With third quarter dividend payouts reaching their highest ever level, it is clear that income stocks are continuing to prove alluring to yield hungry investors. But while overall dividends grew for the seventh successive quarter between July and September, the level of growth dropped markedly. While it might be too early to predict any kind of significant dividend pullback, it is worth keeping an eye on which stocks are delivering the best forecast yields. Dividend strategies have easily outstripped the FTSE so far this year – and forecasts indicate that the country’s biggest insurance companies are where the highest yields will be.
How do you find these stocks?
Among our income stocks screens at Stockopedia, arguably the best known are based on the formula set out by US fund professional Michael O’Higgins in his book Dogs of the Dow. We have discussed the principles behind the UK equivalent strategy at length here (and in our dividend book – How to Make Money in Dividend Stocks – here) but essentially Dividend Dogs of the FTSE is about buying the highest yielding shares in the FTSE 100 and holding them. The regular Dogs screen, which uses historic yields, has turned in a respectable year-to-date performance of 15.5%. However, its less well known younger brother, the Forecast Dogs of the FTSE, which uses the one-year rolling dividend yield made up of a weighting of the next two years’ dividend forecasts, is beating that with a blistering return of 21.7%.
It’s a balancing act…
It is important to note why Stockopedia’s Dogs of the FTSE screens have performed so well in 2012. By comparison, the same screen (the regular Dogs of the FTSE) tracked by Money Observer has produced a negative return so far this year. The reason is that our portfolio has been rebalanced quarterly whereas Money Observer’s has not. Now, O’Higgin’s original strategy was to buy and hold the stocks for 12 months, which is what Money Observer have done. Even then, critics of the strategy have claimed that it can incur some hefty fees when carrying out the annual rebalancing. By rebalancing quarterly, we have racked up even more trading costs. Broadly speaking, those fees would involve 2% (stamp duty) + 1% (spread) + £400 (commission), which undoubtedly puts a dent in the return. As…
