Guinness is good for your holdings despite the modest dividend yield

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employee pours a pint of Guinness
employee pours a pint of Guinness

Selling part of our income portfolio holding in Legal & General to buy Diageo may appear to be a rather strange decision. After all, the diversified financial services company is one of the FTSE 100 index’s highest-yielding stocks. Its dividend yield of 9.1pc is nearly three times that of the alcoholic beverages company.

Moreover, this column has consistently been bullish about Legal & General’s income prospects. Although we remain upbeat about its future outlook, our plan to hold a wider range of equities in the income portfolio inevitably means some positions must be reduced in order to provide capital for new purchases.

Investors, therefore, should not conclude that the partial sale of our notional holding in Legal & General equates to a negative stance regarding the company’s income investing prospects. Rather, it is merely a means to add what is now a surprisingly strong, long-term income opportunity to the portfolio.

Indeed, Diageo’s yield has risen to 3.1pc over recent months due largely to a slump in its share price. The owner of well-known brands such as Smirnoff, Johnnie Walker and Guinness has experienced a decline in its market value of around 32pc in the past 18 months due to a disappointing financial performance amid weak operating conditions in some of its markets.

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In its latest financial year, for example, operating profits were down almost 5pc as sales volumes in its Latin America and Caribbean region slumped by over 21pc year on year.

While the company’s recently released trading update stated that its financial expectations are unchanged, its profits are due to fall by around 1pc in 2025 before rising by a somewhat modest 5pc in the following year. This means that while the firm’s dividends per share rose by 5pc in its latest financial year, further growth in the short run may be somewhat constrained.

As a long-term investor, though, Questor is firmly of the view that Diageo’s financial performance will gradually improve as its operating environment benefits from interest rate cuts. Its performance has undoubtedly suffered from an era of restrictive monetary policy and rampant inflation that has placed significant pressure on consumer incomes.

Since 63pc of total sales in its latest financial year were generated in North America and Europe, it is well placed to benefit from monetary policy easing across developed economies. And with inflation in its key markets being roughly in line with central bank targets, demand for its range of premium products is likely to rise.