Dividends From Drinks

Stephen Bland picks a brewer as the tenth share for his third high yield portfolio.

My first article of each new month always starts with the next selection for my third high yield portfolio until I decide it's complete.

My tenth choice is brewer Scottish & Newcastle (LSE: SCTN) . 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.

S&N, a FTSE100 company, takes the portfolio into a new sector, known officially as Beverages. Note that I don't feel that I always have to follow the normally accepted definitions of sectors. Whilst some are obvious like banks for example, others contain a diverse range of businesses that often bear little relation to each other.

So it's possible that I could eventually have two shares in the portfolio that are nominally from the same sector yet which are clearly entirely unrelated. For example within the Travel & Leisure sector you can find bus companies and gambling businesses. Assuming the former don't offer blackjack on their buses and the latter don't offer buses with their blackjack, it's difficult to see the remotest connection between the two. In fact there are enough gambling companies now for the whole lot to represent a sector on their own in my opinion.

As usual, I make not the slightest attempt to predict where long term my selection, their sector, the British economy or the whole world is going. The less I know the more I know as far as this approach to shares is concerned. If I thought I knew more, I know I'd know less.

S&N is in the FTSE100 at 66th place but is the 18th highest forecast yielder. The company has paid a modestly increasing dividend since 2003, though that is following a sharp cut over the previous year. The payout for the year to 31/12/05 was 21.14p and for 2006 is forecast at 21.7p. This gives a forward yield of 4.2% on my above cost price. For what it's worth, the 2007 dividend forecast is 22.2p. This yield is not massive but is still well above the market average which is in the region of 3%.

The forecast yield at current prices of the ten-share HYP3 is now a whisker over 5% including the latest acquisition of S&N. Pretty good I think compared with the market and probably about equal to interest on cash right now. HYP dividend income though carries a significant tax advantage over interest, is much more stable than it, and offers the prospect of growth over time both in the income itself and the capital. However there is a trade-off, being the volatility of the capital.

Note that my monthly selections for HYP3 are valid only around the time I make them and it must not be assumed that I would pick the same shares now. Also, unlike HYPs 1 and 2 which are eternity portfolios, I am keeping open the possibility of trading the shares in HYP3.

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, United Utilities.