Britain’s blue-chip stocks are under pressure, with volatility slicing 9% from the value of the FTSE 100 (UKX) Index since the turn of the year. One impact of this price pressure is that dividend yields on some of the country’s biggest companies have risen quite noticeably. So for high yield investors, this particular market cloud could have a silver lining.
One of the best known approaches used for picking out high-yield large-cap shares 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 all-important trade-off is that their size and financial muscle means they’ll likely recover and come back into favour over time.
One of the problems of this strategy, however, is that focusing on high yields ignores how a stock’s dividend, and hence its yield, might change in the year ahead and beyond. This is important because while a high yield can be attractive, it can also be a signal that the market doesn’t trust the payout. Troubled companies often have high yields, which can make them dividend traps.
To tackle this problem, one option is to look further ahead and change the strategy rules slightly to focus on forecast yields rather than current yields.
With this in mind, this week’s top 10 list for Interactive Investor takes a look at the highest forecast yields in the FTSE 100. Our 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.
Based on forecast yield, the energy supplier Centrica (CNA) leads the list having seen its forecast yield rise to 8.5% from 8.1% since the start of the year. SSE (SSE), another utility, also makes the list with a forward yield of 7.7%.
Housebuilders, which have done exceptionally well in recent years, have all seen their share prices drift in 2018. This has also pushed up their forward yields. Barratt Developments (BDEV), Taylor Wimpey (TW.) and Persimmon (PSN) make the list. Others include the mining group Evraz (EVR), tobacco group Imperial Brands (IMB) and household names like BT (BT.A), Direct Line (DLG) and Marks & Spencer (MKS).
Name Mkt Cap £m P/E Ratio Forecast Dividend Yield % Forecast Dividend Cover Sector Centrica 7,799 10.9 8.5 1.1 Utilities Taylor Wimpey 6,055 9.2 8.3 1.4 Consumer Cyclicals Barratt Developments 5,330 8.5 8.1 1.6 Consumer Cyclicals EVRAZ 6,119 9.4 8 1.7 Basic Materials Imperial Brands 23,305 13.4 8 1.4 Consumer Defensives SSE 12,795 9.5 7.7 1.3 Utilities Persimmon 7,870 10.4 7.7 1.4 Consumer Cyclicals BT 22,354 8.2 7.1 1.8 Telecoms Direct Line Insurance 5,219 11.4 7.1 1.2 Financials Marks and Spencer 4,364 9.2 7 1.5 Consumer Cyclicals
Source: Stockopedia Past performance is not a guide to future performance
A focus on forecasts
Dividend payouts have hit new highs in recent years. That’s been a welcome boost for high yield investors. And while equity prices have slumped since the start of 2018, these declines have pushed up the forecast yields on a number of stocks often favoured by income hunters – so it’s not all bad news.
For investors looking closely at equity income, the FTSE 100 offer the deepest pool of ideas, but there are still risks. Dividend traps and over-concentration in specific sectors are a routine challenge when it comes to finding the best dividends. But exploring the market for stocks with the highest forecast yields could help mitigate some of these risks.
Interactive Investor’s Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard’s review of Stockopedia.com and learn more about the site.
Interactive Investor readers can enjoy a completely FREE 14-day trial of Stockopedia by clicking here.
It’s worth remembering that these and other investment articles on Interactive Investor are simply for generating ideas and if you are thinking of investing they should only ever be a starting point for your own in-depth research before making a decision.
*No fee for publication is involved between Interactive Investor and Stockopedia for this column.
About the Author
Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including “How to Make Money in Value Stocks” and “The Smart Money Playbook”
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