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, through brokers and affinity partners, principally in the United Kingdom and Ireland, Scandinavia and Canada. It operates through segments, including 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. Central functions include its internal reinsurance function and Group Corporate Centre. Its core businesses are Scandinavia, Canada, and United Kingdom and Ireland. Its non-core businesses consist of its United Kingdom legacy business and Middle East operation. Its product lines include personal motor, household, personal other, commercial property, commercial motor, 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 investment management business segment. It offers a range of absolute return and long-only funds. It distributes its investment products and solutions directly to institutions and to private investors through a global network of intermediaries. Its customers include endowments, insurance companies and pension funds. Its investment engines include Man AHL, Man Numeric, Man GLG and Man FRM. Man AHL is a systematic investment specialist that focuses on delivering absolute return, long-only and momentum-based quantitative funds. Man Numeric is a quantitative asset manager that offers long-only, active extension and hedged equity strategies across regions, styles, and capitalizations. Man GLG delivers a range of absolute return and long-only strategies across asset classes, sectors and geographies. Man FRM is an independent alternative specialist with an institutional client base. more »

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Aviva plc is the holding company of the Aviva Group. The Company provides customers with long-term insurance and savings, general and health insurance, and fund management products and services. The Company's segments include UK & Ireland; France; Poland; Italy, Spain and Other; Canada; Asia, and Aviva Investors. In the United Kingdom, the Company has long-term insurance and savings businesses and general insurance, and health businesses. In Europe, it has long-term insurance and savings businesses in all countries in which it operates, general insurance businesses in France, Ireland and Italy, and smaller general insurance operations in various other countries and health businesses in France and Ireland. In Canada, it has general insurance operation. In Asia, it has long-term insurance and savings businesses. Its fund management businesses operate across Europe, Asia, North America and the United Kingdom. The Company provides services to over 30 million customers across the world. 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.

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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%.

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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.

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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.

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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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