Seeking Alpha

Dividend Dogs With More Bite: How To Hunt For High Yield Large-Cap Shares

|
Includes: BT, BTDPF, BTDPY, CPYYF, CPYYY, DIISF, DIISY, IMBBF, IMBBY, MAKSF, MAKSY, PSMMF, PSMMY, SSEZF, SSEZY, TWODF, TWODY
by: Stockopedia

Britain's blue chip stocks have been under pressure in 2018. Prices have trended down since the start of the year, slicing a noticeable 6.5 percent off the FTSE 100. But one of the potential upsides of these declines is that forecasts of dividend yields on some of the country's biggest companies have risen quite markedly in places.

One of the best known approaches used for picking out high-yield large-caps is called Dogs of the Dow. It's a strategy based on the work of Michael O'Higgins and John Downes in their book, Beating the Dow.

The aim of their strategy is to buy the 10 highest yielding stocks in a large-cap index like the Dow Jones or the FTSE 100. Part of the appeal of this method is that it really is a very straightforward set of rules.

In theory, the highest yielding stocks are usually out of favour for some reason, and their depressed share prices push the yields up further (hence why these are 'Dogs'). But the trade-off is that their size and financial muscle ought to mean they'll recover and come back into favour over time.

Critics of the strategy point to the fact that, beyond the financial strength of large-caps, there aren't many safety nets in the Dividend Dogs approach. After all, blue chips aren't immune from cutting dividends, and this strategy does demand you buy companies usually with negative price momentum.

Despite the drawbacks, high yields are obviously appealing. There are two versions of this strategy - one that uses current yield and another called the Forecast Dividend Dogs, which uses 1-year forward rolling yields. This second version is quite interesting because Stockopedia's latest tracking shows some pretty lacklustre price performance (not accounting for dividends).

The chart below speaks volumes - the most recent trends among high yield large-caps in the UK, Europe, U.S. and Australia, are pretty negative. It shows that larger, high yielding shares have been under pressure over the past year or so - but the forecast yields have been rising.

So what names is this this strategy coming up with at the moment? The top 10 stocks are listed below...

(Note that the screen includes forecast yields one year ahead. It also considers forecast dividend cover, which is a measure of how well the dividend payout is covered by earnings.)

Name

Mkt Cap £m

P/E Ratio

Yield % Rolling 1y

Div Cover Rolling 1y

Stock Rank

Sector

Centrica (OTCPK:CPYYF) (OTCPK:CPYYY)

7,911

-

8.3

1.1

57

Utilities

Taylor Wimpey (OTCPK:TWODF) (OTCPK:TWODY)

6,143

9.3

8.1

1.4

94

Consumer Cyclicals

Barratt Developments (OTCPK:BTDPF) (OTCPK:BTDPY)

5,508

8.8

7.8

1.6

91

Consumer Cyclicals

Direct Line Insurance (OTC:DIISF) (OTCPK:DIISY)

4,752

10.4

7.8

1.2

92

Financials

Imperial Brands (OTCQX:IMBBF) (OTCQX:IMBBY)

24,125

13.8

7.7

1.4

46

Consumer Defensives

SSE (OTCPK:SSEZF) (OTCPK:SSEZY)

12,942

9.6

7.6

1.3

70

Utilities

EVRAZ

6,450

9.9

7.6

1.7

99

Basic Materials

Persimmon (OTCPK:PSMMF) (OTCPK:PSMMY)

8,137

10.7

7.5

1.4

98

Consumer Cyclicals

BT (NYSE:BT)

23,044

8.5

6.9

1.8

60

Telecoms

Marks and Spencer (OTCQX:MAKSF) (OTCQX:MAKSY)

4,452

9.3

6.9

1.5

81

Consumer Cyclicals

Based on forecast yield, the energy supplier Centrica leads the list. It illustrates the kind of stock that the Dividend Dogs strategy will present - Centrica's share price momentum has been negative for more than two years. Indeed, its dividend cover has been negative for several years. But over 12 months, the forecast yield has risen from 5.5 percent to 8.3 percent. Plus, the forecast dividend cover looks set to go positive in 2018.

Elsewhere, housebuilders have fallen slightly out of favour recently, but that too, has propelled their forecast yields. Taylor Wimpey has moved from 7.1 percent to 8.2 percent since January. Barratt's forecast yield has shifted from 6.5 percent to 7.8 percent.

Another stock under long-term price pressure is the (sin stock) Imperial Brands. Here as well, the forward yield has inclined to 7.7 percent from 6.1 percent since January.

A focus on forecasts

Dividend payouts hit record levels last year, but with rising equity prices, the forecast yield of the market was expected to be 3.5 percent in 2018. What we see with the Forecast Dividend Dogs is that superior yields in large-cap stocks are available - and they've been rising in recent months. The pain point is that these stocks are often experiencing volatility, and may have seen much longer term price pressure. So the risk in the strategy is that these shares are often (although not always) out of favour and they'll need careful assessment. But it's interesting nonetheless that some of the market's biggest companies are seeing their forecast yields rise noticeably. There could be opportunities there for income hunters.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.