Dividend Dogs of the FTSE 100: Six stocks for dividend hunters

Wednesday, Dec 07 2011 by
Dividend Dogs of the FTSE 100 Six stocks for dividend hunters

Stocks have paid a heavy price for the economic turmoil that has ravaged London markets during the second half of this year but it hasn’t all been bad news. A direct consequence of depressed market caps is that those companies that continue to pay dividends look all the more attractive. Indeed, for investors chasing income, the conditions have provided an ideal hunting ground for buying into some of the best dividend payers in the market – but how do you find them?

Screening for high yielding stocks is nothing new; in the early 1990s Michael O’Higgins and John Downes popularised the approach in their book Beating the Dow. Their Dogs of the Dow technique stripped away conventional metrics such as EPS growth and PE ratios and focused simply on who was paying what. The idea was that by backing a mechanically selected basket of stalwart income generators, investors could insulate themselves from the vagaries of the market and still make a profit.

The technique involved taking the 30 stocks that make up the Dow Jones industrial average, filtering them for the 10 highest dividend yields and then investing an equal sum in each stock. The appeal of this approach is its simplicity – you simply take a company’s current annual dividend per share and divide it by the stock price. In terms of housekeeping, O’Higgins and Downes urged that the 10-strong portfolio be revised once a year based on an updated list of high yielding stocks.

Rising dividends

With market volatility providing fewer and fewer opportunities for all but the bravest investors, a dividend screen – in this case the Dogs of the Footsie – offers an intriguing option. Scrutinising large, mature and relatively safe companies means investors can put less emphasis on market reaction and sentiment and focus more on finding attractively priced dividend payers. The screen theoretically offers a conservative option that produces a list of well financed companies that have long histories of weathering economic turmoil.

The technique has added resonance at a time when market conditions are weak but dividend levels are rising. According to Capita Registrars, the rolling historic yield for the FTSE 100 (UKX) for the four quarters up to the end of Q2 2011 was 3.4%. The forecast for the whole of 2011 is 3.6%. With a list defined using Stockopedia Premium, the top…

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RSA Insurance Group plc is an international general insurer. The Company provides personal, commercial and specialty insurance products and services direct-to-customers. Its segments include Scandinavia, Canada, UK & Ireland, Central Functions and non-core. Its segments are based on geography and all are engaged in providing personal and commercial general insurance services. The Central functions segment includes the Company's internal reinsurance function and Group Corporate Center. Its core businesses are Scandinavia, Canada, and the United Kingdom and International. The Company's non-core businesses consist of its United Kingdom legacy business and the Middle East operation. The Company's United Kingdom legacy business is part of the United Kingdom operations. Its product lines include personal motor, household, personal other, commercial property, liability, and marine and other. It serves small and medium sized commercial, mid-market and global specialty customers. more »

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Man Group plc is a United Kingdom-based independent alternative investment manager. The Company operates in the investment management business segment. It offers long-only, alternative and private markets products on a single and multi-manager basis. Its investment management firms include Man AHL, Man Numeric, Man GLG, Man FRM and Man Global Private Markets (Man GPM). Man AHL is a diversified quantitative investment manager. Man Numeric is a quantitative equity manager invested across equity markets. Man GLG is a discretionary fund manager, active across alternative and long only strategies. Man FRM is an open architecture, full service hedge fund platform, which offers commingled fund of hedge funds, advisory solutions and outsourced research and consulting. Man GPM is engaged in private market asset classes, such as real estate, private credit and infrastructure. more »

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Aviva plc is a holding company. The Company provides customers with long-term insurance and savings, general and health insurance, and fund management products and services. Its segments include United Kingdom & Ireland; France; Poland; Italy, Spain and Other; Canada; Asia; Aviva Investors, and Other Group activities. The United Kingdom and Ireland segment consists of two operating segments: Life and General Insurance. The principal activities of its French operations are long-term business and general insurance. Its Poland Activities in Poland consist of long-term business and general insurance operations. Its Italian operations are long-term business and general insurance. The principal activity of the Canadian operation is general insurance. Its activities in Asia consist of its long-term business operations in China, India, Singapore, Hong Kong, Vietnam, Indonesia, Taiwan and international operations. The Aviva Investors segment offers a range of asset management services. more »

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  Is RSA Insurance fundamentally strong or weak? Find out More »

7 Comments on this Article show/hide all

UK Value Investor 8th Dec '11 1 of 7

I'd vouch for a few of these (since I hold them). BAE, AstraZeneca and Vodafone. Aviva certainly looks interesting but perhaps risky.

