VALUE INVESTING
High Yield Entertainment

By Stephen Bland (TMFPyad)
December 2, 2005

I am building up a third high yield portfolio (HYP) by monthly instalments and it's time for the seventh addition. My first two HYPs were each created by purchasing all their constituent shares with one lump sum, so portfolio number three differs in its construction style.

Whether purchasing over time is beneficial for HYP construction compared with a single lump sum invested in the shares at the outset is debatable. In practice, and in my experience with investors, the guiding factor is likely to be the availability or otherwise of the necessary cash rather than a considered decision based upon the perceived merits of instalments or lump sums.

My seventh selection is Rank Group (LSE: RNK). Here is the table of all the shares to date in HYP3. £5,000 was invested in each and all costs are included.

Month 2005	Company	Purchase price	Price now	Gain/(loss)
May	Lloyds TSB (LSE: LLOY)	470.5p	470p	(0.1%)
Jun	United Utilities (LSE: UU.)	651.4p	645p	(1.0%)
Jul	Alliance & Leicester (LSE: AL.)	899.2p	896p	(0.4%)
Aug	DSG International (LSE: DSGI)	159.7p	155p	(2.9%)
Sep	Legal & General (LSE: LGEN)	111.8p	116p	3.8%
Nov	BT Group (LSE: BT.A)	212.6p	214p	0.7%
Dec	Rank Group (LSE: RNK)	311.8p	310p	(0.6%)
	Total invested	£35,000	£34,973	(0.1%)

As you can see the portfolio is very marginally down on its cost. My last review at the beginning of November for the then six shares showed it be down 3.5% so it has improved slightly. I'm not including dividends yet, these are purely capital movements. Clearly though, given that these are high yielders, there would have been some worthwhile income to date which would boost total return.

Rank is the first company in this portfolio that I've picked from outside the FTSE100. Nearly all the shares in my HYPs have been from the FTSE100 index at the time of selection because the high yield strategy works best with large caps. James O'Shaugnessy found this to be true in his book, What Works on Wall Street, but it is something I've always felt instinctively anyway. Generally, my belief is that a large cap is more likely to maintain dividends through bad patches and more likely to recover, in capital terms, from bad times.

Having said that I am not averse to selecting the occasional share outside of the FTSE100 for the portfolio because this still contains some fairly sizeable businesses, such as Rank. At a value of about £1.9bn it is near the top of the FTSE250 index which comprises the next 250 shares by cap after the FTSE100 index. So it's still a large company, even though it is not quite large enough for the FTSE100.

Rank diversifies the portfolio by being in the gambling, film and restaurant businesses, none of which figure in the shares selected to date. It has paid rising dividends for some years and for the year to 31/12/05 is expected to deliver 15.3p, with a consensus 16.1p forecast for 2006. On the latter, this gives a forecast yield of around 5.2%, well up with the sort of return I seek and substantially over the market yield which is currently about 3.1%.

There is a downside in that gearing is eye-wateringly high. However, the company has been saying for some time that it wishes to sell its film interests which may ease the debt level considerably should that happen. Don't hold your breath though, I mention this only in passing.

As regular readers will know, the policy I advocate for HYP share selection is strategic ignorance. That is, assume you know nothing of the future of the either the economy in general or any share in particular. Don't select on the basis that you believe you have some idea of the long-term trend that makes this or that share more or less attractive than any other. Ignorance is power.

For further information on HYPs in general including the very advantageous tax treatment of dividends compared with other forms of income such as pension annuities, interest or rents, readers may wish to refer to my earlier HYP articles.

Stephen owns shares in Alliance & Leicester, BT, Lloyds TSB & United Utilities.