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Could this year’s ‘Dogs of the FTSE 100′ be the big winners of 2019?

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The ‘dogs’ investment strategy has been around for years and is very simple. Buy the 10 highest-yield stocks of an index, such as the FTSE 100, at the start of the year and sell them at the end.

I’m not keen on mechanical strategies like this, but yield can be an indicator of value and I always like to take a look at what the dogs of the Footsie might have to offer. The table below shows the 10 companies currently sporting the highest yields.

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  Industry Recent share price (p) Forecast yield (%)
Evraz Industrial metals & mining 486 13.2
Persimmon Housebuilder 1,903 12.3
Taylor Wimpey Housebuilder 135 11.4
Barratt Developments Housebuilder 452 10.0
SSE Utility 1,081 9.0
Centrica Utility 136 8.7
Standard Life Aberdeen Asset management 255 8.7
Imperial Brands Tobacco 2,370 8.7
Direct Line Non-life insurance 314 8.6
Vodafone Telecommunications 157 8.5

I wrote at length about two of these stocks — Imperial Brands and Vodafone — in an article yesterday. I named them, “My top FTSE 100 high-yield picks for 2019 and beyond“. But what do I think of the prospects for the others?

Demolished housebuilders

The presence of Persimmon, Taylor Wimpey and Barratt in the table means all the Footsie’s housebuilders are in the doghouse. Their shares have been hammered in 2018, being down 30%, 34% and 30%, respectively, since the start of the year. I’ve had all three on my ‘avoid’ list for the past 14 months and, despite the slump in their shares, I’m continuing to avoid them going into 2019.

Their high yields and cheap earnings ratings may be tempting, but their shares continue to trade at significant premiums to their net assets. I’ve previously discussed the valuation cycle in the boom-and-bust housebuilding industry, and shown how the time in the cycle to buy stocks in this sector is when the shares are trading at a discount to net assets.

Utilities under pressure

SSE and Centrica (owner of British Gas) are the only two of Britain’s ‘big six’ energy suppliers listed on the London stock market. Their shares haven’t fallen as heavily as those of the housebuilders since the start of the year, being down 17% and little more than 1%, respectively. However, like Persimmon, Taylor Wimpey and Barratt, SSE and Centrica are on my list of stocks to avoid.

I’m concerned by the determination of politicians to give energy consumers a better deal and a future in which regulators shrink utilities’ allowable returns to levels where shareholders are barely rewarded for equity risk. Indeed, fund manager Neil Woodford, who has billions of pounds under his management, is one institutional investor who has already withdrawn from the sector for precisely this reason. This, together with a highly competitive market (SSE and Centrica are continuing to lose customers to a plethora of smaller rivals), makes me wary of the outlook for these two stocks.

My maybes

Highest-yielder Evraz, in the industrial metals and mining sector, and financials Standard Life Aberdeen (asset management) and Direct Line (non-life insurance), may merit closer investigation. They have fans among some of my Foolish colleagues.

Rupert Hargreaves named Evraz as one of “3 FTSE 100 stocks that could jump 30% and yield 5%+.” Harvey Jones penned “I think the dirt-cheap Standard Life share price and its 10% yield is too exciting to ignore.” And Roland Head answered in the affirmative when asking himself, “8.7% yielder Direct Line Insurance Group is down nearly 15%, should I buy more?” For now, though, my attention will turn from Footsie dogs to festive turkeys!

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands and Standard Life Aberdeen. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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