Ten High Scoring Dreman Stocks with Low-Price Dividend Ratios

One of the hardest things to do as an investor is go against the grain. Being a contrarian by investing in stocks that no one else wants to touch with a ten-foot pole is difficult, especially in markets like this. But most good value investors, including Warren Buffett, David Dreman, John Neff and others, use strategies to uncover value where no one else wants to look. The Dreman strategy, in particular, has a deep bias for unloved, out-of-favor stocks.

To identify those types of companies, the approach uses four price-focused variables: Price-Earnings Ratio, Price-Cash Flow Ratio, Price-Book Ratio and Price-Dividend Ratio. For a stock to even be considered by my Dreman strategy, it needs to meet at least two of these valuation tests (in addition to a host of other criteria).

The following two paragraphs are excerpted from my new book, The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies, in which I talk about the Price-Dividend Ratio criteria:

The final way Dreman looked for stocks whose fundamentals were strong compared to their stock prices—i.e. those that were contrarian picks—was by looking at the price/dividend ratio. As with the other three contrarian indicators, our Dreman-based model looks for stocks in the bottom 20 percent of the market in terms of P/D ratio, since that’s what Dreman used in his book. (Looked at another way, the yield—the dollar amount of dividends for the last four quarters divided by the current share price—should be in the top 20 percent.)

Dreman conducted studies from 1970 to 1996 that showed stocks with P/D ratios in the bottom 20 percent of the market had an average annual return of 16.1 percent versus 14.9 percent for the market. Dreman was cautious about investing on the basis of this criterion, as it is mainly for income-seeking investors, who are better off investing in stocks that pass this criterion rather than investing in bonds. For investors with different objectives, this is a very useful criterion that should be used in conjunction with Dreman’s other criteria. We use it in our model in conjunction with the three other contrarian indicators.

Below, I have listed a few stocks that currently score highly using my overall Dreman approach and also have particularly low Price-Dividend Ratios.

click to enlarge

*all of these stocks have a Price-Dividend ratio in the bottom 20% of the market (below 11.3) at the current time.

Disclosure: At the time of publication, John Reese and his private clients at Validea Capital were long GMR, WIN and BRP.

Comments

[Pat Shuff:]

DWS Dreman Value Income Edge Fund (DHG) is a closed end fund that IPO'd in '07 at $20, now trades at $4, an 80% loss, similar to any fund with Dreman in the name. He doubled down into Fannie Mae common and preferrred until Fannie was a 7% position in DHG at the time of its government takeover and total loss to the fund. That is reckless and irresponsible.

finance.yahoo.com/look...

The author is a contestant in the current Strategy Lab.
Strategy Lab is MSN Money's stock-picking challenge.
He is down 45% in the last six months, behind the other contestants by a gaping margin.

articles.moneycentral....

The Dreman brand of contrarian investing has been catastrophically out of synch and out of favor for the last two years. I am sorry to have ever heard of David Dreman and his previous track record.

DHG is a leveraged combination of dividend paying equities, high yield bonds and a hedge type short strategy. The equities cratered, the bonds evaporated and the shorts appreciated in share price.

Feb 05 10:51 AM

[Richandre:]

If your goal is to sell books, then it is understandable to sweep the fact that Dreman has driven his investors to financial ruin under the rug.

Feb 10 11:20 AM

[John Reese:]

Taking a "contrarian" point of view, maybe now is the time to start looking at these types of out-of-favor stocks.

I agree, a deep value, contrarian approach has lagged the market over the last two years (I don't use leverage so the DHG example is not apples to apples with my investment portfolios) but that doesn't mean it won't be on of the top strategies for the next five years.

The article was simply trying to provide some insight on one criteria in Dreman's strategy that I thought readers may find interesting.

Feb 18 06:24 PM