I think the altman-z score on BAE is definitely wonky! I really don't see them going under any time soon.

Blog: UK Value Investor
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Edward Croft 8th Dec '11 2 of 7

In reply to UK Value Investor, post #1

UKVI - BAE's Altman Score is definitely in what he calls "the distress zone" - I've verified on different platforms. That of course doesn't mean its going to go bust, just that it shares the same balance sheet qualities as companies that have fallen into financial distress in the past.

According to various studies, the Altman Z score has been from 72% - 90% accurate.  Investing is a game of probabilities, and its good to know where you stand.  Figuring out whether BAE Systems is at risk or not is one for better accountants than me though!

Here's a picture from our Altman Popup/Checklist on Coke... 


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UK Value Investor 8th Dec '11 3 of 7

In reply to Edward Croft, post #2

Hi Ed. I totally agree, it's in the zone and I didn't mean 'wonky' as in your data is wonky, I just mean that the metric is very probably giving a false positive.

I will eat a (very small) hat if BAE goes to the wall in the next 5 years!

That doesn't mean I think the altman-z is no good, like you say it has a history of success, it's just in this case I think BAE falls into the other 10-28%.

Blog: UK Value Investor
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Edward Croft 8th Dec '11 4 of 7

In reply to UK Value Investor, post #3

I've been thinking an interesting thought about the Z Score. There's no doubt that Quantitative Portfolio Managers are using algorithmic trading programs to harvest risk premia from low P/B stocks using metrics like the Z Score to minimise risk. If that's the case then the increased crowding in these trades will arbitrage away the excess returns over time.

There's a good case for more forensic analysts to spend their time solely in the 10-20% of stocks that are failing Z-Score / M-Score type tests to figure out where the 'Type II' errors are. Its a more difficult task, but the rewards could be extremely handsome for those that get them right.

I remember you wrote about BAE in the summer - still holding?

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MadDutch 8th Dec '11 5 of 7

May I suggest that this theme, stocks for dividend hunters, would be much more valuable if dividend cover was included; I think that a dividend % yield is worthless without knowledge of its cover.

Take one stock mentioned above, Royal & Sun Alliance Insurance. I would not touch it with a barge pole. The dividend cover is a dangerous 1.1 times.

I do not understand why the CEO Andy Haste was upbeat in his comments when he discussed his company’s confidence about its outlook. You mentioned this above and especially regarding the 7% dividend increase. The skinny cover tells me his company is in danger of its divi exceeding its earnings, and therefore RSA is in danger of a dividend cut.

I hope someone can show me I am mistaken; if not, my credence of Mr Haste's future comments will be negative.

I will be resuming my ideas thread next week, the current draft is about my preference for First Group despite the larger DY of RSA.


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UK Value Investor 8th Dec '11 6 of 7

oops.  please delete this comment.

Blog: UK Value Investor
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UK Value Investor 8th Dec '11 7 of 7

In reply to Edward Croft, post #4

I'm not sure the excess returns will ever go away as ultimately valuations are driven by the amount of money flowing into and out of equities, regardless of what smart fund managers do. AFAIK retail investors drive the big flows and they are always driven by the recent trend up or down.

BAE? I expect to be holding that for quite a while; years rather than months. You never know when Mr Market might drop a gift into your hand by pushing the price up, but I don't see that happening until all this debt crisis stuff fades into history.

Blog: UK Value Investor
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About Ben Hobson

Ben Hobson

Strategies Editor at Stockopedia. My goal is to help private investors learn and invest with confidence through the articles, ebooks and other resources we publish on site. I also occasionally bunk off to interview famous investors at expensive restaurants. I studied History at Aberystwyth University, trained as a journalist and covered business news and corporate finance before settling in as one of the first staff members at Stockopedia.  Away from Stockopedia I'm a mountain bike junkie. more »


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