Todd Wenning of the Motley Fool has published a number of 'Dividend Report Cards' for the UK and US markets that provide a good introduction for what to look for in high-yield shares as well as identifying some potential candidates for your High Yield Portfolio.
His tutorial is here. The basic approach is:
- Dividend history: is there an established track record of increasing dividends, in relation to the earnings growth of the company
- Sustainability of the dividend: 'interest coverage ratio' (Earnings Before Interest and Tax/dividend expense); 'earning dividends payout ratio' (dividends/earnings); 'free cash flow dividend payout ratio' (dividends/free cash flow to equity, excluding acquisitions)
- growth prospects, based on 'return on equity' times the 'retention ratio' (percentage of profits kept in the business)
- competitive strength in its sector: comparison with yields of competitors
Todd's UK Report Cards can be found here
To help you, I've summarised below the overall rating he has given to the shares he has examined:
National Grid: C
BHP Billiton: C
Diageo: C (updated)
SAB Miller: B+
British American Tobacco: B
Imperial Tobacco: B+ (I personally wouldn't have anything to do with the tobacco industry)
Marks & Spencer: A- (recently re-confirmed)
G4S: D (!)
Reckitt Benckiser: A
United Utilities: B-
Next Group: A
BAE Systems: B
William Hill: A-
Rolls Royce: B
Ultra Electronics: A
Royal Dutch Shell: D (!)
Todd's US Dividend Report Cards can be found here.The list is more extensive than for the UK, so I won't try to summarise it.
These are not a complete list of the potential high-yield shares - for that you will need to do some research of your own (coming in a later post).
I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.