US-based investor Michael O’Higgins wrote about dividend ‘dogs’ in his stock strategy book Beating the Dow.
He suggested picking the highest-yielding stocks from a major index and called them dogs because they are often out of favour with investors.
Dogs of the Dow refers to those in America’s Dow Jones industrial average. But I reckon the approach can work for the UK’s FTSE 100 index too.
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Big companies, low valuations
The strategy targets large, mature and well-financed businesses. In other words, companies with a long history of survival and staying power.
O’Higgins suggested picking the 10 highest-yielding dividend stocks and rebalancing a portfolio every year.
However, high yields can signal that investors are worried about something, although that’s not always the case.
Nevertheless, the big strength of O’Higgins’ strategy is that high yields often point to a business with a low valuation. But cheapness doesn’t always save investors from losing money if an enterprise runs into operational difficulties.
Despite the apparent simplicity of the Dogs strategy, the process of investing carries risks as well as opportunities, whatever the approach.
Meanwhile, financial services provider Legal & General (LSE: LGEN) may be a decent candidate to consider for a Dividend Dogs of the Footsie portfolio.
A chunky yield
With the share price in the ballpark of 236p, the forward-looking yield is just above 9% for 2024. So it qualifies as one of the highest yielders on the FTSE 100. On top of that, the company has a strong multi-year dividend record. The compound annual growth rate of the shareholder payment is running at just under 5%.
City analysts predict an advance in earnings of around 24% this year with the dividend rising by about 5%.
Things seem to be going well in the business, so why is the stock so cheap? It could all come down to the firm’s cyclical vulnerability.
The business is diversified across insurance, savings and investment products and services. On top of that, it’s one of the biggest asset management businesses in Europe. Therefore, it’s well-rooted in the wider financial sector – one of the most cyclical out there.
The big fear among investors could be that a downturn may arrive in the industry at any moment. The obvious defence against that possibility is to keep a firm’s valuation pegged low. So I’m not expecting the share price to shoot the lights out soon, or ever.
If I’d bought Legal & General shares a year ago following O’Higgins’ strategy I’d have lost about 19p per share on the stock price and gained 19.63p per share from dividends.
That 0.63p per share net gain is underwhelming. However, a recent dip in the stock price means it may be worth revisiting now.
If rebalancing my portfolio today following O’Higgins’ advice, there’s a good chance that Legal and General would be worth further research. I’d likely aim to hold it for at least another year.
