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

Wednesday, Dec 07 2011 by
15
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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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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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 »

LSE Price
564.8p
Change
-0.4%
Mkt Cap (£m)
5,848
P/E (fwd)
12.2
Yield (fwd)
5.3

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 »

LSE Price
149.45p
Change
-0.0%
Mkt Cap (£m)
2,305
P/E (fwd)
11.0
Yield (fwd)
5.4

Aviva plc is a United Kingdom-based holding company that provides life insurance, general insurance and asset management products and services. Aviva Investors provides asset management services to Aviva and external clients. Its segments include United Kingdom & Ireland; France; Poland; Italy; Canada; Asia; Aviva Investors, and Other Group activities. It distributes products to its individual, group and corporate customers directly and via a network of intermediaries and partners. more »

LSE Price
411.9p
Change
-1.4%
Mkt Cap (£m)
16,361
P/E (fwd)
6.8
Yield (fwd)
7.8



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23 Comments on this Article show/hide all

Edward Croft 8th Dec '11 4 of 23
2

In reply to post #62529

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?
http://www.ukvalueinvestor.com/2011/08/bae-systems-its-time-to-get-defensive.html/

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MadDutch 8th Dec '11 5 of 23
2

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.

MadDutch

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UK Value Investor 8th Dec '11 6 of 23
1

oops.  please delete this comment.

Blog: UK Value Investor
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UK Value Investor 8th Dec '11 7 of 23
1

In reply to post #62532

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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AC2361 29th Aug '17 8 of 23

Great article on what is a popular strategy , so could we please bring this one bang up to date Ed ? Many thanks , Andrew

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Stephen Bland 5th Sep '17 9 of 23
7

Okay, here are the five current highest yielders in the FTSE100 ranked in descending order based on rolling one year yields from Stockopedia:

Taylor Woodrow 7.37%
Direct Line 7.12%
Lloyds 6.92%
BP 6.76%
Barratt Devs 6.68%

I have not analysed these companies and have not applied any selection filters other than yield so it's purely a Dogs mech in accordance with the method without any personal views on the shares. I am not advocating the strategy, just featured it out of interest and in response to the above message.

Personally, if following this, which I'm not, I'd apply just one more filter - diversification to lower the risk. In the above list there are two housebuilders and seeking the next on the list in a new sector replaces Barratt to give the following:

Taylor Woodrow
Direct Line
Lloyds
BP
SSE 6.66%

The idea is to hold for a year then sell and reinvest together with accumulated dividends into the new five highest yielders, equally in each, and repeat annually. If the same share(s) occur in the new selections then keep that portion making equal investment and sell the balance to reinvest in the others.

Good luck to anyone adopting this but don't blame me if it's poor. On the other hand if it works well, I'll take the credit. ;~) 

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Stephen Bland 7th Sep '17 10 of 23

Apologies, where I wrote Taylor Woodrow above it should of course have read Taylor Wimpey.

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CliveBorg 7th Sep '17 11 of 23

Ben,

You mention with regard to Astrazeneca: "although 2011 will probably be a year to forget for both the company and its investors." I take it you meant 2017? However, if you did mean 2011, what is the current significance?

Unapologetically a pedant, and do feel free to highlight all my typos, Clive.

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Logic 7th Sep '17 12 of 23
1

In reply to post #216248

The original post is from 7th of December, 2011.

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Stephen Bland 5th Oct '17 13 of 23

It's a month after my last HY-Five share selections in my version of this, which I'll call the The Hounds of the Footsie mech strategy.

It has two filters, high yield and separate sectors, the second filter being my personal addition. Just for a larf, I show the latest HY-Five selections and their yields. The results are drawn from Stockopedia's rolling 12 month yields.


Direct Line 7.65%
Taylor Wimpey 7.41%
SSE 6.99%
Lloyds 6.47%
Vodafone 6.21%

The sole change from a month ago is that BP has been replaced by Vodafone. That's what I'd expect, little or no change in the HY-Five over the short term.

