10 Dividend Dogs from this top income strategy

UK companies have paid out £1 trillion in dividends over the last 16 years. At the current rate of growth, the second trillion will be paid out within 10 years.

There is no doubt that dividend income is a huge contributor to total stockmarket returns. But, as we saw in 2016, dividend stocks can be very sensitive to political and economic forces.

The state of dividends in 2016

High-yielding equities have become increasingly popular in recent years. Low interest rates and low bond yields have made sure that dividend-paying shares have been in constant demand.

Until recently, big, predictable, high-yielding defensives have been a particularly popular choice. But some of the so-called "bond proxies" in the consumer staples and utilities sectors have become more and more expensive to buy. Some now wonder whether they are poised for a period of underperformance.

Elsewhere in 2016, signs of an upturn in some commodity prices caused share prices in the oil and mining sectors to leap.

With so much mixed sentiment in the market, it's no surprise Dividend Dogs did so wellThis, of course, was great news for income hunters because these sectors are the traditional home of some of the best dividend payers in the market. Think companies like BP, Royal Dutch Shell, BHP Billiton and Rio Tinto.

The most important influence on dividends in 2016 was the UK's decision to leave the EU, however. In an instant, the vote for Brexit caused a meaningful devaluation of sterling and cast a shadow over the UK's economic outlook.

As a result, there was a surge of interest in commodity stocks and miners, and in defensive-like companies with broad international exposure.

But those small- and mid-cap companies that are more sensitive to the UK economy and face higher import prices came under the cosh. Without knowing exactly how these firms will respond to the changing outlook, investors toned down their enthusiasm for them.

With so much mixed sentiment in the market, it was perhaps no surprise that one of the best performing income strategies tracked by Stockopedia this year has been the Dividend Dogs of the FTSE.

Dividend Dogs have their day

Dividend Dogs is one of the most popular dividend strategies around, picking up the top 10 highest yielding stocks from the blue-chip FTSE 100 index. After a poor year in 2015, the strategy raced ahead in 2016 with a staggering 50% gain, before dividends.

A good part of the reason for that performance was that it had a high exposure to natural resources shares like BP and BHP Billiton, and it really rode the rally in those sectors.

Below is the current list of the top yielding Dividend Dogs along with details of their expected dividend cover next year and their price-earnings ratios.

One of the occasional problems with the Dividend Dogs strategy is that the highest yields in the market are often bunched together in just a few sectors. Currently, there is a reasonable spread of exposure between the top 10 stocks.

Leading the list is Capita, which issued a profit warning in September that caused its share price to fall and drove up the yield on those shares. Capita is a classic case of a potential dividend trap. High yields can often point to problems - so the question is whether Capita has the ability to recover any time soon.

On forecast valuations, it's the oil companies like BP and Shell that look the most expensive. Vodafone is another large-cap that is wrestling with problems in its business but may now be on the road to recovery.

Meanwhile, financial stocks like HSBC, Standard Life and Legal & General currently offer signs of stability and solid yields.

Looking ahead to 2017

Despite the huge political events of 2016, and their unpredictable impact on the economy, commentators are generally upbeat about the outlook for dividends next year.

There is no doubt that a new era of uncertainty will cause problems for some companies, but others will navigate around it.

With a number of stalwart dividend payers in the natural resources and finance sectors beginning to recover this year, it could be that the high yielding Dividend Dogs of the FTSE 100 are poised to stretch their legs again.

About Stockopedia

Interactive Investor's Stock Screening series is written by Ben Hobson ofStockopedia.com, the rules-based stockmarket investing website. You canclick here to read Richard Beddard's review of Stockopedia.com and learn more about the site.

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Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook"

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.