Interactive Investor

Stockopedia: dividend blue-chips that offer income comfort

The ‘Dividend Dogs’ strategy has been a good one lately, and our columnist explains why.

28th April 2021 15:29

Ben Hobson from Stockopedia

The ‘Dividend Dogs’ strategy has been a good one lately, and our columnist explains why. 

This time last year, dividends paid by UK quoted companies were coming under tremendous pressure. With the drama of the first Covid-19 lockdown sweeping through the market, payouts were cut as companies shored up their finances.

Between January and March last year, executives were already putting payouts on hold. But it was from April onwards that the full impact was really felt.

New data from Link Asset Services examining the full 12-month picture of the pandemic, shows that dividends fell by 41.6% overall. Two-thirds of companies reduced or scrapped their payouts, costing investors £44.8 billion in lost income between the second quarter of 2020 and the first quarter of this year.

Sectors that were hit hardest included banking, oil, mining, leisure and travel, housebuilding and consumer goods. Among the winners, by value, food retailers, consumer essentials, and general financials did the best.

Recent trends point to improvements

During the first three months of 2021, dividends remained under pressure but the rate of reductions continued to slow. Payouts from companies fell to £12.7 billion, from £17.3 billion in Q1 last year. Dividend cuts between January and March totalled £5.8 billion, of which half was accounted for by the oil sector.

The good news is that half of UK companies either raised, restarted or held their dividends during the first quarter, according to Link. That was up from a third in the previous quarter. Among the highlights was a full restoration of payouts from the housebuilder, Persimmon (LSE:PSN).

Indeed, the outlook appears to be improving, with signs of low-level payout increases in the banking, mining, insurance and media sectors. Link now expects underlying dividends to rise 5.6% to £66.4 billion this year, with headline payouts as high as £74.9 billion because of special payouts from Tesco (LSE:TSCO) and several mining companies.

Dividend strategies starting to improve

Unsurprisingly, dividend investing strategies have been thrown into turmoil over the last year. But recently we’ve seen signs of improvement, and one strategy that has been doing well is the well-known Dividend Dogs.

Dividend Dogs are the highest yielding large-caps in the market. It was a term coined by Michael O’Higgins and John Downes in their book, Beating the Dow. Their strategy buys the 10 highest-yielding stocks in an index of leading shares - like the Dow Jones or the FTSE 100 - and then holds them for a year.

The simplicity of the Dividend Dogs approach is a big attraction to investors. In theory, the highest-yielding stocks are usually out of favour for some reason, and their depressed share prices push the yields up further (hence why these are ‘Dogs’). But the all-important trade-off is that their size and financial muscle means they’ll likely recover and come back into favour - paying off for their shareholders.

A strategy like this tracked by Stockopedia has seen capital growth of 44.7% over the past year - although that return misses all the market collapse and captures all the recovery we’ve seen since. But what’s potentially just as attractive to income hunters are some of the trailing yields currently on offer with these blue-chip shares.

Here are some of the stocks offering some of the highest yields in the FTSE 100 - ranging from tobacco and smokeless products groups Imperial Brands (LSE:IMB) and British American Tobacco (LSE:BATS) to financials and insurers such as M&G (LSE:MNG), Phoenix (LSE:PHNX) and Legal & General (LSE:LGEN) and other stalwart dividend stocks such as BP (LSE:BP.) Persimmon (LSE:PSN) and GlaxoSmithKline (LSE:GSK).

Name Mkt Cap
6m Relative
Price Strength
Imperial Brands (LSE:IMB) 14,002 9.3 1.2 -4.65 Consumer Defensives
M&G (LSE:MNG) 5,495 8.6 2.4 14.4 Financials
British American Tobacco (LSE:BATS) 61,897 7.8 1.3 -13.6 Consumer Defensives
BP (LSE:BP.) 60,087 7.7 -3.2 20.7 Energy
Persimmon (LSE:PSN) 10,042 7.5 0.9 7.58 Consumer Cyclicals
Phoenix (LSE:PHNX) 7,145 6.6 1.9 -14.7 Financials
Legal & General (LSE:LGEN) 16,238 6.5 1.2 17 Financials
GlaxoSmithKline (LSE:GSK) 67,260 6 1.4 -18.9 Healthcare
Polymetal International (LSE:POLY) 7,358 6 1.8 -25.9 Basic Materials
Vodafone (LSE:VOD) 37,954 5.8 1 3.21 Telecoms

Dividend strategies typically fall into one or a combination of three key approaches: high dividend yield, dividend growth and dividend safety. All these strategies have come under pressure over the past year as payouts were cut.

Yield is classically the most important measure to many income investors, but excessive yields can be dangerous. What we seem to be seeing at the moment is a general recovery across the market and a gradual recovery of dividends. In times of uncertainty, it’s important to trade carefully in the search for reliable payouts, but the strength of FTSE 100 companies may offer some comfort

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