Beating the FTSE 100 with Dividend Dogs: portfolio update

A year ago, I noticed that Stockopedia’s Dividend Dog screens had been outperforming the market by a comfortable margin since late 2022 – broadly speaking, when interest rates started to rise.

I created a model portfolio to test whether this outperformance would continue – and to see how much income it could generate in a market where risk-free yields were over 4%.

One year later, the initial results are in. This simple high yield strategy has almost matched the FTSE 100 on share price gains…

… but it’s beaten the index when dividends are included:

While the total return outperformance is only 1.5%, it’s worth remembering that the Dividend Dogs portfolio generated an income of 7.4% over the year, compared to just 4.1% for the FTSE 100.

For investors interested in generating a natural income from their portfolio – withdrawing dividends without selling stocks – I think this could be an attractive result.

Certainly I am sufficiently encouraged to refresh the portfolio and keep it running for another year. Before I look at the updated stock selection though, here’s a snapshot of how my selection from last year performed.

2024/25 Dividend Dogs review

To create the portfolio, I merged the results of Stockopedia’s two Dividend Dog Guru Screens:

• Dividend Dogs: uses trailing 12-month dividend yields

• Dividend Dogs (Forecast): uses rolling 1-year forecast yields

I chose to do this mostly because it provided a larger and more diversified result set than relying on either screen alone.

In terms of historic performance, the historic Dividend Dogs have outperformed the forecast Dogs since the screens’ inception, but the pattern of performance has been fairly similar.

I ended up with 13 stocks in last year’s portfolio. While this is below the 15-20 I’d ideally target, I think it was enough for a useful experiment. Here’s how they performed last year:

I would not have predicted this set of outcomes at the start of the year (I was relatively bullish about the biggest loser, B&M European Value Retail SA (LON:BME)) – but that’s the nature of this kind of investing. Shares qualifying for a Dog-type strategy have typically underperformed for a period of time and are often due for a recovery – but not always.

As I’ve noted before with other screening strategies, implementing a 25% stop-loss rule would very likely have improved my overall returns, assuming I’d been able to find suitable replacements mid-year.

Alternatively, I might have chosen to sell any stocks that dropped out of the FTSE 100 – the two biggest losers, Taylor Wimpey (LON:TW.) and B&M were both ejected from the big cap index during the year, thus going against one of the core principles of this strategy:

It's main safety net is that blue chip stocks tend to be large, mature and well financed companies with long histories of weathering economic turmoil.

We’ve discussed both B&M and Taylor Wimpey in the DSMR in recent months:

• Taylor Wimpey: 30 Jul 25 - AMBER (profit warning)

• B&M: multiple times, most recently 20 Oct 25 - AMBER/RED (profit warning and accounting error)

At the top end of the performance scale, I don’t follow HSBC Holdings (LON:HSBA) in any detail as it’s hugely complicated. But in short, while profits have fallen this year, the bank has continued to upgrade expectations:

My impression is that the market also seems quite confident in the ability of newish CEO Georges Elhedery to reshape this big bank.

While HSBC may still not be too expensive at 1.2x book value, the stock’s 5.2% yield means it no longer qualifies as a Dividend Dog, so will be replaced in my new portfolio for the year ahead.

Dividend Dogs: 2025/26 portfolio

In keeping with the spirit of running a natural income portfolio, I am going to disregard last year’s dividends and update and rebalance the portfolio using its capital value alone.

In an effort to avoid big losses, I am going to introduce one new rule:

• Sell any stock that is demoted from the FTSE 100, replacing with a new stock if possible.

As previously, all positions will be equally sized and I’ll build a list of stocks to include by combining the results of the Dividend Dogs and Dividend Dogs (Forecast) screens.

Once again, there’s a lot of overlap between the two Dividend Dogs screens’ results:

Combining the historic and forecast screens gives me 13 shares. Once again, that’s fewer than I’d like in an income portfolio – especially as some come from the same sectors and overlap heavily.

Doubling up in this way (e.g. two tobacco stocks) provides some protection from company-specific problems, but none against sector or market issues – which are arguably more likely in the FTSE 100.

However, this concentration is a feature of the Dividend Dogs strategy, which specifically selects the 10 highest-yielding shares from a big cap index.

The lack of diversification means that this approach won’t suit all investors. I could improve on this by extending the screen to include lower yields or smaller market caps. But the key principle of Dividend Dogs is that it is a big cap, high yield strategy – and I’m keen to stick with this closely for the purposes of this model portfolio.

