the richest man in atherstone

Well, I made my decision and subsequently I've bought 171 shares in Lloyds TSB at 576.3p each.

I felt that Lloyds offered the best investment because of the stability of the company (dividend has not fallen like United Utilities and the Chief Exec has not resigned like DSG International) plus, of course, it has the highest yield of the FTSE 100.

I also feel that by selling their registrars business, Lloyds TSB are focusing on the core financial services that they've laid out in their annual report and maybe some of the profits made from the sale could be be put in the shareholders pockets. I also think it is likely that Lloyds TSB shares will appreciate in value over the next few years.

Calculations
In total the shares cost me £985.47 (171 shares at £5.763 each).

Added to that are my broker's commission at £7 (per trade) and Stamp Duty at 0.05% of the purchase cost, which equated to £4.93. In all, the transaction cost £997.40 which, divided between the 171 shares, equals an actual cost of a fraction over £5.83 per share.

Assuming a dividend payment of 34.2p per share (as it has been for the previous 5 years), I should earn £58.48 gross per year from these shares. Dividend income is taxed at 10%, so that will actually be £52.63 net. That means a net yield of:

£52.63 / £997.40 x 100 = 5.28%

If I didn't take the commission and stamp duty into account, the net yield is:

£52.63 / £985.47 x 100 = 5.34%

Compared to a good savings account, the shares I have bought will have a better return. To earn 5.28% net from a savings account would require an interest rate of around 6.6% gross. Additionally, with savings, there is no chance that the capital will appreciate in value. By the same token, there is no risk that savings account funds will depreciate in value but I think investing in a large corporation like Lloyds TSB is a safe bet.

After one year, I would have earned around £47.88 had I put the £997.40 in my high interest IceSave savings account, compared to the £52.63 I will recieve from my Lloyds TSB shares in dividend yield. Over the long-term, reinvested dividends and capital growth should make the shares out-perform the savings account by a lot more.

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...

Following the nightmare I had organising my paperwork, I decided to follow-up a pension that i contributed to between the years 1998 to 2002. Admittedly I wasn't earning a lot at that time and didn't really understand what pensions were for when I signed up for it. I was young and my parents advised me to do it, so I did. When I changed jobs in 2002, I elected to opt out of a pension because I wanted more money for myself.

Happening across some paperwork for the pension, I wondered if I could cash it in and put the money towards some other type of investment. I would prefer to be rich long before I reach retirement age and recent news about the poor returns of company pensions have put me off them a bit as an investment vehicle.

My benefit statement for 2005 states that I would get a lump sum of £3'400 and a yearly pension of £1100 plus £500 per annum for my wife.

I wrote a letter to the pension provider stating my intentions, however the reply was negative. Apparantly I cannot liquidate the pension and have only two options:

• Wait until I am 60 and use the pension for its original purpose
• Defer the the benefits to another pension scheme

Never mind. It was worth a try. I have learnt a valuable lesson by doing this: I should not invest money in something I do not understand.

I also feel I've learned a lot more about pension schemes. I didn't really understand them before but now I have a basic knowledge of their advantages and disadvantages. The most important advantage is that you can contribute to your pension straight from your paycheck, before the taxman has chance to get his grubby hands on it. The main disadvantage is that you can't get your hands on the cash until you reach retirement age.

I don't regret investing in a pension. If I hadn't put cash in there it would have only been spent on booze, fags and gadgets anyway! I'm older now and I like to think a little wiser and I know that when it comes to investing money again, I won't go about it willy-nilly. I'll find the best products available and understand them inside-out before I hand over the dough.