Dogs open lead over FTSE

By THIS IS MONEY
Updated: 04:35 EST, 24 July 2006

STOCK market investors have had an exciting time over the past quarter. Share prices peaked three months ago, took a precipitate tumble in May, and have since managed to recover only part of their fall.

Late last week, the value of the FTSE 100 was about five% down from its April high. But Midas's Dogs of the Footsie portfolio, based on high-yielding shares, has held up well.

We suggested in April that risk averse investors should stick with our formula, and our approach has paid off. While the Footsie has fallen, the value of our Dogs portfolio has shown a fractional rise, gaining a minuscule, but reassuring 0.1% since we last updated our selections.

The Dogs of the Footsie approach is based on a theory conceived by American fund manager Michael O'Higgins. We buy shares in the ten Footsie companies with the highest percentage yield - their predicted annual dividends divided by current share price.

Then every three months or so, we check to see how the list of top ten yielders has changed.

Companies might drop out because their share prices have risen or forecast dividends have been cut; and they might move into the top ten if dividend forecasts have increased or their share prices have fallen.

We sell shares in the companies that drop out and reinvest that money equally in companies that have moved into the top ten.

In assessing the performance of our investments, we look only at share prices. We do not take into account dividend income received.

Look how our portfolio has performed since its launch in 2001. If you had invested £10,000 and followed our advice every step of the way, your investments would now be worth £17,493, a gain of almost 75% based on share prices late last week.

Over the same period, the Footsie has risen about 4%: an investment of £10,000 would be worth £10,400.

The Dogs' outperformance is remarkable. Since Midas's April update of the Dogs, we have been holding shares in Lloyds TSB, United Utilities, Alliance & Leicester, DSG International - which most people still think of as the old Dixons retail group - BT, Kingfisher, National Grid, HSBC, Rentokil and Scottish Power.

Three of those now drop out. Kingfisher's share price has risen, so the shares no longer make the list of highestyielders. Forecasts for HSBC's likely dividends have been trimmed, so it, too, drops out. And by a whisker, Scottish Power leaves the Dogs portfolio.

So if you are following our system, sell these three shares, divide the money equally and put it into the three recruits to the Dogs - Barclays, Royal Bank of Scotland and Vodafone. Barclays and RBS have featured in the Dogs before.

Vodafone's inclusion is perhaps more surprising. Its share price has been sluggish this year, but watchers of the company reckon that it will pay dividends of about 6.3p over the 12 months to March next year. Hence it makes the cut for the Dogs.

No investment system is foolproof, but the Dogs approach continues to serve us well. We are happy to stick with it.