Dogs of the Footsie 2017: ahead of the FTSE 100 at the halfway stage

Dogs of the Footsie

Anyone who had a flutter on our Dogs back in February should be feeling pleased with themselves, as our portfolio of out-of-favour companies has built up a good lead over the FTSE 100 index at the halfway stage. But don’t be tempted to cash in – our Dogs of the Footsie strategy requires punters to hold on for the full 12-month race.

Regular readers will be familiar with the basics of the Dogs strategy, which involves putting an equal amount into the 10 FTSE 100 companies with the highest yields and holding them for a year. The theory is that a high yield indicates a company that is unpopular with investors so has seen its share price fall. Often, that fall will be overdone; when sentiment changes, the shares will bounce sharply – and the generous dividend yield provides a decent income while we wait for that to happen.

The theory has been borne out over the years in which we have been compiling our portfolio, with the Dogs beating the index 75 per cent of the time, coming in ahead over three, five and 10 year periods. So far this year, the Dogs are also winning with a 12.7 per cent total return over the six months to end July, and an 8.4 per cent rise in share price terms, compared with 6.1 and 3.7 per cent respectively for the index. As usual, the performance of individual companies has been mixed: the shares of half of the companies in the portfolio have actually fallen over the period, led by utility company SSE with a 6.5 per cent drop, but the gains from the other five have more than compensated for those losses.

Crosshead

The star performer this time round was Capita, the support services giant, which has produced a spectacular return of almost 37 per cent when dividends are included, as disposals and contract wins helped persuade investors that the company is back on a more even keel. Close behind was housebuilder Persimmon, with a 36 per cent gain reflecting renewed confidence in the housing market among investors.

While we offer a quarterly review of the portfolio, the strategy requires investment for a full year: those who signed up to our 2017 portfolio should therefore stay put. But the beauty of the Dogs is that it can be started at any time: simply screen the FTSE 100 by historic dividend yield using the tools available on investment sites like interactive investor, and spread your investment across the top 10. The current list, for those who want to start here, is below. It is very similar to the 2017 portfolio with just three newcomers – Provident Financial, Centrica and GlaxoSmithKline – instead of Capita, Persimmon and HSBC, whose shares have jumped enough to mean they no longer have top 10 yields.

AUGUST DOGS: NEW INVESTORS START HERE
Price (p) Yield (%)
Royal Dutch Shell A 2158.5p 6.7
BP 459.3 6.6
SSE 1385 6.6
Provident Financial* 2112 6.4
Vodafone 220.75 6
Centrica* 202.2 5.9
Marks & Spencer 325.2 5.8
Royal Mail 400.1 5.7
Legal & General 270.5 5.3
GlaxoSmithKline* 1517 5.3
Note:* = new entrant for August update.

Selection is based on historical information, not predictions. That means you should exclude companies where a dividend cut has actually been announced, but not if it is simply forecast by analysts – this means Pearson is excluded from the portfolio starting from here because it has already told shareholders their dividends will be cut. Indeed, even if that prediction proves correct and a company slashes its payout, the shares can rise sharply on relief that the cut is not worse, or that the bad news is out of the way.

One of the factors underlying the Dogs theory is that income is a crucial part of investment returns – and that is particularly true as inflation starts to creep up. While even the highest-paying bank account is paying well below the current 2.6 per cent, the average yield on our portfolio for those starting now is just over 6 per cent. Assuming these dividends are all held, that would provide a healthy return even without any share price appreciation, as well as providing compensation should some shares in the portfolio underperform.

While some Dogs portfolios have an high concentration of particular sectors – utilities, pharmaceuticals and banks have dominated in previous years – the 2017 Dogs portfolio and that for those who want to start here are relatively diversified, containing a mixture of oil, utilities, retailers and financial companies.

There is still, however, a relatively high concentration of oil and utilities – just as there is in the FTSE 100 index itself, where 44 per cent of the total dividend income comes from oil and financial companies. That could give investors constructing a portfolio on normal terms pause for thought – indeed, many experts advise trawling the FTSE 250 index for sources of income from other sectors. However, for as long as the Dogs keep winning, we will continue to back them.

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Returns
NAME Share price
change
(%)
Total
return
(%)
Dividend
yield (%)
2016 2017
Royal Dutch Shell A -4.8 -1.4 7.3 7.0
BP -5.7 -2.4 6.6 7.1
Capita 32.0 36.9 3.4 4.8
HSBC Holdings 18.2 21.6 7.7 4.2
SSE -6.5 -2.2 5.9 6.6
Vodafone Group 15.0 19.6 5.0 5.8
Persimmon 28.3 36.2 6.5 5.4
Legal & General 13.9 18.7 6.5 5.4
Marks and Spencer Group -5.1 -2.1 5.9 5.8
Royal Mail -1.6 2.1 4.5 5.7
Average 8.4 12.7
FTSE100 3.7 6.1
Note: Figures show performance 1 May to 2 August 2017. Source: Thomson Reuters Datastream

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