HYP4 Publishes

Stephen Bland adds Pearson to his fourth High Yield Portfolio.

It's the first article for August and I'm adding the twelfth share to my fourth High Yield Portfolio (HYP). It is Financial Times and Penguin books publisher Pearson (LSE: PSON) at 772p plus costs, a share which has now featured in three of my HYPs to date including this one. I've got a few myself too.

I don't think though that it is in so many of my HYPs for anything to do with sentimentality; there's no room for that in HYP construction. I selected Pearson because it is the next share on the descending yield FTSE 100 list in a new sector which has also the sort of fundamentals that I consider desirable in an HYP selection.

Thus the diversification of this portfolio continues. As I've mentioned repeatedly, diversification is critically important to the security of both the capital and the income of the HYP strategy, and is a major component of its low risk by equity standards.

The all important dividend shows unbroken growth over the last few years ranging from 23.4p in the year to 31/12/02 to 29.3p for 06. Forecasts for 07 and 08 indicate 31.07p and 33.15p. This growth rate is not enormous but is ahead of inflation. Interim results to 30/06/07 released a couple of days ago showed the half time dividend increased by 6% to 11.1p.

Pearson generates about two thirds of its sales in the USA, principally through its educational publishing business. Thus adverse dollar exchange rates affect its sterling accounted profits to the extent, they state, that a five cent decline in the dollar against sterling over a year reduces eps by about one penny.

A lot of major British companies, many of which will appear in HYPs, have substantial dollar sales and thus have been hit by the surprisingly high weakness of that currency in recent times. Making it worse, some of them actually account in dollars and calculate their dividends in it too so that even if the dollar dividends have been raised, the sterling equivalent may be little changed or actually reduced.

It shows the additional risks being run by holding shares with substantial foreign interests. This is a two-way street, of course, so that when the dollar appreciates, dollar profits and dividends increase automatically in sterling terms.

Note that I'm not suggesting that HYPers ignore companies with major dollar or other foreign currency based business, that would cut out far too many potentially attractive shares including all the oils and miners for a start as well as Pearson but it does increase risk. A lot of blue chip British shares are very internationally invested but this is probably not evenly spread amongst the world's leading currencies. My guess is that the dollar is by far the most common currency of foreign business and accounting. So the dollar rate against sterling matters in general far more here than other main currencies such as the euro or yen and consequently we can't look for currency volatility to be evened out amongst them.

All of which I mention only in passing really, the trend of exchange rates is not something to which HYPers need give much thought if they follow my doctrine of Strategic Ignorance, which means deliberately avoiding any consideration of the distant future. It makes your hair hurt.

Here's HYP4 to date. It's looking a bit sad with recent falls, nearly every share is showing a loss though the income won't have been affected. And income, crucially a rising one, is what this strategy is all about. In fact where there have been figures released for any of these shares since selection, almost all have declared an increased dividend over the previous period.

Of the shares shown I hold BAT, BP, BT, DSGI, Lloyds, Pearson, Royal Bank of Scotland, United Utilities