Here’s how my updated Dividend Dogs portfolio looks for the year ahead, ordered by StockRank:

At the time of publication, the stocks in this updated portfolio have an average forecast yield of 6.8%. That’s lower than the 7.4% realised last year, but the lower yield reflects the fact that the FTSE 100 has risen by 15% over the last year. Higher share prices mean lower yields.

Within the portfolio, there are five new stocks this year. Let’s wrap up with a brief look at each of these.

WPP (LON:WPP)

The global advertising group has been through a multi-year decline, as cuts to marketing spend have coincided with the growth of AI. More broadly, WPP’s role in the world has been squeezed by the long-term growth of internet advertising platforms, leaving WPP in the squeezed middle.

However, the company now has a new CEO (a former senior Microsoft exec!) and my feeling is that both sentiment and earnings may be close to the bottom.

While consensus forecasts have been cut by 30% over the last year, I think this business may be starting to look too cheap for a profitable FTSE 100 firm:

The algorithms also see opportunity, styling WPP as a Contrarian stock.

Schroders (LON:SDR)

Blue chip financial Schroders is one of the UK’s largest asset managers, with £817bn of AUM at the end of September. The business remains under family control and hasn’t cut its dividend for over 30 years. I don’t think it’s likely to start now.

While profits have come under pressure in recent years – as seen across this sector – the business has reported positive inflows this year and profits and appears to be on track for a recovery in profits under CEO Richard Oldfield.

Trading on a P/E of 12 with a 5.7% yield, Schroders looks reasonably priced to me and has shown improved momentum recently:

If this progress continues, I think the stock could continue to recover from a multi-year slump (a value scenario Ed highlighted in his recent piece):

Londonmetric Property (LON:LMP)

This commercial property REIT is a relatively new arrival in the FTSE 100, as a result of its merger with LXi REIT in summer 2024. Since then, Londonmetric has continued to expand and reshape its portfolio through the acquisition of Urban Logistics REIT and Highcroft Investment, and some sizeable property transactions.

The stock currently trades at a premium to its last-reported book value – not an obvious sign of cheapness. However, the March 2025 NAV of 4,071p per share is probably a little stale at the moment, due to those recent acquisitions. November’s results will include an updated figure providing a fresher view.

Another factor behind the premium valuation may be Londonmetric’s 55% portfolio weighting to logistics property – this remains a fairly hot sector.

In the meantime, a forecast yield of 6.3% puts Londonmetric close to the top of the FTSE 100 income table and appears to be comfortably covered by forecast earnings.

Admiral (LON:ADM)

Unlike most of the stocks in this portfolio, insurer Admiral’s share price is not remotely depressed. Quite the opposite – shares in this £10bn company are close to all-time highs:

Admiral’s inclusion in the Dogs is driven by its high forecast yield, which currently stands at 6.4%.

In turn, this is driven by strong profitability – in particular, high returns on equity:

These quality metrics are a function of Admiral’s scale and its well-designed business model, which keeps capital requirements under control and supports strong cash generation.

The upshot is that the company routinely pays out a very high proportion of its earnings in the form of dividends. This supports an attractive yield, even when the valuation isn’t at bargain basement levels.

This is a business I admire greatly – I’m keen to see if it will keep performing in this portfolio over the coming year.

Mondi (LON:MNDI)

This packaging group has been through a challenging few years. It sold its high-margin Russian business following the outbreak of war in Ukraine and has faced difficult cyclical market conditions more recently.

Heavy capex should theoretically leave the business well positioned for the next upturn, but it’s not yet clear how soon momentum will recover.

In the meantime, profits and margins are depressed and debt levels have risen.

A forward P/E of 13 may not seem especially cheap, but these are expected to be trough earnings, with the potential for operating leverage to drive a recovery in profits if cyclical conditions improve.

This is another stock that’s being styled as Contrarian by the algorithms. Solid quality and value ranks are paired with a rock-bottom momentum score:

Investing with such a low MomentumRank may carry some extra risk, as Mark has discussed.

But my feeling is that Mondi is a typical example of a Dividend Dog. The 6%+ yield reflects poor sentiment and a lack of interest in this cyclical sector of the market. But it’s not so long ago that profits – and the dividend – were substantially higher than they are today.

Disclosure: at the time of publication, Roland owned shares in Imperial Brands, Aviva and Legal & General.