the richest man in atherstone

Having short-listed the eight highest yielding stocks in FTSE 100 (see my previous post) I set to work narrowing my selection down to a single stock based on a number of criteria.

Yield of 4.7% or More?
The first thing I did was have a change of heart about the short-list. I was originally happy with anything over 4.5% yield but, as I was aiming for a yield of 4.7% or more (the best savings account rate), I decided that I didn't want to rely on capital growth to push up my earnings when I didn't have to. Lloyds TSB(5.9%), United Utilities(5.71%) and DSG International(4.82%) all have a dividend yield above my target so why make things harder on myself?

Stable Dividend?
Next I checked each of the three aforementioned companies for details of their previous dividend payouts to check that their previous yields would be achievable this year. If, for example, one of the companies had a dividend this year that was twice the size that of previous years it would be prudent to find out why and if it is likely that this years dividend would be similar.

Lloyds TSB has had a dividend of 34.2p for the previous 5 years, so I think it's pretty safe to assume it'll be the same or higher over the next 12 months.

United Utilities has also had fairly a stable dividend of around 45p for the previous 5 years although 2006 is a little lower than in previous years and there seems to be a slight downward trend.

DSG International's dividend has been climbing steadily for the previous 5 years, starting at 6.05p in 2001/02 and rising to 8.43p in 2005/06.

So, all three companies have good looking dividends although I'm slightly concerned with United Utilities dividend going in the wrong direction.

Company News
I decided it would be sensible to take a look at the latest news headlines for the three companies to check that there were no recently published problems with the businesses and to see if there were any issues that could affect future profitability in a negative way. I used Yahoo Finance News for my research.

I found that Lloyds TSB has sold it's share registration business for £550M. Lloyds TSB Registrars contributes £32M to the group's profits, so I assume that the board must think that the money raised can be utilised more profitably in other areas (and perhaps some of it may go to shareholders).

I could find no relevant news for United Utilities.

The Chief Executive of DSG International has announced his resignation today citing early retirement as the reason. According to reports, this announcement was unexpected but many analysts agree that having someone new step in would probably be good for the company.

Summary
So, three companies to choose from.

Lloyds TSB has a very stable dividend but has just sold off one of it's profitable businesses. Will this reduce profits over the long-term or will the cash be more profitably employed?

United Utilities' dividend has gone down a little in recent years but it still remains a high-yielding stable company.

And, finally, DSG International's dividend has been rising in value but the Chief Executive has just announced his retirement. Will this negatively affect the yield or will new blood take the company to new levels?

There's still a bit to think about but I think I've already made my decision. I'll let you know what it is in the next article in this series.

Incidently, while I was researching these companies, I discovered that a strategy exceedingly similar to that I've described has already been written about over at The Motley Fool website. Named the HYP or High-Yield portfolio, I found it very interesting to read and it has worked out well for the author over the past 5 or 6 years, which adds to my confidence.

One of my goals for 2007 is to invest £1000 in an investment that will yield more than the best savings account. This was around 4.3% NET at the beginning of the year but due to recent interest rate rises, I'm now looking for something that will earn me over 4.7% NET per annum (based on the IceSave Savings account interest rate). Investing in the stock market is an option to achieve this goal, so I wanted to describe the process I have gone through to pick the stocks that I think will perform well.

The funds I am going to use for this venture are currently invested in Premium Bonds, but I will be cashing them in next month after the prize draw.

FTSE 100
I've spent this evening looking into the recent yields of shares in the FTSE 100 index. Companies in the FTSE 100 are the 100 largest UK registered companies in terms of their market capitalisation (value in the market).

I've chosen to base my investigation on the largest companies for a couple of reasons. Firstly, I am partway through reading "The Intelligent Investor" by Benjamin Graham (for those that don't know of him, he was Warren Buffet's mentor) and he advises:

"The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition."

"An investment operation is one which, upon thorough analysis promises safety of principal and adequate return."

Although not 100% secure, investing in larger companies increases the margin of safety. Secondly, I have been burned before, when I invested in a growth stock that didn't bring the returns I anticipated, so this time around I plan to be a lot more careful.

Yield
Profits from investing in stock come in two main forms. Firstly, shareholders are paid a proportion of the companies profits in the form of dividends usually, but not always, twice a year. The yield is the equivalent of a savings account interest rate and is represented as a percentage of the dividend in relation to the share price, using the following formula:

Dividend / Share Price * 100

Secondly, the value of the share itself can rise (and fall) due to various market influences, so shares can be sold at a higher (or lower) price than what they were bought at. Obviously, these losses and gains cannot be realised until the stock is sold.

I decided that the first thing I should do is find out the yield of each of the companies in the FTSE 100 to find out the kind of "interest rates" I could achieve and who were the top performers.

Data Collection
I found a list of the companies on the FTSE website and copied/pasted them into a spreadsheet, then went to work finding the current share price and recent dividend value for each of them. I recorded my results in my spreadsheet and used the formula above to calculate the yield

I began using Yahoo Finance to collect the data but later on I found ShareCrazy, which I found to be faster and display more company information.

The information on my spreadsheet is available here. Many of the figures are rounded and due to the nature of the stock market, the share prices will probably be different when it opens again. The data shown is only for example - please do not use it for your own research and analysis.

