Dividend paying stocks can be a hugely attractive option for investors seeking to cushion their portfolios from market volatility – yet selecting income-generating shares comes with risks. While companies with frothy current yields may prove an immediate temptation, applying some additional metrics to limit downside risk can help investors taking the plunge to sleep at night.
For more than 50 years Geraldine Weiss has been widely regarded as one of the investment community’s most astute dividend hunters. The now retired editor of the US dividend newsletter Investment Quality Trends (http://www.iqtrends.com), Weiss developed a formula for identifying companies with strong dividend track records that are attractively valued in the market.
Weiss, of course, is not alone in formulating methods to select dividend stocks. Last week we considered another strategy known as Dogs of the FTSE 100 - a technique that calls on investors to pick out the 10 highest dividend yielding stocks in the index, invest in each one and then tuck the portfolio away for one year. In the same way, Weiss’s strategy looks for high yielding stocks that are apparently mis-priced – but her approach is much more demanding, requiring ongoing review and additional criteria. You can read more about it here.
At its heart, the technique looks for quality and value. It uses the dividend yield of a stock (derived by dividing the dividend per share by the stock price) as the critical measure of its valuation. If the yield is high it may signal a buying opportunity, if it the yield is low or drifting lower then that could be an indication to sell. Each company also needs to have a good quality track record and pass an additional set of robust criteria to prove it.
Weiss given the PRO treatment
Using Stockopedia Premium we have designed a Geraldine Weiss screen to get as close as possible to her criteria given the limitations of our UK based data set. Weiss liked her companies to have a 25 year dividend history, known in the US as “Dividend Aristocrats” but unfortunately, in the UK, these companies are as rare as hen’s teeth and the equivalent UK index covers just five years (known as Dividend Achievers), so we’ve relaxed this criterion and one or two others that are more US market specific.
As a…
Your dividend darlings report.
I am sad to say so, but there is something seriously wrong here. This article is not to Stockopedia's usual high standard.
First, how on Earth can you list Smith & Nephew as one of only 3 "dividend darlings" in most of the market and the only one in the Footsie 100? List the whole Footsie index in Sharescope, then double click on the yield column and you will see that S&N is ranked at 79 out of 100. Of the 21 below S&N, 9 pay no dividend at all. By dividend yield, S&N is a dog and not a darling!
I have my own system for finding the real winners. I base it on a system which listsshares by 7 year periods, 5 historic and 2 forecast. I value 20 different facts (ie interest paid, Director buying / selling, institutions holding stock etc), forecasts (ie eps and dividend estimates for the next 2 years), and historic plus forward ratios (gearing, price to book for tangible assets, cash flow exceeding eps, historic profits, eps, eps growth, dividends and dividend growth). I rate each in one of 5 ways; superb, good, poor, bad or no comment.
The elite businesses are then judged whether they qualify for my top classification, GTR, Growth Throughout Recession. To qualify, I look for growth in normalised pretax profits, earnings per share and dividends, all of these and others in every year, plus a minimum current dividend yield of 4% plus good cover in the last year. That is 21 tests over 7 years with the additional 2 relating to dividends. If a share fails on one test only out of 23, the stock is not considered for GTR. Equivalent to a perfect 10 out of 10 in Strictly Come Dancing.
I have records going back to 1997, the oldest included records back to 1992, and there are several GTR stocks that feature in all my past years research. Tesco for example.
This is a big job, I tend to do it once a year, and the last one took me 6 days over Christmas 2011.
Mrs. Weiss has muych less stringent tests than me, but over a longer period. She accepts poor years, I do not tolerate them. You have used her methods to find 3, including the dividend dog above.
I found 31 GTR businesses in December 2010 (some have been rejected since, hard times like these do sort out the over optimistic!).
MadDutch.
I am not willing to divulge more of my method at this time.
If someone would like me to help them, I am available for employment.
