Fool's Eye View

[ November 13, 2000 ]

Retirement Pays Dividends -- 2

By Stephen Bland (TMFPyad)

In last week's article I wrote about why I consider equities an ideal home for those looking for income from a lump sum investment, provided they can accept the risks involved. Investing a lump sum for income is not only for the retired, of course: there are many other people who may be in this situation. Examples may include those made redundant with a payoff, perhaps widows or widowers with the proceeds of an insurance policy, those inheriting money, lottery winners and so on.

My article generated some interest on the retirement investing board, such that I agreed to draw up a suggested list of higher-yielding shares. Note that this is not an official Motley Fool portfolio, merely some ideas I have generated with a little research. I would advise that nobody takes this at face value but rather does some investigation of their own, because the required criteria may well differ from one individual to another.

To obtain a little more choice, I went marginally outside the FTSE 100 index and set £1.5b as my minimum capitalisation filter. This brings in a few shares that are just below the index. The other filters were an increasing dividend over the last five years and net gearing of under 50%. However I did relax the gearing filter because I wanted to bring in a utility. They have high yields but often high borrowings as well. I therefore went outside a purely mechanical approach on occasion and exercised a little personal judgement of my own. However, all the shares satisfy the increasing dividend and minimum cap rule.

The list is not therefore wholly automatic in construction, and consequently includes some of my personal likes, and probably excludes some of my personal dislikes too. The shares are ranked by decreasing yield. There are fifteen, which is my suggested maximum holding.

Share                                Business     Share price (p)   Yield (%)

United Utilities (LSE: UU.)          Water            690            6.9
Gallaher (LSE: GLH)                  Tobacco          416            6.4
Scottish & Newcastle (LSE: SCTN)     Brewery          490            6.1
Royal & Sun(LSE: RSA)                Insurance        498            5.6
Alliance & Leicester (LSE: AL.)      Bank             645            5.6
Britannic (LSE: BRT)                 Insurance       1020            5.6
Lloyds TSB (LSE: LLOY)               Bank             705            4.8
Bass (LSE: BASS)                     Hotels           725            4.8
Boots (LSE: BOOT)                    Retail           575            4.8
Land Securities (LSE: LAND)          Property         771            4.3
Associated British Ports (LSE: ABP)  Ports            321            4.2
Blue Circle (LSE: BCI)               Cement           454            3.9
Rio Tinto (LSE: RIO)                 Mining          1120            3.5
Anglo American (LSE: AAL)            Mining          3770            3.5
Shell (LSE: SHEL)                    Oil              572            2.7

Yields are on a forecast basis. The average is 4.8%. For comparison, the yield on the FTSE 100 at present is marginally over 2%. So there is a substantial difference between that and the yield on this sort of income portfolio.

There is a definite bias towards financials, with two banks and two insurance companies. However Royal & SunAlliance (LSE: RSA) is a composite with a leaning towards general insurance, whereas Britannic (LSE: BRT), I believe, is involved wholly or mainly in life products. On the banks, Lloyds TSB (LSE: LLOY) is a clearer with substantial international involvement, but Alliance & Leicester (LSE: AL.) is a UK-based mortgage bank.

There is also a something of a bias towards holes in the ground, with two of the world's leading mining companies and an oil major. I like these companies and in fact would include some or all of them in long-term-hold growth portfolios at the moment as well as this income package. The same goes for some of the banks and insurers too.

My belief is that a portfolio along these lines will generate a rising income over a long period together with a good chance of some capital growth as well. On top of that your money is available to you at any time, at market value, and you don't have to pay any charges whatsoever, apart of course from the small initial brokerage charge on purchase. It is almost the perfect investment for an income player, as long as the person can accept the risks involved -- and I do stress that point. This is not for those who will lose sleep if the portfolio plunges in value. It is for those who can ignore the fluctuations in capital value and accept that there is a risk that the income will not, in fact, rise. But I consider that latter risk quite small.

Just to recap: my suggestion is that you simply buy and hold forever, ignoring press comment on your shares, resisting the temptation to meddle once the initial decision has been taken. There may be occasions when something has to be done, for example if a share is taken over for cash which has to be reinvested, but in general leaving the portfolio completely alone is probably the best policy for a large number of income investors.

The income portfolio is not for those who like to trade in order to generate capital profits. It is for the income investor seeking an alternative to insurance products or deposit accounts.

Buy and hold is the quintessential Motley Fool equity investment advice for a large number of investors. Buy and hold for income makes that advice even more attractive, in my view.

Where Next?

• Retirement Investing discussion board