Interactive Investor

Half-time report: how our 10 Dogs of the Footsie are faring

10th August 2021 09:59

Faith Glasgow from interactive investor

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The Dogs is designed to appeal to bargain-hunters and income investors alike. Here’s how the strategy has fared at the six-month mark. 

How time flies. It is six months already since we revealed a new pack of high-yielding hounds for our Dogs of the FTSE portfolio, and time to take a look at how they are faring halfway through this year.

The Dogs philosophy is a simple one, designed to appeal to bargain-hunters and income investors alike. Each February, we identify the 10 FTSE 100 companies with the highest yields (in other words, with the biggest dividend payments relative to their share price), and invest equally in them all for the coming 12 months.

The premise is that at least some of them will be high-yielding because the share price has been hard hit by forces outside their control and may bounce back over that time; and in the meantime investors receive a generous dividend as compensation.

The Dogs as a whole have had a difficult time in the past few years, beating the wider FTSE 100 only once since 2016; and the first half of 2021 suggests this year’s kennel club is set to continue in that vein.

Keith Bowman, equity analyst at interactive investor, offers some context for the elusiveness of share price recovery among Dogs over recent years: “An ongoing era of ultra-low interest rates leaves high-yielding companies out of step with the broader environment, raising investor concerns that payments may have to be cut in the future,” he explains. That’s a deterrent to those seeking a reliable income.

So how has the current line-up performed? As the table below shows, the Dogs’ average share price rise of 6.2% has lagged the index rise of 9.8% over the six months to 31 July. Underperformance persists even when dividend payouts are included, although the total returns gap between Dogs and index is much narrower than the share price differential.

Against that, yields are impressive. The Dogs are on historic dividend payouts averaging a massive 7.3%, against a FTSE 100 average yield of 3.3% (source: dividenddata.co.uk). Abrdn (LSE:ABDN) (formerly named Standard Life Aberdeen), paying 4.9%, is the lowest-yielding in the kennel, with miner EVRAZ (LSE:EVR) topping the table on a meaty 12.5%.

The table highlights the diversity of the Dogs’ fortunes over the past six months. Eight of the 10 mutts have failed to keep pace with the 11.9% total return from the wider index; two – Abrdn and Vodafone (LSE:VOD) – have actually delivered losses for investors, despite a generally buoyant run for the UK market particularly during the spring and early summer months.

Meanwhile, the winners have stormed ahead. Evraz has had a great run: it has produced an impressive performance on the back of the rebound in the global steel market since last autumn, further bolstered by corporate cost-cutting initiatives, yet still boasts that double-digit yield.

Investment manager M&G (LSE:MNG) - one of four financial companies in the kennels this year – is the other frontrunner. It has pulled off a 28% share price rise despite the fact that its sector peers, Legal & General (LSE:LGEN), Phoenix (LSE:PHNX) and Abrdn, have all disappointed.

Newly rebranded Abrdn posted negative total returns over the half year, but it is in the throes of restructuring its investment management team and launching a new growth strategy to turn the business around after years of unremarkable performance.

As Bowman observes: ”Investment-related companies such as L&G, Abrdn and M&G have been beneficiaries of the ultra-low interest rate environment prevailing since the financial crisis, as low deposit rates have forced investors out of cash and into riskier alternatives such as equities.”

However, the rebound in equities since the market low point in March 2020 could leave investors questioning prospects from here on. “Expected inflation and its potential impact on interest rates is also likely to stunt market prospects,” he adds.

Elsewhere, both blue-chip tobacco businesses have found themselves deeply unloved in recent years, with an enforced shift towards vaping, plus concerns around heightened regulation as well as growing ethical resistance among investors. They were further punished during the pandemic, as duty-free sales at airports were decimated by lockdown.

