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.