Royal Bank of Scotland Group
During my data collection, I calculated that The Royal Bank of Scotland Group had a yield of 14%! This was more than any other two stocks combined, so I figured I'd made a mistake somewhere. I checked and re-checked the share price and dividend and also the formula I was using but it kept adding up to 14%, so I searched the Internet for an answer. I came across this website, which informed me that RBOS shares had recently been consolidated 3 to 1, but this was after the dividends had been announced. As there were now three shares to every one, the yield needed to be divided by three making it a much more realistic 4.67%. This was confirmed on the RBOS website.

Analysis
I decided to shortlist the companies that had an annualised yield of 4.5% or above as potential share purchases. I chose this number because I am aiming for 4.7% profit per annum and the dividend profit does not include earnings that could be made by capital growth, so it's likely I would earn a little extra over the long term as share prices in general tend to go up.

Having whittled my list of potential investment companies from 100 to 8, I am left with this list of companies to analyse further:

1. Lloyds TSB Group (5.9%)
2. United Utilities (5.71%)
3. DSG Internation (4.82%)
4. Royal Bank of Scotland (4.67%)
5. BT Group (4.62%)
6. Alliance + Leicester (4.59%)
7. Bradford & Bingley (4.58%)
8. HSBC Holdings (4.51%)

I was pleased that the best yield came from Lloyds TSB because I have already got a small investment in it, that I made spur of the moment with very little research - I lucked out there

So should I increase my Lloyds holding or diversify by purchasing one of the other stocks in the shortlist? I need to do some more detailed research into the companies that are left before I make a decision.

I'll be publishing part 2 of this article soon...

This series of articles was inspired by a wealth-building strategy created by Stuart Goldsmith. It is called 'Double Your way to a Million' and you can sign up for your free copy on this webpage.

It would seem my new house is sitting on top of a goldmine. Well maybe that's a bit of an exaggeration but I have found quite a few coins left around the place by the previous owners - so they are now legally mine

Taking up the carpet in my daughter's bedroom yesterday, I discovered a lone penny and while I was laying some laminate flooring in there, I found a five pence piece that had slid under the skirting board.

Additionally, taking out the rubbish today my highly-acute, silver-spotting, beady eye homed in on the glinting of a five pence piece around the side of my property. I'm quite surprised that I saw it, as it was almost fully caked in dirt and half buried under the grit.

As I counted out my riches and added the 11p to my current Doubling Kitty I wondered what other treasures lay in wait for me in my new property.

Step 12 in progress
Cumulative Cash: £10.13

This series of articles was inspired by a wealth-building strategy created by Stuart Goldsmith. It is called 'Double Your way to a Million' and you can sign up for your free copy on this webpage.

Well, after much blood, sweat and tears, we've finally moved house!

I'm not online yet - my ISP are dragging their heels a bit with the changeover - so I can only get on the Internet for short periods of time, but I thought I'd quickly give you an update of my Doubling exploits.

On Saturday, I took the kids to the nearby park and found a penny under the climbing frame.

Then, on Sunday I picked up and paid for an item from a nearby store for a friend. It cost £99.99 and when I dropped it off, my friend gave me £100, effectively giving me a penny.

An extra 2p to the Doubling kitty. Not much, I know, but every little helps.

Step 12 in progress
Cumulative Cash: £10.02

To help maintain my focus, I will be reviewing my progress towards my annual goals every four months. Unfortunately, the first few months have been a nightmare. Complications in my wife's pregnancy and moving house have not left a lot of time for much else. However, I have made some progress towards hitting my targets.

Goal 1: Save at least £3000 - I'm on target to achieve this goal. I've put away £1000 from my salary so far (£250 per month) and have budgeted for a further £250 per month until the end of the year.

Goal 2: Set up a Savings Account for my children - I put some work into this earlier in the year but was messed around somewhat by the Halifax when I tried to open the accounts. This goal is now on hold until we have moved house, so I don't have to go through the hindrance of changing the addresses.

Goal 3: Donate 1% of my gross salary to charity - I've chosen my charity (BDF NewLife) and have budgeted to give 1% of my income to it (at the end of the year), so this goal is very much on track.

Goal 4: Set up and run a Limited Company - I've had a number of ideas for my corporation but one stands out significantly from the others and I'm currently putting some tests in place to find a viable business model. Most of my ideas involve using my residential address as my business address, so incorporation has been put on hold until we move house.

Goal 5: Earn at least an additional £5000 of income - This goal is very much tied to the previous goal. When I set up my company, it will generate the at least £5000 of income needed to achieve this target.

Goal 6: Invest £1000 in an investment which will earn more than the top savings account - I have decided to use the money from my Premium Bonds to finance this goal, however there are going to be 4 times the number of jackpot prizes up for grabs in June, so I will be holding on to them until then. At present, I am considering investing in shares but this has not yet been finalised.

Goal 7 - Complete steps 9 to 16 of my Doubling Plan - This year, I have completed steps 9, 10 and 11 so I'm on target for completing this goal by Xmas. All my Doubling Adventures can be found here.

On the whole, I'm pleased with my progress thus far under difficult circumstances. I am slightly concerned about Goal 5 - £5000 seems like an awful lot of money - but I'm confident I'll have met the target by the end of the year. Goal 6 also seems a little daunting but I'm sure after some research, I'll feel better about investing.