Neither British American Tobacco (LSE:BATS) nor Imperial Brands (LSE:IMB) has seen any dramatic change of fortune in 2021, with continuing international travel uncertainty stunting any meaningful recovery for duty-free airport sales. However, Bowman reports, “analyst opinion for both companies remains favourable”. Strong sales of e-cigarettes and other alternatives have helped them boost revenue, even though “profitability has yet to be reached for either company in its alternative category arena”.

For BP (LSE:BP.), reduced global activity during successive lockdowns and the consequent slump in the oil price made for a torrid time last year, and investors suffered further with a painful cut to the dividend.

But Bowman argues that Covid has precipitated a more fundamental shift for the fossil fuel industry. “The acceleration of climate change concerns has arguably been the core outcome of the pandemic,” he suggests.

BP, like many of its rivals, is now racing to increase its involvement in low-carbon and alternative energies, while reducing its focus on fossil fuels. The stakes are pretty high for those oil majors that reorient themselves most successfully towards sustainable energy sources.

Meanwhile, as Bowman notes: “BP’s 4% rise just announced for second-quarter dividends, aided by a recovery in the oil price since pandemic lows, should arguably help to lure investors back.”

Vodafone investors have little to smile about in terms of current reward, with negative total returns over the past six months. However, it has been playing the long game over recent years, pursuing a number of strategic priorities.

“It has simplified its operations down to Europe and Africa, separated out and listed its Vantage Towers business, helping to reduce debt, and continued the roll-out of its next-generation mobile and fixed networks,” explains Bowman.

There have been significant headwinds, including strong price competition in markets such as Italy, and lower roaming and visitor revenue due to reduced travel in the pandemic. Nonetheless, Bowman adds, “analyst opinion remains positive, as it has been for some time”. The question is how long investors have to wait for the benefits to feed through to the share price.

Finally, GlaxoSmithKline (LSE:GSK) had a tough pandemic. While AstraZeneca (LSE:AZN)’s stock climbed 30%, GlaxoSmithKline was absent from coronavirus vaccine research. Moreover, the focus on Covid meant other vaccines and medicines produced by GlaxoSmithKline were less in demand.

As a consequence, it managed a share price rise of just 4.5% over this six-month period. Now it plans to split into two, and has announced a dividend cut for 2022, after years of unchanged payouts. It seems this Dog is unlikely to deliver, in the short term at least.

Money Observer magazine, which closed last summer, first began tracking the Dogs in 2001 and the portfolio has beaten the benchmark in 12 of the past 20 years. Over this period, the average annual share price return for the Dogs of the Footsie is 4.9%, comfortably outpacing the main index’s 1.3%. In terms of total returns (with dividends reinvested), the gap is much wider. The Dogs have averaged 11.2% per year – more than double the FTSE 100’s 5.2%.

At the halfway stage: tale of the tape for 2021s Dogs line-up

Company Price return over six-month period (%)* Total return over six-month period (%) * Historic yield (%)
EVRAZ (LSE:EVR) 22.5 29.6 12.5
Imperial Brands (LSE:IMB) 4.9 9.6 8.8
BP (LSE:BP.) 6.5 9.3 5
British American Tobacco (LSE:BATS) 0.9 4.9 8.1
Standard Life Aberdeen (now called Abrdn (LSE:ABDN)) -6 -3.6 4.9
Legal & General (LSE:LGEN) 7.1 12.3 6.6
Phoenix (LSE:PHNX) 0.7 4.3 6.9
M&G (LSE:MNG) 28.1 35.1 7.8
GlaxoSmithKline (LSE:GSK) 4.5 7.6 5.6
Vodafone (LSE:VOD) -6.9 -3.3 6.5
FTSE 100 Index 9.8 11.9  
Dogs average return 6.2 10.6  

Source: SharePad. *31 January 2021 to 31 July 2021. Yield data from dividenddata.co.uk on 6 August 2021. Dogs ranked in order of yield figures in early February 2021.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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.

Related Categories

    UK shares
    Income Investor
    Europe
    Commodities
    Financials
    Consumer goods and services
    Health care
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    Growth Investor

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