Following up on my recent construction of a 25-share high-yield portfolio this update expands out to smaller shares in order to improve the range of companies and overall yield

Introduction

This is a follow-up to my earlier high-yield portfolio construction articles located here: Part 1 and Part 2.

The motivation for this update is that I received some very interesting feedback from investors on the Motley Fool website. The gist of the discussion was that by restricting my selection to the very largest of companies I was potentially missing out on smaller firms with better histories and dividend growth profiles. So I decided to test this hypothesis by reducing the minimum size for consideration down to £500mn (which is small in the HYP context!) to see what would happen.

In practice this meant scrutinizing each of the original constituents and looking for one of two reasons to change:

  • I could find a better, smaller candidate in the same sector, or
  • the original share wasn't of high quality and a share in a new sector looked stronger

The end result of this filtering is that I've identified 8 substitutions; six of these involve direct, like for like replacements while two are new companies that provide improved income and yield security. In this piece I cover each of these eight companies and give my reasoning as to why these are sensible picks in their own right and, in addition, why they are better than the shares that they replace.

For reference the spreadsheet of candidate shares is available here.

Changes to the original portfolio

1) Imperial Tobacco [Consumer Defensives - Food & Tobacco]

The first portfolio change that I'm making is to switch from British American Tobacco to Imperial Tobacco. A few months ago BAT yielded more than Imperial and with twice the market cap of its competitor seemed like a decent choice. However Imperial now offers more, with a forecast yield of 4.7% for 2016, at a higher cover level and dividend growth rate (around 10% compared to BAT's more pedestrian 5%). That said there's very little to choose between with these companies and I'd be happy to buy both and split the sector allocation between them.

What's important though are future prospects for the dividend and there are two good reasons for feeling positive here. Firstly the dividend policy is…

Unlock the rest of this article with a 14 day trial

Already have an account?
Login here