Today I’m going to be taking a look at two very different income-focused strategies and trying to ascertain which strategy is best. Let’s take a look….
Chalk and cheese
The Dividend Dog is simply a high-yield income strategy, which in truth is one of the simplest strategies in investing. All you need do is select the 10 highest-yielding stocks in a major market index, such as the FTSE 100.
While there are a number of versions of the strategy that use the current or historic dividend yield, I prefer to use the forecast dividend yield as a potential safety net as it tends to filter out the companies that are likely to either cut or scrap the dividend payout, which has happened with mining giants BHP Billiton and Rio Tinto.
This strategy was popularised by Michael B O’Higgins in 1991 and was one focused on US markets where O’Higgins sought out large, mature and well-financed companies with long histories of weathering economic turmoil.
Using Stockopedia I’ve selected banking giant HSBC (LSE: HSBA). It currently has the highest forecast yield (on a 12-month rolling basis) in the FTSE 100 with 7.85% not to be sniffed at.
On the other side of the coin we have companies known as Dividend Achievers. This is a slightly different income strategy, which looks for companies that have grown their dividend payouts for at least the past five consecutive years.
As we’re searching for companies that are growing the payouts we can probably expect a lower yield. However, the trade-off should be that investors see a reasonable amount of capital growth alongside the dividend growth as company earnings grow alongside the dividend.
Again I used Stockopedia and selected Zytronic (LSE: ZYT), a UK-based developer and manufacturer of a range of touch sensor products, and UK-based owner and manufacturer of ceramic tableware brands Portmeirion, Spode, Royal Worcester and Pimpernel, Portmeirion Group (LSE: PMP).
With forecast yields of 3.42% and 2.76%, neither come close to HSBC.
Which strategy is best?
Well, with a quick look at the chart, certainly in terms of capital appreciation both the dividend achievers have beaten both the dividend dog and the market as a whole.
Not only that, if we rewind the clock by 12 months it wouldn’t be too difficult to calculate that the dividend yields wouldn’t have been too different. You see, as the shares of HSBC have slipped, the yield on offer increases. Over at Zytronic and Portmeirion the opposite would be true as even a growing yield will decrease if the shares appreciate enough – as they have in this case.
So, over the last 12-month period it’s clear that the dividend achievers have trumped the dividend dog. However, with a near 8% dividend yield on offer and the recovery potential once management has the business back on track, means it would be foolish to write off HSBC at these levels.
So in answer to the question in the headline, for me there’s a case to invest in all three businesses in order to bring some balance to a portfolio. The solid yield from HSBC, augmented by the earnings and dividend growth of Zytronic and Portmeirion means that this trio is worthy of further research in my view.
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Dave Sullivan has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.