Putting high yielders through the sieve

You will often notice the words 'Source Datastream' under a chart or panel of figures in the financial press. Datastream is a computer database of statistics of quoted companies and economic data, which is constantly being updated.

The press, brokers, analysts and others who have access to Datastream can conduct sophisticated searches for shares that meet specified criteria. The information produced can then be displayed by a graph or simply in a list or panel of figures.

The use of Datastream for investment analysis can be compared to selecting officers from an army of men. You would want your officers to be physically fit, to have an above-average IQ and to have the experience, character and personality to handle the extra responsibility.

To select shares for investment is very similar. You might only consider companies with a substantial market capitalisation and you could specify a minimum yield, a certain level of dividend cover and an acceptable percentage of debt. Datastream would then be able to give you a near-instant shortlist.

High-yielding shares have performed well recently and over the years have tended to beat the market. On Friday of last week, I pressed the appropriate buttons to request from Datastream a list of the shares with market capitalisations of more than pounds 200m that appeared to yield more than 6 per cent. Only 23 found their way through this sieve.

From this point onwards, the harsher you make the criteria, the safer your resultant selections. However, the safety you are seeking will also reduce the upside potential of your final portfolio.

For example, I have little doubt that British Gas will pay its forecast dividend this year and may pay a little more in the following year.

Even in that happy event though, its shares are unlikely to perform as well as a company like Ladbroke, if the recovery continues. Ladbroke is highly geared (60 per cent after deducting cash) so you also have to factor the risk of failure or a severe setback into the equation.

On balance, I decided to pursue my search with safety as my main criterion, but not to the point of eliminating all the upside of recovery.

As a first step in reducing the risk a little, I pressed a few more buttons to eliminate those companies with dividend cover this year of less than 0.75 per cent. Ocean Group, APV and Lucas disappeared from my list. I then turned to the May edition of The Estimate Directory to strike out any company that had already cut its dividend or was forecast to do so. Only Willis Corroon was eliminated.

The next sieve was excessive borrowings, as indicated in the last edition of my Hambro Company Guide.

I decided that any company with percentage gearing, net of cash, of 50 per cent or more had to go. As a result, I happily waved goodbye to Booker (71 per cent), Fisons (83 per cent), London International Group (151 per cent) and Tiphook (154 per cent), and bade a sadder farewell to Ladbroke (60 per cent) and Great Portland Estates (80 per cent).

The remaining total of 13 shares might be 'lucky for some' at bingo, but for investment I prefer 10, so I eliminated Babcock (not keen on the business), CE Heath (widely disparate profit forecasts) and Calor Group (just a hunch).

My final list of the 10 officers of high yield, selected from the leading 350 shares, is shown in the table.

All of these companies are currently forecasting profits that will cover this year's dividend by at least 0.75 times; they have percentage gearing, net of cash, of under 50 per cent; and they all yield 6 per cent per annum or more with an average yield of about 62 3 per cent, compared with just under 4 per cent for the FT 350 Index.

For investors who really need a well-above-average yield, the 10 selected shares constitute a relatively safe portfolio, with the hope of some capital growth.

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. Mr Slater has agreed not to deal in a share within six weeks before and after any mention in this column.

----------------------------------------------------------------- Table: THE 10 OFFICERS OF HIGH YIELD ----------------------------------------------------------------- Company Price Yield p % Albert Fisher 65 7.3 BBA 152 6.1 BICC 395 6.3 British Gas 290 6.2 Hanson 233 6.1 Harrisons and Crosfield 185 6.1 Hillsdown 147 7.9 P&O 601 6.3 Redland 504 6.3 T&N 172 8.0 -----------------------------------------------------------------