Dogs of the Footsie: BT and Vodafone impact index-beating high-yield portfolio

Dogs investors have enjoyed a welcome restorative at a time when FTSE 100 returns overall have disappointed, writes David Budworth.

This article was written in November for the December 2018 print edition of our sister publication Money Observer. Market data and share prices are likely to have since changed.

The valuable income stream provided by dividends has helped our high-yielding Dogs of the Footsie portfolio move comfortably ahead of the pack, in what has been another difficult quarter for global stockmarkets.

The FTSE 100 index has disappointed in recent months as fears of a global trade war and rising US interest rates rattled investors. As a result, the index's return since the inception of the 2018 portfolio in February has dropped into negative territory: in share price terms, the FTSE 100 is down by 5%, as at 1 November. Even on a total return basis, taking account of dividend payments, the index has fallen by almost 2%.

Over the same period, Money Observer's Dogs are slightly down in share price terms. However, thanks to their generous dividend payments, in total return terms our canine competitors have surged ahead, having returned 4.6% in the nine months since the portfolio was overhauled for this year.

In some years a return of this magnitude might not have been much to write home about, but it is well ahead of the FTSE 100 and inflation, demonstrating the value of this crude but often effective strategy.

Regular readers will know that our Dogs are made up of 10 unloved companies from the FTSE 100 based on dividend yields (which show the dividend as a percentage of the share price at the time). Compiling the portfolio simply involves investing equal amounts in the 10 companies with the highest historic yields, based on past dividend payments. 

Once you've selected your stocks, there is nothing to do for a year – the strategy involves holding the Dogs for a full 12 months, with no tinkering.
This simple trading strategy is designed to find stocks that are temporarily cheap as measured by their dividend yield. A high dividend yield can be a sign that a company is unloved because it has been through a bad patch or is in an out-of-favour sector. The hope is that the share price will bounce back when sentiment changes (pushing the yield down), and that in the meantime patient investors will be rewarded with generous dividends underpinning the high yield. 

Diverging paths

Patience can sometimes start to wear thin, though. Vodafone continues to be the biggest disappointment: it is now down by nearly 30% in share price terms. The main cause of a frantic sell-off of Vodafone's shares has been the market's expectation of an imminent dividend cut.

A cut would obviously not be good for income, but it is worth remembering that it would not necessarily be all bad news. A company's shares can often rebound when anticipated bad news actually arrives, as investors express their relief that the uncertainty is over. 

That is apparent in the performance of fellow telecoms Dog BT Group. When we last looked at the portfolio in August, BT was also having a difficult time, but it has enjoyed something of a rebound over the past three months. Back in positive share price territory, BT is now up 6.2% in total return terms.

The telecoms giant had a particularly good day on 1 November when it announced a jump in first-half profits and outgoing boss Gavin Patterson said the company was beginning to see the benefits of its strategy to "simplify and strengthen the business and improve efficiency".

The company lowered its interim dividend from 4.85p to 4.62p last year, but the immediate reaction of the market was one of positive relief.

Notes for newcomers

Overall, seven of the Dogs outperformed the index over the nine-month period. Despite the disappointing performance of Vodafone, SSE and Imperial Brands, the Dogs strategy requires that we refrain from making changes to the portfolio – that will come at our next update in February.

However, investors who want to start a Dogs portfolio now can select a portfolio of the highest yielders themselves or use the companies shown in the box (below), which comprised the top 10 after the market closed on 1 November.

The new entrants are a mixed bunch. Investors who have been following the fortunes of WPP since the departure of its former chief executive Martin Sorrell will not be surprised to see it among the newcomers – although in fairness, WPP's share price decline began long before Sorrell quit, due to a lack of clarity about the future direction of the advertising industry.

An unexpected profit warning at Royal Mail, which sparked speculation that its dividend is under threat, explains its presence in the newcomers' portfolio. Aviva is another new entrant, after the surprise resignation of chief executive Mark Wilson put further pressure on the insurer's share price.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.