A full year has passed since Midas reviewed the Dogs of the Footsie portfolio, assessing the performance of the ten highest-yielding shares in the FTSE 100 index.
Back then, the yields seemed little short of extraordinary, especially compared to the desultory 1-2 per cent savings rates on offer from banks and building societies.
As the summer of 2018 drew to a close, our Dogs were yielding an average of more than 8 per cent per annum, while the top two, housebuilder Persimmon and steel producer Evraz, offered income of more than 9 per cent.
Building returns: Housebuilding firms such as Persimmon and Taylor Wimpey helped lift our portfolio’s dividend yield to an average around 10 per cent
At the same time, savings rates remain depressingly low. Even the broader FTSE 100 index, comprising Britain’s largest listed companies, is yielding less than 5 per cent.
So what does it all mean? Normally, exceptionally high yields suggest that change is afoot. A company’s shares could be undervalued by the market – and about to increase in price.
The shares could have fallen, pushing the yield higher (because yields rise as stock prices fall). Or brokers believe that prevailing dividend policies are unsustainable and payouts are going to be cut.
There have been several examples of this in recent months. And our portfolio is no exception. In 2018, our ten Dogs were housebuilders Barratt Developments, Taylor Wimpey and Persimmon, insurer Direct Line, tobacco group Imperial Brands, fund manager Standard Life Aberdeen, energy provider SSE, Evraz, mobile operator Vodafone and British Gas owner Centrica.
Vodafone was yielding more than 7 per cent and Centrica almost 8.5 per cent. Vodafone new boss Nick Read duly slashed the dividend by 40 per cent in May of this year, while Centrica more than halved its dividend earlier this summer, announcing the departure of chief executive Iain Conn in the process.
Centrica remains in our portfolio – just – but Vodafone has now been turfed out of the Dogs, along with SSE and Barratt.
SSE has not yet cut its dividend but it intends to, confirming in May that next year’s payout will fall from 97.5p to 80p. SSE has been hit by falling customer numbers and the Government’s price cap on gas and electricity charges.
The group is trying to offload its household energy business but attempts have failed so far.
Barratt is the only company to have left the Dogs for positive reasons. Britain’s largest housebuilder delivers results for the year to June 30 later this week and analysts are expecting the annual dividend will rise from 43.8p to around 46p, including a special payout that will be made later this year.
The share price has risen more than 19 per cent to £6.32 over the past 12 months, boosted by an upbeat trading statement in July, when chief executive David Thomas said the group would deliver better than expected results this year, after building nearly 18,000 homes, improving profit margins and securing top marks for customer satisfaction.
How we pick top ten tips
The Midas Dogs of the Footsie portfolio tracks the ten highest-yielding stocks in the FTSE 100 index. It looks at prospective yields, which are calculated by dividing the next forecast annual dividend by the share price and turning that number into a percentage.
Midas reassesses the portfolio regularly, removing stocks that are no longer top yielders and replacing them with those that are, to the same value. Our calculations based purely on the share price do not include the dividends received by investors. Adding them in clearly boosts the overall returns.
Barratt’s robust performance is in stark contrast to Persimmon’s woes. The shares have fallen almost 23 per cent since last year to £19.03, as the company faced complaints from customers about the quality of its homes and fought with investors over a two-year £84 million pay package awarded to boss Jeff Fairburn, now departed.
Like its fellow housebuilders, Persimmon has been energetically returning cash to shareholders in recent years. This year, £2.35 has been paid out per share and the same again is expected in 2020, hence the group’s remarkable 12.5 per cent dividend yield. Looking ahead, however, analysts forecast little or no growth in sales and profits, so future dividend increases may be hard for new boss Dave Jenkinson to justify.
Taylor Wimpey has suffered fewer blows than Persimmon in recent months but profits slipped at the half year and the share price has fallen more than 8 per cent over the past 12 months to £1.46. With an 18.3p dividend pencilled in for this year, rising to 18.5p in 2020, that puts the yield on a par with Persimmon, suggesting that the market believes these payments cannot be sustained indefinitely.
Our third-highest payer is Evraz, the Moscow-based steel producer, whose largest shareholder is Roman Abramovich, owner of Chelsea FC. Steel companies tend to do best when economic conditions are robust and growing fears about the global outlook have sent Evraz shares from £7.09 in June to £4.96 today.
Our third-highest payer is Evraz, the Moscow-based steel producer, whose largest shareholder is Roman Abramovich, owner of Chelsea FC
Nonetheless, the company is expected to pay a dividend of 65 cents this year (reporting in US dollars because that is the main trading currency for steel) and sterling weakness means shareholders should end up with a sterling payment of around 53p, putting the stock on a yield of more than 10.5 per cent.
As three Dogs have left the portfolio since last year, we have three new joiners – insurers Aviva and Legal & General, and BT.
The phone company’s shares have tumbled almost 25 per cent over the past year to £1.66, including a heavy lurch downwards since chief executive Philip Jansen unveiled lacklustre results in May and big ambitions for the future.
Jansen said back then that he would keep next year’s dividend at 15.4p, which puts the stock on a yield of more than 9 per cent. Brokers believe, however, that a cut is on the cards, as BT ups investment in superfast broadband.
Our Dogs seem more vulnerable today than they have been for a while. Share prices have generally fallen and dividend cuts may be on the cards. In August 2018, our portfolio was worth £17,797. Today, that figure has slipped by 17.5 per cent to £14,675. A sorry result but still better than the FTSE 100 index.
A nominal £10,000 invested in the Footsie in March 2012 was worth £12,769 in August last year. By Friday, that had fallen to £12,143.
Our portfolio has been buffeted by economic and political headwinds, while some firms have suffered from problems of their own making. Even so, investors have benefited from exceptional yields, and the Dogs have still managed to beat the index.