that will go on yielding 7% or 8% forever. Two things can change that: a sharply rising price, or of course a cut dividend. Now already it cut dividends three or four years ago in the credit crunch, so the most likely, not certain, but the most likely thing to happen eventually is that a sharp rise in price will ensue. So in this particular case for Aviva, yield is the biggest hook upon which I'm hanging the value status for it.
David: So what is the catalyst that will actually cause the share price to rise?
Stephen: Change in sentiment -- I mean, it's been hit by the mess in Europe, although if you read its reports, its involvement with European governments and so on is actually quite low, particularly the risky European governments like Portugal, Spain, Italy, Ireland, and so on, and it's now in the process of pulling out of a lot of markets that don't deliver the returns it expects. So it's a combination of sentiment and fear of investors that what happens in Europe will ruin it. I don't think that's going to happen -- again, I could be wrong. Shares are always a risk. But I think the poor sentiment, based on its involvement in Europe, has kept the share price low for a long time, too low, and as I said, that yield is not sustainable over a time.
David: OK, now then, you've got four shares in your portfolio: Aviva, BP, Royal Bank of Scotland, and also Molins. Now as a result of having 60% of your investment in Aviva, it has done something very attractive for you: It has generated a lot of cash for you, as a result of that 8% dividend yield. So consequently, you end up with cash, a lot of cash, every six months from that investment. How do you decide how to allocate that dividend, that cash that you have, among the four shares?
Stephen: I've got two main options: reinvest it in one of the existing shares, or buy a new share for the portfolio. If I see a share, a value share outside of that, which is especially attractive, I would do that. If the four shares there, I think are the most attractive, then I'll find the most attractive of those, and also bearing in mind that I may not want to increase Aviva's already seriously overweight proportion of the portfolio. So it's like buying any new value share: I look at them, which is the best value at the moment -- not necessarily Aviva, if I don't want to go even more overweight.
David: OK, but if you did find that Aviva was the most attractive out of the four, it wouldn't actually disturb you in any way to say, I will add more to this?
Stephen: No; in fact, I've done that many times. Of all the dividends I've received, several have been reinvested into Aviva itself.
David: Right, OK. So my final question, Stephen, is this one, and a lot of investors will be urging me to ask you this: Which is better, value or income?
Stephen: Neither is better. It goes back to what I said at the beginning, David -- it depends what you want from your shares. Do you want income? For instance, because the money invested in a bank account brings only a paltry return at the moment? You might want to increase your income, and be prepared to take the risks of deriving it from equities; therefore the answer in that case is clearly income. Are you willing to take the risk of trading shares and hope to make a gain? In that case, you might want to be a value trader, if you've got the right personality and the huge patience, the contrarian attitude. So you can't say which is better, it's like saying...
David: Do you prefer chicken, or duck?
Stephen: Yeah, exactly -- it's that, it's down to the individual person's requirements. But clearly, most older people, retired people, are likely to prefer income, because traditionally, when you've retired, your income might be lower than when you were working, even if you've got a decent pension. You might have some cash to invest, and you're looking to get the maximum income out of it, so as to live in the manner which you'd like to. So an older person is likely to go for income, and a younger for value, but that's a very crude distinction, and many younger people prefer the high-yield portfolio strategy, because they see that as quite an attractive long-term investment approach in itself. So as you said, it's not a question of which is better, it's a question of what you want from your share investing.
David: OK, I said that was my last question, but I'm going to have a final question, and this is very personal to you, Stephen, and that is: Which one gives you more pleasure? Value investing or income investing?
Stephen: No question -- value! Income investing's boring, because the way I approach high-yield portfolio investing is to hold the shares forever, and that obviously can hardly be described as exciting. But value is about action, even though there can be several years between trade -- it's about action, and value is more exciting, but exciting is not really a good requirement for an investor at all. In fact, that's why a lot of investors go wrong, and try to trade shares, because it's exciting. Unfortunately, boring is where the money is in the stock market, in my view. Far more people will make money from income investing than from trading shares.
David: Yeah, that is my preferred style of investing, income investing. I think I first came across income investing over 10 years ago, and I just couldn't see anything wrong with it, because first of all, I never had the time to go and investigate shares so thoroughly that I was convinced that I could actually put a huge amount of money into it; and secondly, I just quite liked the idea of having dividend checks into my account.
Stephen: Yes -- it is very nice to get that, those checks dropping in, these days straight to your bank account, rather than through the letterbox, but yeah, it is very attractive. Again, it requires big patience -- I've seen many HYP investors give up after a couple of years, because nothing's happening, but both of those strategies, the thing they have in common is, both require huge patience. If you haven't got that, then you probably shouldn't be in shares at all.
David: OK, well that is actually good to hear.
Stephen: Thank you, David.
David: OK, now, I have one more chore to perform, which is to sum up today's podcast, and that is to try and find a suitable quote for today's podcast. The quote comes from Roy Disney, who is a relative of Walt Disney, and he said, "It's not hard to make decisions, when you know what your values are," and I think that applies to investing -- once you know what you want, then it's not difficult trying to make decisions about what you want to invest in.
Stephen: I fully agree, but it is hard for many investors to come to the conclusion of what they really want from shares. I've seen so many, they chop and change their strategies every week -- they don't know what they want, they don't know how to get there. That really is the first step in share investing -- what do you want from shares, and does it fit your personality? Because a lot of people think they're traders, and of course most are not. So you have to look, what do you want from your shares, and whether you have the personality to actually achieve that aim?
David: That's great, so income investing for boring investors like myself. I'm just a bore.
Stephen: And myself!
David: OK, this has been Money Talk, I have been David Kuo, and my guest has been value investor Stephen Bland, otherwise known as Pyad. If you have a comment about today's show, please post it on the Money Talk web page, which you can find at fool.co.uk/podcast, and don't forget, you can sign up for The Motley Fool's take on what is going on in the world of finance by going to fool.co.uk/davidkuo. Until next week, happy investing!
That was the second part of a two-part transcript in which Fool.co.uk'sDavid Kuo chats with longtime Foolish writer Stephen Bland about his style of investing. Stephen, who is an exponent of both value and yield investing, explains why he has 60% of his portfolio in.
In the first part of the transcript, David and Stephen discuss why it is important to understand the difference between value and high-yield investing, and when a share can straddle both styles. They look at,and.Just click here to continue reading.
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