As before I am not following this scheme personally and make no claims for it. So if it's shit then that's nothing to do with me. If it's a star, then naturally that's everything to do with me.

The Hounds mech scheme, like its original version in O'Higgins Dogs of the Dow, is very long term and so cannot fairly be judged over much less than say ten years. There will be good years and there will be bum years but the idea is that the good ones more than make up for the poor ones so as to deliver a great return in time. That's the theory - the practice may differ.

To recap, you buy the five with equal amounts each, wait a year and repeat, adding in the accumulated dividends and any other cash receipts such as cash returns, lapsed rights, a bid etc. always ensuring that equal amounts are invested in the new HY-Five. Any shares that appear again are reduced or increased accordingly so as to match the new equal amount invested per share in the new list.

Apart from the two mechanical filters, no personal preference is expressed for any selections, you just go with the mech and ignore any views that you may have, pos or neg.

One final point, although this is classifed as income investing and I'm just following the existing thread, I think that this scheme and all the other related ones are much more accurately described as capital gain strategies. That's because their aim is for a good capital return over time and certainly not to draw a regular income. The confusion arises because these methods use yield as a selection criterion but it is just that, a selection filter and definitely not the purpose of these mech investment styles.

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Stephen Bland 18th Dec '17 14 of 23

Here is the latest HY5, my version of the strategy based on just the two filters I mention above of highest yield and compulsory diversification, drawn from Stockopedia's rolling 12m yields in the FTSE100:

Centrica 8.49%
Taylor Wimpey 7.44%
Direct Line 7.12%
Lloyds 6.87%
Marks & Spencer 6.30%

Haven't done this for a while and there are two changes from the last run. Out go SSE and Vodafone, replaced by Centrica and M&S. No investigation of these companies has been applied in choosing these shares, nor any personal opinion, they are purely the mech result of the two filters.

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Stephen Bland 5th Apr '18 15 of 23
6

Here is the latest HY5, my version of the mech strategy based on just the two filters I mention above of highest yield and compulsory diversification, drawn from Stockopedia's yields in the FTSE100:

Persimmon 9.19%
Centrica 8.59%
Marks & Spencer 7.02%
Micro Focus Int 6.88%
Imperial Brands 6.81%

Haven't done this for a while and there are three changes from the last run. Out go Taylor Wimpey, Direct Line and Lloyds, replaced by Persimmon, Micro Focus and Imperial Brands. No investigation of these companies has been applied in choosing these shares, nor any personal opinion, they are purely the mech result of the two filters.

It is worthy of note that none of the original five shares from the first mention of my version of this strategy seven months ago in September 2017 recur in this latest list.

Just to recap, the strategy is not really about income as some think, rather, its aim is long term capital growth from a combination of share price gains and reinvested dividends.

As no interest seems to have been expressed here in this, I'll probably refrain from any further posting of the idea.

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letap73 5th Apr '18 16 of 23
2

In reply to post #349863

You should continue to post. As someone who is relatively new to investing the obvious strategy would be to look at high dividend yields - so it would be interesting to see how this strategy pans out over the long term.
A cursory glance at the five above - without any research - would suggest that three of the five, Centrica, M&S and Micro Focus are not doing very well, the share price is dropping and the dividend maybe cut. Would it be worth putting an additional dividend cover filter to your screen?

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Stephen Bland 5th Apr '18 17 of 23
9

Thanks for the comments, now I know that at least one person has read it!

The whole point of the dogs approach is that the companies are very likely to be experiencing a bad patch, that's why they are so low rated. It's based on the idea that this low rating has been overdone so the shares may show price recovery in the holding year, plus deliver some dividends. Some will, some won't, but on balance the hope is that enough will to make the scheme work with gains over many years.

