HYP4 Bets

Stephen Bland makes a rare selection outside the FTSE 100.

First article for September means a new selection for my fourth High Yield Portfolio, the thirteenth share, and I'm going for bookmaker William Hill (LSE: WMH) . Hill is not quite large enough to be in the FTSE100. With a present market cap of £2.2bn it falls just outside it, though it is one of the largest companies in the FTSE250. HYP selections should be primarily from FTSE100 companies but there is room for one or two slightly smaller businesses where they are required to add diversity and/or a higher yield.

Actually the next share in the descending yield list of the 100 which diversifies the portfolio substantially was Rentokil (LSE: RTO) but although its yield is higher than that of Hill, I found that it had not increased dividends in some of the last five years which ruled it out for me at this stage. Note that my selection rules are not invariable and on occasion I may overlook some points if there is a trade off, which means usually that a much higher yield can be obtained or possibly that the diversification aspect is important. In this case I felt that the trade off was not quite worth it. Doesn't mean that it won't be in future though; HYP4 still requires a few more shares to complete it.

In contrast to Rentokil, Hill has a good dividend record, paying out 8.7p in the year to 31/12/02 which rose steadily to 21.75p in 06. Forecasts for '07 and '08 are 23.6p and 25.6p respectively. On my buying price (including costs) of 625p, the '07 forecast yield is 3.78% and for '08 it is 4.09%.

Hill is a complete diversification entry into HYP4 because none of the other existing constituents even come close in the nature of their businesses. That's assuming you don't include insurer Aviva in the comparison, though gambling and life insurance in fact have a common ancestry. These days of course their paths have diverged to the extent that their shared roots are unrecognisable; one difference being that at least bookmakers are straightforward and open about the way they go about relieving mugs of their money.

Here's HYP4 to date. As in last month's article it continues to be valued below cost though there has been an improvement since August. Readers should note that it is far too early to conclude anything about the capital performance so far. It takes several years for the direction to be ascertained because HYPs are a very long-term strategy. The income though is doing the business so far, and income is what this is all about. Capital follows income in the HYP approach, not the other way round.

Of the shares mentioned I own BAT, BP, BT, DSGI, Lloyds, Pearson, Rentokil, Royal Bank of Scotland, United Utilities.