How to hunt for top quality high yield shares

Wednesday, Jun 10 2015 by
15
How to hunt for top quality high yield shares

In the search for dividend income there are strategies to suit all tastes - whether you’re after long-term payout growth or the very highest forecast yields. In terms of price returns, dividend strategies tracked by Stockopedia held up pretty well in last year’s flat market conditions. Most generated positive single-figure returns and the yields on offer generally improved. But this year things have changed dramatically. Some of these income strategies are racing ahead, and the top performer so far is Quality Income - up an eye-catching 17%. So what is a quality income share, and how can you find one?

557863aae10caQuality_Income.png

Being realistic about yields

Quality Income looks for large, high quality companies in strong financial shape, which offer good - but not excessive - yields.

It’s an approach inspired by the quant global equity team at investment bank Societe Generale. They developed a quality income index back in 2012 after finding that that chasing the very highest forecast yields tends to end in disappointment. It turned out that the very highest yields were often attached to companies that were likely to have to cut their dividends in the near future. These yields are often fantasy and the shares become known as dividend traps. Very recent research by advisory firm Research Affiliates arrives at much the same conclusion.

Examples abound, but one high profile dividend yield trap last year was Tesco. Twelve months ago Tesco’s forecast yield was a whisker off 5%. But a collapse in earnings forced a swingeing dividend cut last summer. It left the yield on the shares limping along at just over half a percent.

What Tesco showed was that a sparkling dividend history and high yield is no gauge of the future. What’s more important is sound balance sheet health and good business economics. As such, Stockopedia’s Quality Income strategy requires stocks to have a modest forecast yield of more than 4%.

Looking for quality economics

To get a picture of financial strength, Quality Income uses American finance professor Joseph Piotroski’s F-Score. Companies must pass more than seven out of a possible nine of Piotroski's accounting tests to qualify for the strategy. The checklist is backward looking insomuch that it looks for improving trends in financial statements. These touch on a company’s profitability, debt,…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

LSE Price
5648p
Change
-1.0%
Mkt Cap (£m)
7,602
P/E (fwd)
12.3
Yield (fwd)
3.0

Persimmon Plc is a United Kingdom-based holding company. The Company is engaged in house building within the United Kingdom. The Company trades under the brand names of Persimmon Homes, Charles Church, Westbury Partnerships and Space4. The Company offers a range of homes from studio apartments to family homes in approximately 400 locations under Persimmon Homes brand. The Company builds homes under Charles Church brand in a range of locations. The Company focuses on affordable social housing and sells these homes under Westbury Partnerships. The Space4 business operates an off-site manufacturing plant producing timber frames, insulated wall panels and roof cassettes as a fabric first solution to the construction of new homes. more »

LSE Price
1846.5p
Change
-0.8%
Mkt Cap (£m)
5,931
P/E (fwd)
6.8
Yield (fwd)
12.7

Taylor Wimpey plc is a residential developer. The Company operates at a local level from 24 regional businesses across the United Kingdom, and it has operations in Spain. Its segments include Housing United Kingdom and Housing Spain. The Housing United Kingdom segment includes North, Central and South West, and London and South East (including Central London) divisions. The North division covers its East and West Scotland, North East, North Yorkshire, Yorkshire, North West, Manchester, North Midlands, Midlands and West Midlands regional businesses. The Central and South West Division covers its East Midlands, South Midlands, East Anglia, Oxfordshire, South Wales, Bristol, Southern Counties and Exeter regional businesses. The London and South East Division includes Central London and covers its East London, North Thames, South East, South Thames and West London regional businesses. It builds homes in various locations of Costa Blanca, Costa del Sol and the island of Mallorca. more »

LSE Price
144.9p
Change
-0.9%
Mkt Cap (£m)
4,795
P/E (fwd)
7.1
Yield (fwd)
12.5



  Is LON:NXT fundamentally strong or weak? Find out More »


4 Comments on this Article show/hide all

herbie47 10th Jun '15 1 of 4

Seems a pretty sound selection. Some of the housebuilders have been paying out special dividends. The only one I hold which maybe worth considering is Air Partner (LON:AIP), its highly ranked and div. is over 6%. Will the Kier rights issue have any effect on the dividend?

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Chipspa 11th Jun '15 2 of 4
1

Ben,

The figures for Reed are incorrect and it shouldn't be listed in your article (also the Stockopedia numbers all need revising). This is probably due to the Dutch / English combination.

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Ben Hobson 11th Jun '15 3 of 4

In reply to post #100933

Thanks Chipspa - noted, we're on the case.

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anilwaichal 12th Jul '15 4 of 4

Please do let me know if you also have a coverage for indian stocks... Thanks

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