The recent introduction of more than 16,500 new stocks to Stockopedia’s international coverage is a hugely exciting development for the investing strategies that we track. The new data takes us into Developed Asia, India, Canada, Australia and New Zealand. In doing so, it completely transforms the breadth and depth of choice when it comes to screening for investment opportunities. After all, these are some of the most popular and exciting markets in the world. One strategy that I’ve been really keen to test out with the expanded coverage is Quality Income - a dividend checklist that’s been crying out for some more international flavour.
Why quality matters
High yield shares are naturally popular with investors looking for an income that can be reinvested and compounded - or just spent. There are strategies to suit all tastes, whether you’re after consistent dividend growth or the very highest forecast yields.
But while high yields (where the dividend payout is high relative to the company’s share price) can be eye-catching, evidence shows that stocks on the very highest yields tend to disappoint. They can be a sign that the market has lost confidence in a company and expects the payout to be pared back. In the worst cases, it may be that the business is in serious trouble and the dividend ends up being cancelled.
A classic case of this happening was at Glencore, the commodities group. A year ago (April 2015) the stock was on a forecast yield of 4.0% but its price slipped over the following six months and the forecast yield shot up to nearer 10%. In the end, inclement market conditions forced Glencore to ditch its final payout for 2015 and the interim payout for 2016. Those forecast yields turned out to be a red herring !
Quality Income is an antidote to this kind of ‘yield trap’. It looks for large, high quality companies in strong financial shape, which offer good - but not excessive - yields. It’s an approach that has strong support among quantitative finance professionals. Investment bank Societe Generale runs its own quality income index, and a similar method is also used in the FTSE RAFI Equity Income index, created by Research Affiliates.
Modelling quality income
In essence, Quality Income hunts for reasonable yields, sound balance sheet health and good business economics. Stockopedia’s interpretation of the rules requires companies…