It is not a part  of this strategy to examine the companies and revise the selections by inputting your own feelings, because it is a mech approach, meaning it is designed expressly to overcome any personal views. Once you start fiddling with the selections, it's no longer a mech. I am not saying that's wrong, just that we are talking mechs here.

As for further filters, there are many additional tests one could apply but it is meant to be as simple as possible. The original scheme was just one filter, yield, I added diversification to lower risk, based on lengthy experience with schemes like this and HY and value investing, but that's it for my version. People have devised all sorts of variations on the dogs concept over the years, but this is my particular contribution to the large number of such approaches out there.

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covkid 5th Apr '18 18 of 23
1

letap73 is the only one who reads the posts my friend.....................I'm sure we all read them but only respond when we have something to say !

Please keep up the interesting postings.

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GBGMC0 5th Apr '18 19 of 23

In reply to post #349913

Stephen, Appreciate the posts, I read it. The stand out from your list is M&S. Most would be classifying M&S as a Value Trap and would filter it, as not eligible even for Dogs of the Dow.

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Stephen Bland 5th Apr '18 20 of 23
2

...The stand out from your list is M&S. Most would be classifying M&S as a Value Trap and would filter it, as not eligible even for Dogs of the Dow

As I said, the Dogs is purely mech so you apply no personal opinion and thus MKS would remain as a selection for someone following it. 

It's not a Dogs any more if you start applying personal views to the selections and there are numerous ways you could that. I'm not saying that's wrong, there's no right or wrong here, just that the commonly understood meaning of a Dogs approach is a mech strategy so that's what I've done.

I devised what I've written for anyone interested but don't follow it myself. I just continued the discussion from other people in the thread, in particular a reader seeking to bring the old thread up to date, and chucked in my 2¢ worth. However, if anyone does want to follow it I felt that the single filter of yield, which is the original Dogs approach, would invite excessive risk by often choosing more than one company from the same beaten up sector. 

My view is that a second filter of diversification will ameliorate that sector risk. That don't mean it will perform better, it just means the risk is probably lower.

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Paulpoyser 14th May '18 21 of 23

I was introduced to this concept several years ago by a company that doesn’t appear to exist any more. All of my virtual portfolio’s did well. Virtual because I found being married and having money to invest didn’t fit together. Another difference was that the criteria was applied to the constituents of the FT30 index rather than the FTSE100. It can be difficult to find out when the constituents change but it reduces ( but not eliminate) the problem of diversification. Now that I have re-started a real money portfolio and am looking to add a new share, I check to see which shares are in the current top 10 and add it, provided that it is in a sector that isn’t currently represented. These selection will be reviewed 12 months after being added, but it won’t make sense replacing any of them unless an alternative is yielding at least 2.5% more (1.5% buying costs and 1% selling costs)

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Stephen Bland 19th May '18 22 of 23
1

The Dogs scheme originated in the USA using the Dow30. In the UK , basing the Dogs on the virtually extinct FT30, which was set up to be a UK version of the Dow, was an attempt to replicate it here. As I've written, the Motley Fool five year test of this which I monitored for them was disastrous.

I never liked using the FT30 for the Dogs approach and my view is that a similar mech on the FTSE100 based on annual reselection of the top five or ten HY shares and adding in my diversification filter is more likely to reduce risk and be a winner long term for people interested in following mechs though I have no proof of this. I'm not personally interested in mechs much any more though I was many years ago.

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Paulpoyser 19th May '18 23 of 23

Stephen, I’m surprised that the 5 year test for the Motley Fool was disastrous, because my observations were positive, even without taken account of dividends, but after reviewing my thoughts I realise that the virtual portfolios I set up were hold and leave alone portfolios. And as you have noticed a lot of the same shares seem to like revisiting this (High Yield) area of the market. Maybe I just happened to start at the right (wrong ?) time. But i’m only using these mechanisms as a starting point for my real money selections. Although I am now changing my view to the FTSE, to fit in with the screen available, 4 of shares to choose from are the same ones.

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