Part One of this series introduced how dividend payments from shares can produce a growing income stream with minimal effort on your part, and certainly no need to frenetically ‘play the markets’ like a demented monkey bashing the bongo drums. (Remember, study after study has proven most share traders fail to beat buy-and-forget tracker funds over the long-term).

Now we’ll consider in detail what makes a particular share an attractive candidate for a portfolio of high yield shares (known as a High Yield Portfolio or HYP). Part Three will outline how to assemble 15-20 such shares that complement each other by drawing their earnings from different industries, and thus avoid you having all your eggs in one basket. Part Four will demonstrate with real examples from the London stock market the construction of such a portfolio.

While we’re consider high yield shares in isolation below, keep in mind that holding only one high yield share (or several in the same sector, such as banking) is far too risky for our purposes: we’ll look at how to reduce the risks of picking a duff share below, but the greater protection comes from the portfolio approach explained in Part Three.

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“Buy! Buy! Buy!” shout the city folk in blue braces from one side of the trading pit. “Sell! Sell! Sell!” retort those with red neckties.

Whatever happened to “Wait! Wait! Wait!” wonders your writer?

These days sharetrading is conducted via computer – the trading is often done automatically according to decisions made by the computers themselves – and the drama of the buyers and the sellers at loggerheads is consigned like steam engines and home brewing to our rosy-tinted memories of yesteryear. Institutions and individuals alike now haggle over shares in front of screens that blink red and blue, with more arrows, buttons and switches than a computer game.

When trading platforms look like fruit machines, it’s no wonder investors behave like short-term gamblers. But there’s a way of profiting from holding shares that requires no selling at all, by receiving the (generally) twice-a-year dividend.

The dividend is the money a company pays every shareholder out of its retained profits, as a reward for holding its shares. It’s too often forgotten that as a shareholder in a company, you’re a part-owner in its business. The dividend you receive is your share of the annual earnings.

Annually, the amount paid out by companies in the London stock market as dividends is about 2-3% of the entire market capitalisation. Some shares pay more: several UK banks, for instance, are currently paying the equivalent of over 6% of their market capitalisation in annual dividends. Others, typically high tech or loss-making companies, don’t pay any dividend.

The amount paid out as a percentage of your shareholding (such as the 6% just cited) is called the yield of the share. There’s more detail elsewhere on Monevator.com regarding calculating the dividend yield; for now it’s enough to know that shares paying relatively high dividends are known as high yield shares.

Do the small percentage returns from dividends sound dull to you? Sure, you won’t hear much about dividends from excited market pundits on CNBC and Bloomberg, who prefer to scream that the price of Wibbly Wobbly PLC has fallen by 0.2% in early morning trading.

What if I was to tell you that over the long-term, the bulk of profits made from investing in the stock market have historically come from receiving and reinvesting dividends?

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“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.”
Robert Frost

Whether to buy your own home or not is a tricky question for anyone wanting financial freedom.

Now that might seem to some a mad statement; in most English speaking countries, buying a house to live in is a rite-of-passage, and while these days renting doesn’t quite conjure up visions of a harried mother washing tired clothes in a tin bath while four kids sleep head-to-toe in a single bed behind her, it’s still frowned upon.

Indeed – and ironically – the British love affair with property has blossomed into Buy-To-Let (BTL), where renting is perfectly acceptable as long as it’s not you doing the renting. These nouveau landlords had better hope the rental sector doesn’t return to its bad old image of multi-occupancy squalor and sordid bedsits. (When most people want to buy their own home, just like you, it’s a daydream to believe that sufficient millions of your peers will put this aspiration aside just to rent from hundreds of thousands of similar new BTL investors and make you all rich.)

But leaving aside for now being a landlord – which can certainly make great money if you buy at the right price – what are the pros and cons of owning your own home to live in?

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