MIDAS by JOANNE HART: At last, Dogs are setting the pace

By JOANNE HART
Updated: 17:15 EST, 14 May 2011

The Midas ‘Dogs’ are fighting back. For the first time since the financial crisis, our experimental portfolio of ten high-yielding shares from the FTSE 100 has done noticeably better than the index.

We assess the Dogs quarterly and since February they have increased in value by 3.3 per cent. That may not sound like much, but the Footsie has fallen by 2.3 per cent over the same period – the first time the Dogs have gained in price while the Footsie has fallen since the beginning of 2009.

Bank of England Governor Mervyn King last week painted a gloomy picture of the economy. He said recovery would take time, inflation was likely to rise this year and interest rates may also have to increase. In early 2009, however, the outlook was far worse. The Dogs were in a precarious state and companies were regularly booted out of the portfolio after being forced to slash their dividends.

Tough going: Boss Ian King (right) has seen BAE's shares slide despite a 60 per cent rise in profits

Today, the Dogs seem rather more stable. Yields are not as eye-catching as they were then, but they still average almost six per cent, substantially ahead of any High Street savings rate. And in contrast to 2009, the Dogs of today are far less likely to spring any unpleasant dividend surprises on shareholders.

In February, when we last assessed the Dogs, the portfolio’s members fell into four camps – insurers Aviva, Resolution, RSA and Standard Life; energy businesses National Grid, Scottish & Southern and United Utilities; drugs giants AstraZeneca and GlaxoSmithKline; and one outsider, cigarette maker BAT.

BAT, Glaxo and United Utilities are now leaving the Dogs. All three have put out strong trading statements in recent weeks and their shares have increased sharply. When a stock rises, the yield falls so, even though the three are still paying generous dividends, they are no longer among the top ten high-yielders in the Footsie.

In their place come defence group BAE Systems, hedge fund manager Man Group and telecoms giant Vodafone. Man and Vodafone have been in and out of the Dogs for years, but the market has taken against them in recent weeks so their shares have fallen and their yields have gone up.

Man invests in hedge funds worldwide and brokers are concerned that recent stock market turbulence will affect the performance of these funds. Vodafone releases results for the year to March later this week and there are fears that the figures will be disappointing as a result of intense competition in the mobile phone market.

Following their recent share price falls, Man is yielding 5.5 per cent while Vodafone is offering a yield of more than 5.8 per cent.

BAE, meanwhile, is a newcomer to the Dogs. The company has had a difficult time over the past couple of years as both Britain and America have reined in defence spending.

Results for 2010 showed a massive 60 per cent increase in profits to £1.6billion, but the order book for future contracts was down from £46billion to £39billion and the company admits sales are likely to be lower this year than last.

Worries about prospects have hit BAE’s share price, particularly since the Government’s Comprehensive Spending Review last October.

Nonetheless, BAE, run by chief executive Ian King, has a strong balance sheet and is committed to paying a decent dividend. The payout for 2010 was 17.5p and brokers forecast an increase to 18.5p for 2011, putting the shares on a yield of almost 5.5 per cent. There is even talk of a share buyback, which could boost the dividend next year.

As for the other Dogs, the five top yielders are insurers Aviva, Resolution, RSA (which owns Norwich Union) and Standard Life as well as utility National Grid.

All five are yielding more than six per cent – they are strong businesses, generate plenty of cash and are happy to reward shareholders for their loyalty.

Overall, the Dogs remain a disappointing investment. In 2007 we invested a notional £10,000 in the Footsie and the same in the Dogs. Today, the Footsie investment is worth £9,234 while the Dogs are worth £6,199.

The gap between the two remains frustrating, but at least it is narrowing. Perhaps the Dogs may even overtake the Footsie at some stage. In the meantime, enjoy their yields.

A Dog’s life: It’s in the yield

The Midas Dogs of the Footsie portfolio tracks the performance of the ten highest-yielding stocks in the FTSE 100 index.

It looks at prospective yields, which are calculated with reference to the next forecast annual dividend. We simply divide those dividends by the current share price to find the prospective yield.

Midas reassesses the portfolio every quarter, ditching stocks that are no longer top yielders and replacing them with those that are, to the same value. Our calculations are based purely on the share price, so we do not reinvest the dividends received.

The idea has its roots in a similar experiment conducted in America on high-yielding stocks in the Dow Jones Industrial Average index and called The Dogs of the Dow.