Shaky stock markets in early 2018 left the Dogs’ share prices stagnating overall, although their total returns have remained reassuringly firm.
When we last looked at Money Observer’s 2018 Dogs of the Footsie back in May, it was at the end of a rocky period for stock markets. The past three months have been much more stable, despite the ongoing threat of a global trade war.
Stability, though, has not been much help to the portfolio of unloved companies that we lined up in February. As a reminder, our Dogs strategy involves investing equal amounts into the 10 FTSE 100 companies with the highest yields and holding them for a year. Over time, it has been one of the most successful investment approaches, beating the FTSE 100 index over three, five and 10 years.
Back in May, the portfolio was comfortably ahead of the index. Now, at the halfway stage, our Dogs are looking a little less perky, although they are still in the race. In share price terms, the Dogs have risen by 2.1 per cent, slightly behind the 2.2 per cent return for the index. However, on a total return basis, taking dividend payments into account, the Dogs are still winning, having returned 5.7 per cent over the six months to 1 August, compared with 4.6 per cent from the index.
As usual, the performance of individual firms has been mixed: six of our Dogs fell in share price terms over the six months. Our two telecoms fims, BT and Vodafone, have been particularly disappointing, with their share prices falling by 10.2 per cent and 14 per cent respectively. Both have been long-term laggards, being among the worst performers in the FTSE 100 over the past five years (as have Centrica and Marks & Spencer). Fierce competition, rising expenses, high levels of debt and ageing infrastructure have hobbled the telecoms giants.
A saving grace, however, has been their high dividend yields. One factor underlying the success of the Dogs strategy is that income is a crucial part of investment returns. Vodafone’s ability to sustain its generous dividend has become the subject of concern recently. However, past payments mean that, in total return terms, its performance does not look quite as terrible, although at -9.2 per cent, it is still pretty awful. Meanwhile, dividend payments by SSE, Marks & Spencer, National Grid and Imperial Brands helped these Dogs turn a share price loss into a positive total return.
So which companies have done well over the six months from a share price and total return perspective? GlaxoSmithKline has been the stock to beat, having produced an impressive return of 23 per cent, when dividends are included. An innovative and diverse new product line-up and sharpened focus under boss Emma Walmsley have put it in an investment sweet spot.
The oil stocks in the portfolio have continued to benefit from a higher oil price and improving profits. BP was up 12 per cent over the six months and Royal Dutch Shell climbed by nearly 8 per cent in share price terms. Even better from our perspective, BP recently increased its dividend for the first time in four years.
Sticking the course
It is important to hold your nerve if you have been following our Dogs strategy and feel discouraged by its first-half performance. The approach requires investment for a full year. However, the beauty of the strategy is that it can be started at any time. Those who want to start now can select the 10 companies with the highest historic yields based on past dividend payments, using screening tools on websites such as interactive investor and SharePad. Alternatively, use the companies listed in this box:
There have been quite a few changes from the February 2018 portfolio that we are following on this page. Newcomers include Evraz, Persimmon and Standard Life Aberdeen – you can read more about them in the previous Dogs update. This month also sees the introduction of Direct Line, whose chief executive, Paul Geddes, recently announced that he is leaving the insurance giant. The news came as the owner of the Churchill, Privilege and Green Flag brands reported a 14 per cent fall in halfyear pre-tax profits.
Our other new entrant is Micro Focus International, which specialises in IT management services. In July Micro Focus revealed that the integration of Hewlett Packard Enterprise’s software business, bought last year, was a year behind schedule. The company’s shares tanked in March after it cut its revenue forecast and its chief executive resigned.