Our high-yield Dogs leave Footsie trailing

TUMBLING stock markets have triggered a flight to value by investors whose appetite for dividend income has favoured the Midas high-yield portfolio in the past three months.

The portfolio, set up in March last year, comprises ten companies with the highest yields - dividends relative to share prices - in the FTSE 100 index of top shares. It has consistently outperformed the Footsie itself, and since we last updated it in March, it has stormed ahead.

Three months ago, the Footsie had an average historic yield of 2.97%, though the index has fallen 12.3% since then and now offers a yield of 3.41%.

Footsie companies may have above average yields for several reasons. They may be low-growth but cash-generative utilities that reward shareholders with big dividends. Or their relatively large payouts may be due to their shares having fallen out of favour, which in slang terms is called becoming a dog.

These two types of shares make up the Midas Dogs Of The Footsie portfolio. We use forecast yields, to exclude firms that are expected to cut their dividends, and we recalculate the portfolio every three months, pulling out of shares whose yields are overtaken by others. We do not include dealing costs, but neither do we include dividend income.

We set up the portfolio with a nominal £1,000 investment in each of the ten companies and its closing valuation last week was £10,349 for a 3.5% gain.

Though the value of the portfolio has fallen from its peak early last month of £11,532, it has only slipped slightly since we last updated on March 24, when it was worth £10,376.

In contrast, the Footsie, at 4,605.3 points, is down 17.2% since the Dogs portfolio started. A nominal £10,000 investment in the Footsie, then at 5,562.8, would now be worth £8,280 after a fall of £1,159 in the past three months alone.

The main reasons for the Dogs portfolio's outperformance have been tobacco firms - British American Tobacco, up 34% since joining for the second time last December, and Gallaher, up 33% since debuting in September.

Their share prices have risen so far that other Footsie shares have higher yields and so the two drop out of the portfolio. As does brewing and pubs group Scottish & Newcastle, whose shares are up 12% since it joined a year ago, reducing its yield.

The seven that remain are water and electricity firm United Utilities, yielding 7.7%, ScottishPower, eight%, Abbey National bank, 6.7%, insurer Royal & Sun-Alliance, 6.8%, water utility Severn Trent, 6.1%, Lloyds TSB, 5.7%, and financial services group Old Mutual, 5.5%.

Selling out of three companies raises £3,868 to invest in three new entrants - utility Scottish & Southern Energy, hotel group Six Continents and aero-engine maker Rolls-Royce, led by chief executive John Rose.

Midas verdict: Not only has the Dogs Of The Footsie outpaced the Footsie index, it has also shown positive returns when the Footsie has fallen. With markets continuing to slide, dividend yield remains a high priority with investors.

Joining the Midas portfolio

Scottish & Southern Energy
Share price: 671 1/2p. Forecast yield: 5.2%. There was relief last week that the utility had not tried to outbid Electricite de France for regional electricity firm Seeboard. But with chief executive Jim Forbes retiring, the failure to make the acquisition has raised questions about Scottish & Southern's strategy.

Six Continents
Share price: 681 1/2p. Forecast yield: 5.2%. The hotels and pubs operator is on the acquisition trail, but chairman Sir Ian Prosser has pledged to return up to £1 billion to investors if no deal is done. Annual results last month showed the impact of September 11, with profits down 28% to £242 million.

Rolls-Royce
Share price: 169 1/2p. Forecast yield: 4.8%. At its AGM last month the firm said its profits would continue to suffer from the fall in demand for planes after September 11. But chairman Sir Ralph Robins, soon to retire, said strong positions in expanding markets would deliver long-term value.

Edited by Andrew Leach