Yes you can do that. Simply select your contacts folder and then go to File>New>Folder - Call it something appropriate. Once you have completed the exercise you select the file and go to File>Import & Export and select the export option to save that folder to a new PST file. I suspect this will only work if your Dad has Office 2003 but there are other file format options to choose from such as CSV (Comma Delimited) which older versions of outlook can import from.
Personally I would simply use Excel to create a database of names and e-mail addresses. From that I would use Word to create the mailshot and merge the data directly to e-mails. This creates individual e-mails without the need to send the newsletter as an attachment to Distribution Groups. Be very careful if you do send it as an attachment that you put the distribution lists into the Blind Carbon Copy (BCC)field. Your Dads customers might be pretty annoyed if they can see all his other customers and it would only take one of them to forward an e-mail to one of his competitors for them to know who all his customers are - pretty angry Dad!