20 Apr 2010, 12:08pm
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  • Dogs of the FTSE 100 – chasing yield

    miscellaneous mutt image

    Not this sort of dog!

    As someone looking for an income from my capital assets, I am going for dividend yield in my shareholdings. There’s no rule that I have to get an income from dividends rather than growth, but realising an income from growth means selling itsy-bitsy numbers of shares.

    The majority of my holdings are in the L&G Global 50:50 fund because that’s one of the three funds I can save AVCs in and I was able to save half last year’s salary tax free in it.

    The principle behind Dogs is to look for stocks that are currently unloved (the share price is low) and have high dividend yields. Select the 10 highest yielding stocks of the FTSE 100 every March, buy an even cash amount of each, then leave for a year and re-evaluate the next year. Sell the ones that aren’t dogs any more, (hopefully at a profit 🙂 ) and purchase the new Dogs, keeping the per-Dog amount around 10%. An analysis of the results of this approach is available here.

    The risks are clear – though companies in the FTSE 100 don’t usually go bust a high yield usually indicates there’s trouble in Paradise. Either the company has fallen out of favour and the price has tanked, or a share split has happened, which means you are looking at the dividend which came from a share that is now represented by 10 shares. In that case you’re not comparing like with like (Cable and Wireless seem to be like this now). You need to screen the candidate Dogs against this sort of thing, and eliminate any which state future dividends will be slashed.

    My ISA is small – I could only fund it with £3600 last year as my cash ISA emergency fund blocked half my ISA allocation. So my opportunity to get into the Dogs was limited. However, in my search for yield, I ended up with two Dogs already – BP and National Grid. I work for another Dog (have just checked and its recent share price appreciation means it is Dog no more), and through the  employee share purchase plans I have more than enough exposure to that Dog.

    There’s something disturbing about inadvertently setting up a Dog fund in my quest for yield. Having read this Money Observer article on the Dogs strategy, this year I may look for Dogs with intent. After all, it seems to align with my values, so I will use my ISA allocation to load up with the remaining 7 Dogs next Feb/March.

     
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