It really is as innocent as it sounds. Cat Stevens said about it, "It was actually true, that song! Not far from here I found a little dog, one of those sausage dogs, tied to a post outside Foyles. No one was claiming it, so I took the dog home. The song was about him."
thanks to all of you though, it came on my ipod this afternoon and I actually listened to it three times in a row to see if I had missed the hidden meaning.