VALUE INVESTING
Here's One I Started Earlier

By Stephen Bland (TMFPyad)
November 4, 2005

In another life I started, but did not finish, a high yield portfolio (HYP). This is now going to become HYP3 here and I intend featuring one new share per month until it is complete. It thus differs in construction from HYPs 1 and 2 in which I bought all the shares at once. Purchasing monthly may add a certain frisson to the construction process.

HYP3, like 1 and 2, is merely illustrative. It is essentially the concept of HYPs I am interested in promoting here rather than the individual shares themselves, as an alternative to other forms of long-term saving or income investing. As previously, I am assuming £5,000 invested in each share, including costs.

Before I was so rudely interrupted, I had reached five shares in HYP3 and they are shown as the first five on this list at the original prices including costs. My addition today is phone company BT Group.

Month picked	Company	Purchase price	Price now	Gain/loss (%)
May 2005	Lloyds TSB (LSE: LLOY)	470.5p	470p	(0.1)
Jun	United Utilities (LSE: UU.)	651.4p	626p	(3.9)
Jul	Alliance & Leicester (LSE: AL.)	899.2p	856p	(4.8)
Aug	DSGI (LSE: DSGI)	159.7p	148p	(7.3)
Sep	Legal & General (LSE: LGEN)	111.8p	109p	(2.5)
Nov	BT Group (LSE: BT.A)	212.6p	209p	(1.7)
Total invested		£30,000	£28,983	(3.5)

These are just the capital movements, dividends would have been paid but I'll leave a full review of the effect of those until the portfolio is complete.

I always compare the performance of my other HYPs with the FTSE100 because it is very useful to have some kind of benchmark but that is not so easy with the piecemeal construction method of HYP3. So I will wait until the portfolio is complete.

So why BT for the latest addition?

Well, simple really. Using forecast dividends it is the fifth highest yielder in the 100 index and I already have the other four above it, being, in descending order, Lloyds, UU, A&L and DSGI. Also, and critically, as a phone company it falls into a different sector from the existing five shares. The consensus forecast dividend for BT's year to 31/03/06 is 11.2p which on my above purchase price gives a yield forecast of a very attractive 5.3%. Moreover, since going through one hell of a crisis in recent years, the company has been fighting back pretty hard with the result that it is now delivering the increasing dividends I find highly desirable.

As to the future for BT in particular, or its industry in general, over the lengthy period intended for it to be held in the HYP, I don't know and I don't want to know. Strategic ignorance rules.

For anyone not aware of the principles behind HYP investing, the general idea is that a sector diversified portfolio of large cap, high yielding shares are bought and held for income over a very long period. Over time the income ought to rise and the capital should follow but income is the major consideration. There can be no guarantees of the income or capital of course, this strategy is only for those prepared to take the risks of being in equities.

Almost inevitably, there will be some years when a number of the companies cut dividends and this may actually reduce total portfolio income on occasion. However, this will be fairly rare and the diversified nature of the businesses will assist in ameliorating the overall effect of a bad year because even if it happens, not all the shares are likely to cut their dividends. Some may hold or continue to increase their payouts.

The strategy can be used both for immediate income investors and those accumulating capital for future income by reinvesting dividends. Switching between the two modes is simple and cost free. In fact, this seamless and costless progression from saving to drawing income is one of the major attractions of the idea.

For further details on HYPs in general, including the very attractive tax treatment of dividends compared with other forms of income, readers may wish to refer to my previous HYP articles.

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