Fans of the Dogs of the Dow strategy believe they can beat the market by buying equal amounts of the 10 highest-yield stocks in the US Dow Jones Industrial Average index at the start of each year, holding them for one year, and then selling and repeating the process.
The Dogs of the Dow have beaten the Dow for two of the last three years, and we can apply the same strategy to the FTSE 100.
In this article, I’ll take a look at the five of 2015’s ‘FTSE Dogs’, and I’ll complete the list in a later article.
|
Company |
2015 prospective yield |
|
BP (LSE: BP) |
7.0% |
|
Wm. Morrison Supermarkets (LSE: MRW) |
6.2% |
|
Persimmon (LSE: PSN) |
6.3% |
|
BHP Billiton (LSE: BLT) |
6.4% |
|
Centrica (LSE: CNA) |
6.8% |
BP
Down by around 25% in 2014, BP’s sky-high yield suggests to me that either BP’s dividend will be cut, or its share price will rise.
However, it’s worth noting that BP could cut next year’s dividend by a third and still offer a yield above the FTSE 100 average.
Morrisons
Morrisons was the first supermarket to admit that it had serious problems, and appears to be making good progress in dealing with them.
Unlike its peers, Morrisons has not yet cut its dividend, but consensus forecasts indicate the market is expecting a 15% cut to 10.6p in 2015, giving a prospective yield of 6.2%.
Persimmon
With a forecast P/E of 10.8 and a prospective yield of 6.3%, Persimmon may look cheap, but I’m not convinced.
The firm’s share price has risen by 250% over the last five years, and is now at 2006/7 peak levels, thanks to the strong recovery we’ve seen in the housing market. The question is how long can this continue?
BHP Billiton
BHP currently trades on a forecast P/E of less than 10 and at less than ten times ten-year average earnings — a key value indicator.
The miner’s prospective yield of 6.4% is backed by a strong balance sheet and average dividend growth of 6.8% per year since 2010.
Shareholders will also receive a capital return in 2015, when the miner spins off non-core assets into a new firm.
Centrica
Centrica’s dividend has risen by an average of 5.8% per year since 2009, but mild weather means gas consumption fell by 21% during the first ten months of 2014.
Centrica’s earnings per share are expected to follow and fall by around 25% to 19.8p this year, leaving the firm’s 17p dividend barely covered by earnings, but offering a Dog-worthy 6.8% prospective yield.
What if these dividends are cut?
The point of the Dogs strategy is to buy stocks based only on their yield — to resist the temptation to analyse and pick stocks.