Shares: A blue-chip bundle for all seasons

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THE sell-in-May reaction I wrote about last week has gathered pace, with the FT-SE 100 index down 160 points at one stage on its March peak and looking capable of dropping further.

But enduring phases of mostly unpredictable weakness is the cost investors have to accept in return for attractive long-term returns. For what it is worth, my belief is that periods of significant general weakness in stock markets almost invariably turn out to have the same cause - fears (sometimes realised) of higher interest rates. That seems such a remote possibility this time that I do not expect the current bout of weakness to last very long. Even if it is more severe than I expect, I am confident that the classy blue- chip FT-SE 100 shares selected here, which have all weathered a fierce recession in style, will cope with any further nasties that the global and local economies may have in store.

Last week's piece established two criteria for selection. One was that the company should have increased its dividend annually without a break throughout the recession. The second was that the latest chairman's statement on prospects should strike an optimistic note. This is more subjective, but it is significantly more positive than the hackneyed 'well placed to take advantage of recovery'.

On my calculations, 53 of the current FT-SE 100 constituents, excluding the utilities, have kept their dividends climbing through the recession. Out of those, I have chosen 16 where the chairman is positive on prospects, out of many more which met both criteria. United States studies have shown that a selection of 16 companies in different sectors gives nearly all the diversification benefits achieved by very large portfolios.

The 16 shares I have chosen, with prices in brackets, are: Abbey National (387p), BAA (750p), Bowater (492p), BTR (601p), Burmah Castrol (725p), GEC (316p), Great Universal Stores (1,665p), HSBC Holdings (607p), Inchcape (597p), Kwik Save (777p), Land Securities (523p), Lloyds Bank (523p), Marks & Spencer (348p), Prudential (320p), Siebe (468p) and Unilever (1,082p).

This constitutes a world- class, diversified group of companies, none of which is going to go bust and all of which have excellent managements that are handling recession with remarkable panache. Yet the average yield on this group is 3.5 per cent.

This is about the same as the yield on indexed gilts. I know which investment I would rather have, but then I have always thought that anyone who buys indexed gilts gave up on life a long time ago.

Readers may wonder how Land Securities managed to meet the requirement of an optimistic statement in the middle of the worst property recession in living memory.

Land Securities shares are doing well because they are being bought for their 5.3 per cent yield rather than as a cheap way of buying commercial property assets; the shares are at a premium, based on third-party assessments that put net asset backing at 500p or less. But when property recovers, which will probably happen sooner than most people expect, assets will soon start to move ahead again, while the dividend should continue to grow steadily.

Many of the other companies have made statements that are positive more in the sense of highlighting efficiency gains within the business and the effect that will have on profits, rather than saying that trading is brilliant.

But part of the reason for that is that the recovery is so recent and there have been so many false starts in the last couple of years that statements themselves may have become more cautious. As suggested last week, the tone may be more positive when companies start reporting their first-half figures later in the summer and early autumn.

A strategy for coping with a period of weakness in share prices would be to buy one of the 16 shares each week to complete the buying programme some time in August. That should virtually guarantee good profits. If the market is weak, the shares will be bought progressively more cheaply. If the weakness is short-lived, then purchases will be made on a rising market, which will make the early buys quicklyprofitable.

The biggest threat is that the UK recovery might start to peter out, as the US recovery is showing signs of doing. But in both cases, that would almost certainly lead to further falls in interest rates, boosting share prices by reducing the competing attractions of money held on deposit.