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STRATEGIES: We identify eight higher-yielding equities worth a long-term place in your portfolio
June 22, 2009

Many investors have withdrawn money from the equity market since it peaked in October 2007. An estimated two thirds of this money has not been reinvested, with most of it being held for reinvestment when the next bull market has been identified.

To move quickly back into the stock market when you feel we're on a bull run, this pot of cash needs to be available on demand or perhaps one month's notice. Until the end of 2008 you would have been happy to hold it on deposit as rates were reasonable - around 5 per cent. However, that is no more.

Much has been written about temporary homes for this money - gilts, leading preference shares, corporate bonds and high-income funds. But relatively little attention has been paid to the higher-yielding equities.

Some groups of investors in SIGnet (Serious Investors Group Network) have been studying the opportunities and evolving a selection method. One of their worries has been the possibility of the world loosing confidence in the pound, resulting in devaluation and hyperinflation.

Higher yielding equities are regarded as a high-risk area because the dividend might not be retained and the company might not survive current conditions.

Using standard data sources like CompanyREFS, we can identify the 321 companies with a prospective yield of at least 5 per cent. To support the yield there needs to be dividend cover and it was thought that an acceptable forecast level was 1.5 or 150 per cent which reduces the population to 213.

Another factor supporting the dividend is earnings per share that should be expected to grow rather than fall. Applying prospective growth of at least 5 per cent (brokers' consensus) we have 62 shares left. Then, to reduce the risk that the company might run into credit difficulties it should have net gearing less than 25 per cent; this reduces the number to 26.

In a further attempt to reduce risk we then exclude companies with a market capitalisation of less than £100m. We are left with just eight companies.

Finally, as a protection from devaluation, the eight survivors were checked for overseas business turnover. All had 50 per cent or more.

Eight companies to protect your income

CompanyMkt val £mYield %Div coverEPS grwthGearing %Non-UK turnover %
Cable & Wireless3,4127.21.657-1450
Diploma1535.81.97.1-1557
James Halstead2275.61.85.1-6057
Jardine Lloyd Thompson9105.31.510.9-19463
Laird2568.31.5102484
Lamprell2345.64.460-41100
Thomas Cook1,9035.42.56.32165
TUI Travel2,77552.219.5568

Yields are prospective, not historic. Source: SIGnet

Cable & Wireless (CW.) - The provision of telecommunications services operating through two standalone business units - International and Europe; Asia and US. FTSE100 constituent.

Diploma (DPLM) - The distribution of life science instrumentation and consumables hydraulic seal kits cylinder components, gaskets, specialising wiring connections and control devices. FTSE Small-cap constituent.

James Halstead (JHD) - Manufacture of safety vinyl tile & cushioned underlay floor coverings, folding campers and trailers and motor cycle accessories distribution. Traded on Aim.

Jardine Lloyd Thompson Group (JLT) - Risk management advice, insurance and reinsurance broking and the provision of employee benefits. FTSE250 constituent.

Laird (LRD) - Design, manufacture and supply of security products and services to the electronics and building industries. FTSE Small-cap constituent.

Lamprell (LAM) - Provision of specialised refurbishment and construction services to the oil and gas industry. Facilities based in the UAE. and Thailand. FTSE Small-cap constituent.

Thomas Cook Group (TCG) - International travel and leisure activity with a portfolio of brands across Europe and the Atlantic. Formed by the merger of MyTravel and the Thomas Cook tourism unit of Germany's KarstadtQuelle. FTSE100 constituent.

Tui Travel (TT.) - Offers a wide range of leisure travel experiences worldwide. Formed by the merger of First Choice with the German TUI’s tourism business. FTSE100 constituent.

For more data and articles about these companies, go to investorschronicle.co.uk, enter the TIDMs shown (eg TCG) in the 'Search' field, and click GO.

You could replicate some elements of the SIGnet selection process using the IC stock screening tool: www.investorschronicle.co.uk/data/stock_screener.cgi