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THE Bank of England may have raised its official borrowing rate to 0.75 per cent this month but savings rates remain painfully low, with savers struggling to earn much more than 1 per cent interest a year.
Compare that with the income from the Midas Dogs of the Footsie portfolio, which comprises the ten highest-yielding shares in the FTSE 100 index. Looking across our canine portfolio, the average annual income is more than 8 per cent and a couple of stocks – housebuilder Persimmon and steel producer Evraz – are delivering yields above 9 per cent.
Extraordinarily high yields, such as these, normally mean one of three things: the shares are undervalued on the stock market, the shares are heading for a fall or brokers believe that future dividends will be cut.
Which is it today? The answer, glibly, depends on who you ask…
The Dogs of the Footsie portfolio is based on a strategy developed by US market guru, Michael O’Higgins, who suggested that investors would benefit over the long term from buying the highest-yielding shares in the New York Dow Jones index.
For many years, our adaptation of that strategy worked well. Between 2012 and 2017, for example, the value of the Midas Dogs portfolio doubled and shareholders enjoyed above average dividends as well.
This year, the picture is more complicated. Dividends are soaring but share prices are not. In February of this year, our Dogs comprised energy groups Centrica and SSE, housebuilders Taylor Wimpey and Barratt Developments, insurers, Direct Line and Admiral Group, t obacco firm Imperial Brands, Lloyds Banking Group, Marks & Spencer and BT.
Today, four of those Dogs are no longer in the portfolio – Admiral, Lloyds, M&S and BT. They have been replaced by housebuilder Persimmon, phone group Vodafone, investment firm Standard Life Aberdeen and Russian coal and steel producer Evraz.
The reshuffle leaves the portfolio with three housebuilders, yielding between 7.9 and 9.6 per cent.
The entire sector has had a difficult year, beset by concerns about stagnating house prices, rising interest rates and consumer confidence. Last week, The Mail on Sunday also revealed large scale share sales by executives across the sector.
Yet the companies themselves remain officially optimistic, producing strong results in recent weeks and stressing their confidence in the future.
This divergence between what companies are saying and what the market is thinking has created real uncertainty about the future. Some brokers believe the stocks are a raging buy, particularly given the dividend yields. Others suggest prices are almost certain to fall.
The truth may depend on investors’ time frame. Housebuilders’ fortunes wax and wane with economic cycles so our three Dogs are unlikely to be immune if the economy slows and the housing market continues to stall. For now however, Barratts, Taylor Wimpey and Persimmon are in our portfolio and the yields are eye-catchingly generous.
As for our other Dogs, Standard Life Aberdeen joins up because its shares have fallen heavily this year and dividend yields tend to rise as stock prices fall. Investors have been deserting the company’s funds and the group also lost Lloyds Banking Group as a customer earlier this year. The share shares now yield just over 7 per cent.
Vodafone is a perennial Dog, having been in and out of the portfolio for years. It scampers back in after a rough year to date, with the shares down more than 15 per cent since February, putting the stock on a yield of 7.2 per cent. Chief executive Vittorio Colao is leaving and the company recently reported slowing sales growth and falling revenues.
Evraz is in a happier position. The business is involved in coal, steel and vanadium production and prices of all three have rebounded this year. Profits are up and dividends have increased sharply. The recovery is a stroke of particular good fortune for majority shareholder Roman Abramovich, the Russian billionaire who owns Chel- sea Football Club. Overall, however, our Dogs have fallen in value this year. In February, our portfolio was worth £19,482. Today it is valued at £17,797. Most of our pups are domestic businesses and, one way or another, they are suffering from continued uncertainty about the UK’s economic and political future. That is unlikely to change while negotiations about the European Union drag on, fears about a nodeal Brexit persist and companies remain in the dark about the outlook for their business.
Fortunately, however, the portfolio is still beating the FTSE 100 index. A nominal £10,000 invested in the Footsie in March 2012 was worth £12,580 in February. Today, it is worth £12,769. The average yield on the FTSE 100 is also worth noting – just over 4 per cent. It is still much higher than anything on offer from banks and building societies but it is roughly half of that on offer from the Dogs right now.