Dogs Take a Beating in Stock Market Turmoil; but Our High-Yield Portfolio Is Still Ahead of the Footsie and We Have Money to Spend
Leach, Andrew, The Mail on Sunday (London, England)
Byline: ANDREW LEACH
COLLAPSING confidence in the stock market has hammered even the normally resilient Midas high-yield portfolio in the past three months.
The portfolio, which comprises the ten highest-yielding shares in the FTSE 100 index based on forecast dividends, has fallen in value by 20.4 per cent since we last updated it in June.
That was the biggest quarterly fall since we set it up in March 2001, and for only the second time it was outperformed by the wider market, with the Footsie falling 15.2 per cent over the period to last week's close of 3,907.2.
Overall, however, our portfolio's performance is still well ahead of the FTSE 100 index since we started it by putting a nominal pound sterling1,000 into each of the ten shares.
At the end of last week it was worth pound sterling8,236, a fall of 17.6 per cent since start-up and just off its lowest ever level of pound sterling7,902 last Tuesday.
Last week's close compared with a value of pound sterling7,024 for pound sterling10,000 invested in the FTSE 100 in March last year, when the index stood at 5,562.8, a drop of 29.8 per cent.
We called our portfolio the Dogs of the FTSE since it was based on American investment manager Michael O'Higgins' Dogs of the Dow theory.
This states that if an investor buys the top-yielding shares then, over time, their share prices will outperform the index - in O'Higgins' case the Dow Jones - to which they belong. Yield is a company's dividend expressed as a percentage of its share price. So if a company falls out of favour - becoming a 'dog' - and its share price falls, its yield will rise.
O'Higgins suggested using historic yields, but these can be artificially high because the market may expect a dividend cut.
So we have used forecast yields and we also reassess the constituents every quarter, selling those whose yields have dropped and replacing them with higheryielding shares.
While using forecast yields eliminates some risk, it does not remove it altogether.
That is one reason behind the portfolio's poor latest quarter, which saw it fall in value by pound sterling2,113, compared with pound sterling1,256 for the Footsie.
Some pound sterling511 of the fall resulted from a 56 per cent slump in the share price of insurer Royal & SunAlliance, from 240p to 1051/2p, reflecting fears about its need to raise funds to bolster its balance sheet and an unexpected interim dividend cut.
Royal, whose chief executive Bob Mendelsohn quit this month, joined the portfolio at 2951/ 2p in March when its forecast yield was 5.7 per cent.
When Mendelsohn presented the interim results in August he said the company still intended to pay an unchanged total dividend for the year of 16p, though some analysts suggest that it could be halved to 8p. While Royal is in a very unstable situation and the final payout could always be passed on current evidence, the company remains in the portfolio since, even with a halved dividend, its yield is 7.6 per cent.
Also staying in the portfolio are financial groups Abbey National, Lloyds TSB and Old Mutual, utility companies Scottish Power, United Utilities and Severn Trent and aero engine maker Rolls-Royce, which joined the Dogs at the last update in June. …