No Pain No Gain: 'Dividends cushion the blow if capital gains fail to materialise'

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I suffer from a yield addiction. Long before the bear market made it fashionable to focus on dividend payments, I relied on cheques cushioning disappointment if capital gains failed to materialise. Indeed when creating the No Pain, No Gain portfolio, a company's ability to post regular dividends was a major consideration.

I suffer from a yield addiction. Long before the bear market made it fashionable to focus on dividend payments, I relied on cheques cushioning disappointment if capital gains failed to materialise. Indeed when creating the No Pain, No Gain portfolio, a company's ability to post regular dividends was a major consideration.

Until recently only two constituents failed to pay dividends. Now, probably, five will leave shareholders chequeless. The sharp increase stems from trading setbacks and my decision to reshuffle the pack and bring in some fledglings that should feature in the stock market recovery I anticipate.

The brewer Scottish & Newcastle illustrates my dividend philosophy. The sole survivor of the "big six" which once dominated the beerage has had an eventful time since I descended on the shares at 394p. Subsequently, the price nudged 700p but then plunged to below 300p, helped downwards by a modest profit warning. Scottish had always been a high yielder, so a yield at one time topping 8.5 per cent was some compensation for the shrinking share price. After all, brewers are not noted for dividend cuts and Scottish, I suspected, had no intention of being an exception. In the event I was only half right. It is at least maintaining its dividend this year, but taking advantage of a dramatic reshaping to cut future dividends.

Even so, Scottish will still be on a handsome yield, unless the army of City drink experts is right and its shares enjoy a truly heady ferment. The City has put pressure on Scottish to ditch its pubs, which it is now doing, to focus on production. Such concentration, it has argued, will result in a higher share rating.

I am not so sure. To my mind, pubs are an essential part of a brewer's barrel – a view shared by Scottish until, we are told, Six Continents (the old Bass) attracted venture capitalist bids for its pubs arm, now called Mitchells & Butlers. As VCs have been keen pub buyers since the ill-conceived Beer Orders of 1989, such an explanation for the sudden change of policy takes some swallowing.

To underline its commitment to brewing, Scottish is taking full control of a Portuguese brewer. But, illustrating that its taste spreads beyond beer, it is splashing out £278m for the struggling HP Bulmer cider maker and buying a Portuguese mineral water company. The £2.3bn or so it expects from its pubs will help plug its yawning borrowing gap, but I suspect it will come to regret the day it forsook the bar. Scottish is offering 310p a share for Bulmer, making it a spectacularly successful member of my busted-flush portfolio.

Two other No Pain, No Gain constituents have made Stock Exchange announcements. Springwood, the late-night bars group, produced off-key, but better than expected, profits. And the builder Galliford Try has dismissed rumours of a management buy-out.

Springwood is one to drop off the dividend list. It had warned its payment would be reduced; in the event, it cannot afford any cheques at all. The shares have climbed off their 10.5p low to reach 25p.

Profits came out at £2.1m. Like so many, Springwood is guilty of expanding at the wrong time. It was still digesting Kingfisher Leisure when it embarked on another acquisition spree it intended to finance through a cash call. But the collapse in its share price dashed any rights issue hopes. However, it clinched a number of deals and is struggling with a debt pile at a time when trading has come under pressure. The takeovers also brought in leased properties, denting its reputation for embracing a strong freehold estate. Still, even shorn of dividend income, I intend to stay with Springwood. There are signs it is getting to grips with its problems.

Besides denying buy-out rumours, Galliford also poured cold water on another story – that it was going to split into two stand-alone companies, housebuilding and construction. I wish it would. The shares have not been a bad investment, but the construction arm has been a drag, denying shareholders the full benefits of the undoubtedly successful housebuilding side. Indeed, as the construction business would probably have little future as a quoted company, I suggest it be sold to a rival, allowing Galliford to divide the resultant cash between shareholders and developing the housing side.

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