A High Yield Pick

Stephen Bland picks an eighth share for his latest high yield portfolio.

A Happy New Year to all my readers, which I'm kicking off with the latest monthly addition to HYP3 being the eighth share in this third high yield portfolio. Like the previous month's choice, Rank, I'm staying with the FTSE250 for this selection because higher yields together with the necessary diversification are to be found there. However I don't expect the final portfolio to have more than a small proportion of its shares drawn from the 250. Most of the holdings will be FTSE100 because I believe that a very long-term hold portfolio should be constructed primarily from the largest caps for security reasons. There are though some decently sized companies in the 250.

Regular readers will be aware that HYP3, unlike my two previous portfolios which were purchased by one lump sum, is being built up monthly. I expect it to be completed during 2006 to make a total of perhaps 15 shares. Both HYPs 1 and 2 started with 15 shares though they now have 16 following a couple of new shares created by divestments from existing holdings.

Note though that 15 is not a magic number, I do not have a predetermined number of holdings in mind other than that I wish it to be at least 12 to achieve a minimum desirable spread of risk for a general HYP.

My eighth selection is F&C Asset Management (LSE: FCAM) . Here is the list of all the shares to date in HYP3. £5,000 was invested in each and all expenses are included in the cost price.

The portfolio is up a little on cost but this does not include the dividends that would have been received to date. I will be showing the full regular reviews for HYP3, similar to those I write for HYPs 1 and 2, once it has been completed.

F&C is an investment management business. It has paid an unchanged dividend of 11.0p per year for some years but I am willing to trade off the lack of increase for the current yield which is about 6.1% on my cost price. That yield is well up amongst the highest yielders in the FTSE350. For what they're worth, forecasts for 2005 and 2006 dividends continue at an unchanged 11.0p.

Although the share is a financial, together with Lloyds, Alliance & Leicester and Legal & General, it is involved purely with investment management and thus I regard it as sufficiently diversified despite the fact that this gives us four financial shares in the portfolio. Financials are a pretty broad area, which as well as being one of the major sectors of the market include a wide range of services such as banking, life and general insurance, investment management and so on. Many of the majors run overlapping business in these areas but there are some smaller businesses that specialise and F&C is one of them.

I accept that some people may see F&C as insufficiently diversified because L&G for example, like many large insurers, has a substantial investment management included with it. Nevertheless I see the specialisation of F&C, precisely because that is all that it does, as marking it out as adequately differentiated from the other financials in HYP3 to date. I expect that I would be less interested in it if the yield were a lot lower but at over 6% I think it's worth it.

As usual I don't propose analysing exactly what F&C does or its potential future or anything else along those lines. Strategic ignorance is the key factor in HYP share selection. Less is more.

For further information on HYPs in general, the performance of my older portfolios, the advantageous tax treatment of dividends compared with other forms of income etc. readers may wish to refer to my earlier HYP articles.

Of the shares featured here Stephen owns Alliance & Leicester, BT, Lloyds and United Utilities.