Midas: Dogs of the FTSE take steps to recovery

By Joanne Hart for The Mail on Sunday
Updated: 03:41 EDT, 14 February 2011

Back in the good old days, before the financial crisis rocked the banking system to its foundations, the Midas Dogs of the Footsie portfolio was dominated by banks, with a smattering of utility stocks thrown in for good measure.

Cash machine: GSK, run by Andrew Witty, yields about 5.6%

In other words, the portfolio was largely defensive. Companies were included because they were considered solid, mature businesses.

They offered high yields because they paid generous dividends and could afford to do this because they had plenty of cash and wanted to reward shareholders, rather than spend the money on research and development or huge acquisitions.

The financial crisis put an end to that. Banks lost billions. Some were rescued by stronger rivals, some were rescued by the Government and some just about managed to remain independent.

Almost all either scrapped dividends completely or cut the payments. These days, the Dogs are bank-free.

In the aftermath of the crisis a number of stocks found themselves in the Dogs not so much because they were robust businesses that wanted to be good to investors but because they were vulnerable businesses.

These companies were forecast to pay high dividends but frequently ended up being unable to do so.

For a while their yields looked good, then they either announced a cut in the dividend or the share price fell so far that they were booted out of the FTSE 100.

Man Group is a classic example of the former and Home Retail Group of the latter.

Finally there are signs that the portfolio is regaining its defensive qualities.

In November, when we last looked at the portfolio, the Dogs comprised Aviva, AstraZeneca, National Grid, Resolution, Royal Dutch Shell, RSA, Scottish & Southern Energy, Standard Life, TUI Travel and Vodafone.

Since then, share prices at Shell, TUI Travel and Vodafone have increased. Their yields, which fall as the stock price rises, have come down and they are dropping out of the portfolio.

In their place we welcome British American Tobacco, GlaxoSmithKline and United Utilities. This means the Dogs include four insurers (Aviva, Resolution, RSA and Standard Life), three utilities (National Grid, Scottish & Southern and United) and two drug multinationals (AstraZeneca and Glaxo).

Last but not least is cigarette manufacturer BAT.

These Dogs bear no resemblance to some of the greyhounds on the stock market today.

They are not racy, they are not unruly and they are not high maintenance. That does not mean they are uninteresting, but they are more likely to behave like reliable labradors than some of their pre decessors.

Resolution may be an exception. Run by entrepreneur Clive Cowdery, the group has a stated aim to expand by buying up slack or underperforming financial services businesses and making them more effective.

It is also determined to generate shareholder value and on a yield of more than six per cent, it is certainly delivering a decent income to its investors.

Looking at the new joiners, however, they display some classic defensive qualities.

United Utilities has been in and out of the Dogs for years. The group used to be involved in water, electricity and telecoms, but it now focuses on water and waste, having disposed of all its other interests and returned £1.5 billion to shareholders.

The shares are yielding nearly 5.2% and should prove a solid investment over the next few years.

GlaxoSmithKline, run by chief executive Andrew Witty, is a new Dog and follows hot on the heels of its main British competitor, Astra-Zeneca.

Both companies were once fast-growing businesses, inventing new drugs and making huge sums of money as they brought them to market.

Recently they have found it more difficult to discover fresh compounds and their share prices have fallen as analysts worry about their ability to increase profits as they used to once existing blockbuster drugs come off patent.

But for now, both generate plenty of cash, they pay chunky dividends and the shares yield about 5.6%.

BAT is another new member of the pack. Smoking may be increasingly unfashionable in Britain, but in many parts of the world it is still very popular.

BAT makes brands such as Dunhill, Lucky Strike and Kent and, although the company has come under pressure from cheaper cigarettes and illegal selling, it remains solid.

Dividends have grown steadily over the past five years and will almost certainly continue doing so. The shares now yield nearly 5.3%.

The Dogs' newly defensive bias has already begun to benefit the portfolio's performance.

Over the past three months the FTSE 100 has gained three per cent while the Dogs are up eight per cent. In 2007 we invested a notional £10,000 in the FTSE and the same in the Dogs.

Today, the FTSE investment is worth £9,452 while the Dogs are worth £6,000.

The gap is still uncomfortably large but it is closing.

It is worth bearing in mind however, that our calculations look at share prices only, on top of which investors have enjoyed some extremely handy dividend payments.

Perhaps the Dogs are not such bad investor companions after all.

It's all in the yield: How it works

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.

At this time of year, many companies are about to report their results for 2010, while some, whose financial year ends in March, will not report until May.

For the sake of clarity, we have looked at the dividends for 2011 in every case. We simply divide those forecast dividends by the current share price to find the prospective yield.

Midas reassesses the portfolio every quarter, ditching stocks that are no longer in the top ten high yielders and replacing them with those that are.

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.