Stocks have paid a heavy price for the economic turmoil that has ravaged London markets during the second half of this year but it hasn’t all been bad news. A direct consequence of depressed market caps is that those companies that continue to pay dividends look all the more attractive. Indeed, for investors chasing income, the conditions have provided an ideal hunting ground for buying into some of the best dividend payers in the market – but how do you find them?
Screening for high yielding stocks is nothing new; in the early 1990s Michael O’Higgins and John Downes popularised the approach in their book Beating the Dow. Their Dogs of the Dow technique stripped away conventional metrics such as EPS growth and PE ratios and focused simply on who was paying what. The idea was that by backing a mechanically selected basket of stalwart income generators, investors could insulate themselves from the vagaries of the market and still make a profit.
The technique involved taking the 30 stocks that make up the Dow Jones industrial average, filtering them for the 10 highest dividend yields and then investing an equal sum in each stock. The appeal of this approach is its simplicity – you simply take a company’s current annual dividend per share and divide it by the stock price. In terms of housekeeping, O’Higgins and Downes urged that the 10-strong portfolio be revised once a year based on an updated list of high yielding stocks.
Rising dividends
With market volatility providing fewer and fewer opportunities for all but the bravest investors, a dividend screen – in this case the Dogs of the Footsie – offers an intriguing option. Scrutinising large, mature and relatively safe companies means investors can put less emphasis on market reaction and sentiment and focus more on finding attractively priced dividend payers. The screen theoretically offers a conservative option that produces a list of well financed companies that have long histories of weathering economic turmoil.
The technique has added resonance at a time when market conditions are weak but dividend levels are rising. According to Capita Registrars, the rolling historic yield for the FTSE 100 (UKX) for the four quarters up to the end of Q2 2011 was 3.4%. The forecast for the whole of 2011 is 3.6%. With a list defined using Stockopedia Premium, the top…
I've been thinking an interesting thought about the Z Score. There's no doubt that Quantitative Portfolio Managers are using algorithmic trading programs to harvest risk premia from low P/B stocks using metrics like the Z Score to minimise risk. If that's the case then the increased crowding in these trades will arbitrage away the excess returns over time.
There's a good case for more forensic analysts to spend their time solely in the 10-20% of stocks that are failing Z-Score / M-Score type tests to figure out where the 'Type II' errors are. Its a more difficult task, but the rewards could be extremely handsome for those that get them right.
I remember you wrote about BAE in the summer - still holding?
http://www.ukvalueinvestor.com/2011/08/bae-systems-its-time-to-get-defensive.html/
