Midas: At last, Dogs are setting the pace

By JOANNE HART FOR THE MAIL ON SUNDAY
Updated: 06:18 EDT, 15 May 2011

The Midas 'Dogs' are fighting back.

Tough going: Boss Ian King has seen BAE's shares slide despite a 60% rise in profits

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%.

That may not sound like much, but the Footsie has fallen by 2.3% 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.

Today, the Dogs seem rather more stable. Yields are not as eye-catching as they were then, but they still average almost six%, 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% while Vodafone is offering a yield of more than 5.8%.

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% increase in profits to £1.6 billion, but the order book for future contracts was down from £46 billion to £39 billion 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%. 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 6% - 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.