Dividend income funds have apparently seen record-breaking levels of investor cash flow their way so far this year. In the scramble for yield, it seems many are convinced that equities offer the least worst option – and if the excellent performances of our dividend GuruModels are anything to go by, they have been proved right. But after a year of rising prices, the very highest yielding UK strategies are coming under pressure while stocks that offer robust yields with the added promise of balance sheet strength are getting harder to find. With only so many homemade rocks to turn over, one solution for income investors seeking more options is to look to the foreign shores of Europe.
This time last year we began tracking an investing strategy that screens the market for companies offering a strong and relatively safe income stream with the potential to grow over time. It’s a model inspired from work by Andrew Lapthorne and Dylan Grice at Societe Generale’s Global Equity team, who in turn have built on the work of our favourite professor, Joseph Piotroski. While Grice has since departed to put his quant theories into practice as a fund manager in Switzerland, there has been no let up in the SocGen team’s quest for the best possible combination of quality and income.
A year on from introducing their Global Quality Income index, they recently reviewed the dividend landscape and came up with one or two surprising findings. Not least among them, in a climate where quality yielders have been sold off recently by profit-taking investors, are findings that Europe could be a honey pot for income seekers.
Rolling our own QI Screen
On Stockopedia, the Quality Income screen has been a huge success, outperforming the FTSE 100 by 23.2% over one year with an impressive 33.5% return (dividends excluded). Unlike less sophisticated income screens such as the Dogs of the Dow, QI shuns the very highest yielding stocks in favour of those in the more sustainable top eighth or ninth quintile. It does however have a minimum threshold of a 4% yield. Financial credibility is essential, meaning each stock must score at least a 7 against Joseph Piotroski’s nine-point F-Score of balance sheet strength and a failure to pass the Altman Z-Score of bankruptcy risk means instant rejection. The screen isn't an exact replica of…
