Will the 10 highest-yielding shares in the FTSE 100 outperform the wider market this year?
For the fourth consecutive year the Dogs of the Footsie – the 10 highest-yielding companies in the FTSE 100 – failed to beat the wider market.
Over the year to 31 January 2022, the pack delivered in total return terms a loss of 9.2% versus a rise of 8% for the FTSE 100. In price terms – stripping out dividends – the underperformance gap was even wider, with the Dogs down 18.1% against a rise of 4.1% for the FTSE 100.
A quick glance at the table shows the damage was mainly done by big declines over the past year for EVRAZ (LSE:EVR) and Polymetal International (LSE:POLY), which respectively suspended and scrapped dividends.
Housebuilder Persimmon (LSE:PSN), the third-worst performer, said in November that it will introduce a more “prudent” approach to its dividend policy due to UK housing market headwinds.
The trio’s poor performance over the past year highlights the risk of the Dogs of the FTSE strategy, in which investors simply build a portfolio of the 10 highest-yielding FTSE 100 shares. Equal amounts of money is put into each, and they are held for a year. The process is then repeated the following year with the new highest yielders. Money Observer magazine ran the portfolio from 31 January each year for 12 months.
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The rationale is that yields on these businesses are high because share prices are low, which in turn often reflects the fact that a company (or its sector) is excessively or temporarily unloved by the market. When it returns to favour, according to the Dogs’ argument, investors should enjoy a significant share price bounce. In the meantime, investors are compensated for waiting with a meaty yield.
However, while a high dividend yield looks attractive on paper it should be treated with a healthy dose of scepticism. As share prices and yields have an inverse relationship, a high yield more often than not is a sign that a stock, for whatever reason, is out of favour. Therefore, it is crucial to do some digging to assess whether the yield on offer is sustainable. This includes looking at dividend cover, the track record of paying dividends, debt levels, and whether management have made recent comments on the health of the dividend.
As 2022 proved, a couple of howlers in the pack can hugely negatively influence the overall returns for the 10 high-yielding shares.
How the 2022 Dogs of the Footsie fared
|Company||Price return over one-year period (%)*||Total return over one-year period (%) *|
|Polymetal International (LSE:POLY)||-78||-78|
|Imperial Brands (LSE:IMB)||16||24|
|Phoenix Group (LSE:PHNX)||-2.9||4.6|
|Rio Tinto (LSE:RIO)||21.9||32.9|
|British American Tobacco (LSE:BATS)||-2.1||4.8|
|Legal & General (LSE:LGEN)||-11.6||-5.1|
|FTSE 100 Index||4.1||8|
|Dogs average return||-18.13||-9.24|
Source: SharePad. *31 January 2021 to 31 January 2023.
2023’s Dogs of the Footsie
For investors sizing up the highest-yielding stocks in the FTSE 100 today, six of the 2022 Dogs remain: Persimmon (LSE:PSN), M&G (LSE:MNG), Phoenix Group (LSE:PHNX), British American Tobacco (LSE:BATS), Legal & General (LSE:LGEN), and Rio Tinto (LSE:RIO).
After two years of dividend recovery following the Covid-19 pandemic, UK dividends are expected to be slightly less generous in 2023.
Link Group, a financial data firm, forecasts a 2.8% drop in dividends in 2023 compared with 2022. This would mean £91.7 billion returned to shareholders compared with £94.3 billion last year.
The drop is due to a sharp decline in special dividends as economic conditions worsen.
The 10 highest-yielding FTSE 100 shares
|Company||Forecast dividend yield (%)|
|NatWest Group (LSE:NWG)||9.6|
|Phoenix Group (LSE:PHNX)||7.9|
|British American Tobacco (LSE:BATS)||7.5|
|Legal & General (LSE:LGEN)||7.5|
|Taylor Wimpey (LSE:TW.)||7.4|
|Rio Tinto (LSE:RIO)||7.2|
Source: SharePad. Yield figures sourced on 3 February 2023.
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