HYP4: BP - The First and Biggest

Stephen picks the first share for his latest High Yield Portfolio.

My usual process for choosing HYP (High Yield Portfolio) shares is simply to go down the list of big caps ranked by descending yield and pick a share from each sector which also exhibits the other characteristics I seek, though I don't see those other characteristics as inviolable.

Very occasionally though, a share presents itself as an unusually high yielder for its sector for reasons which I believe are depressing its price only temporarily. If, in addition, that sector is one I feel is, in any event, highly desirable, I may well jump out of line and pick it before other higher yielders in other sectors.

And so it goes with today's choice, my firstborn for HYP4, oil company BP (LSE: BP) and the largest cap share in the market, though the latter point is not really relevant. The share is not near the top of the yield list but I do want an oil share in the portfolio, and I believe BP to be depressed temporarily by a stream of recent bad news. That creates an opportunity.

In fact, I wrote about BP recently as a crisis play in one of my value articles. I even bought some myself. Crisis plays, like value plays, are for the short term and intended to be sold at a capital profit in due course, unlike HYP shares which are intended for the very long term and purchased essentially for their income producing abilities. I think BP fits both at present.

If I wait many months until I've picked all my highest yielders and get down to yields around the present level of BP, it may no longer be there. Nor may its great rival Shell (LSE: RDSB) . Since I definitely want an oil share at any price, I'm taking my opportunity now when I believe yields are higher than they may be in future.

I could be wrong and it may well go on to yield even more if the price falls further. That's the chance I take. Whatever, I doubt that long term it will turn out to be a mistake to have an oil share in the portfolio and because HYPers cannot time the market by anything other than yield, that is what I am doing here.

Some readers may be interested to observe that in all the past HYPs I've selected on the Fool, Shell has been my oil sector representative. This is not because I had some sort of emotional attachment to it over BP, but simply because Shell was always the higher yielder. There is no other choice amongst oils. Now though, for the first time in a long time, BP's yield has overtaken Shell's but only by a whisker and other things being more or less equal, yield is always the deciding factor for an HYP selection due to strategic ignorance.

I know nothing about the comparative long term merits of these two oil majors and nor do I want to attempt such prognostication. If I did that and by so doing then believed I'd know, I'd know I don't know. HYP Zen tells me that the very act of attempting to know the unknowable merely increases my ignorance.

At my average buying price of 603p (including costs), and with a historical dividend of 20.7p for the year to 31/12/05, the yield on last year's payout is 3.43%. The consensus forecast for the 06 divi is 21.0p for a forecast yield of 3.48%, and 22.3p for 07 for a forecast yield of 3.70%. These yields are both above the FTSE100 average and pretty good for BP on historical comparisons.

Over the last few years the payout actually dipped very slightly, in 02 and again in 03, but then recovered smartly so that the 06 forecast of 21.0p is well above the 15.1p paid in 01. I haven't checked back but it may well be that the slight falls in the above years were more to do with the deteriorating value of the dollar in which the business accounts, rather than an actual cut in the dividend.

Where accounting is maintained in a foreign currency this will add volatility to the dividends when converted to sterling thanks to exchange rate fluctuations. I do not though find this a sufficient reason to avoid such shares in an HYP.

Here is the table for HYP4. The amount invested is £5,000 including all costs:

Stephen owns shares in BP.