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High (-yield) Road to Outperformance

According to textbook financial wisdom, the only way you can earn better returns like this is by running greater risks. But applying the academics’ bog-standard definition of risk – volatility – high-yielding stocks had very similar levels of risk over time. The FTSE 350’s annualised volatility was 15.8% from late 1985 to the present, against 16% for the High Yield index. So, getting the additional gain didn’t really involve any additional pain.

The performance of high-yield investing looks even better when compared to the opposite style: low-yield investing. Whereas the FTSE 350 High Yield index has made a compound annual return of 11.4% since its birth, the FTSE 350 Low Yield index has registered just 8.3%. In money terms, you’d have made less than half the £214,500 you’d have notched up by investing in the High Yield index over the last three decades.

Rather than buying a straightforward UK market tracker, therefore, there may well be a case for skewing our holdings towards something that tracks higher-yielding shares.

I will be exploring this in much greater detail at the Investors Chronicle’s seminar this week: The Ideal Portfolio: Income.