Smarter Way to Pick High Yield Stocks?

I was reading Charles Schwab Investing Insights (Volume 8, 2009) and came across a strategy for picking high-yield stocks. The article studied the 1500 largest stocks by market capitalization from 1990-2009 and divided yielding stocks into 4 quadrants. The highest yielding quadrant underperformed the preceding two quadrants. The highest yield group had 12-month returns of 10.04%, versus 10.73% for the next highest and 10.21% for the 3rd highest yield group. The lowest yield group returned 9.58% and stocks that paid no dividends returned 9.85%. In other words, the highest yield stocks did not equate to the highest return.

However, the Schwab study offered an alternative strategy for picking the likely winners among the highest yielding stocks. They ranked the highest yielding stocks by 6 month price momentum, divided them into 5 segments, and found that highest yield stocks with the highest 6 month price momentum outperformed a) all other momentum segments (in other words, those high yield stocks with lower price momentum) and b) the annual return of every quadrant mentioned in paragraph one.

In other words, by applying a 6 month price momentum screen to the highest yielding stocks among the largest 1500 stocks, an investor would have had superior returns from 1990-2009. The average 12 month return was 11.5% for the highest yield, highest 6 month price momentum stocks. The lower momentum highest yield stocks returned, starting with the lowest momentum stocks, 7%, 9.7%, 10%, and 10%.

The Schwab study defined the highest yielding group as historically having a yield of at least 1.5 times the average yield of the S&P 500. I used a dividend screen of 4% or greater to identify highest yielding stocks. Next, we can rank those stocks by 6 month return. Finally, I have screened for stocks in the S&P 500 to make the list more manageable for an individual investor. This gives us a list of 65 stocks as of today. If we pick the top 20% of this list based on 6 month returns, it gives us 13 stocks.

Below is the full list of stocks with a break after the top 13 stocks:

No disclosures.

Ticker	Company	Trend Analysis	Dividend Yield	Performance (Half Year)	Price
RRD	R.R. Donnelley & Sons Company	Here	5.14%	146.59%	20.22
MWV	MeadWestvaco Corporation	Here	4.27%	66.05%	21.57
VTR	Ventas Inc.	Here	5.53%	46.60%	37.06
GE	General Electric Co.	Here	5.34%	42.35%	15.36
PLD	ProLogis	Here	5.47%	40.82%	10.97
HCP	HCP, Inc.	Here	6.76%	40.36%	27.23
MAT	Mattel Inc.	Here	4.18%	38.61%	17.95
NI	Nisource Inc.	Here	6.84%	38.23%	13.45
TEG	Integrys Energy Group, Inc.	Here	7.78%	37.03%	34.97
PM	Philip Morris International, Inc.	Here	4.80%	36.92%	48.36
EQR	Equity Residential	Here	4.72%	36.22%	28.62
NYX	NYSE Euronext, Inc.	Here	4.39%	35.20%	27.31
LEG	Leggett & Platt, Incorporated	Here	5.69%	31.61%	18.28
	TOP 20% By Momentum
	The rest of the list:
AVB	Avalonbay Communities Inc.	Here	5.25%	30.62%	67.99
MTB	M&T Bank Corp.	Here	4.66%	30.46%	60.14
SLE	Sara Lee Corp.	Here	4.10%	29.78%	10.72
SE	Spectra Energy Corp.	Here	5.43%	27.56%	18.42
HCN	Health Care REIT Inc.	Here	6.57%	27.32%	41.38
TE	TECO Energy Inc.	Here	5.89%	26.54%	13.59
DTE	DTE Energy Co.	Here	6.23%	23.11%	34.04
MRK	Merck & Co. Inc.	Here	4.80%	22.77%	31.65
KMB	Kimberly-Clark Corporation	Here	4.08%	22.75%	58.87
LO	Lorillard, Inc.	Here	5.36%	22.55%	74.61
CTL	Centurytel, Inc.	Here	8.58%	22.45%	32.62
WIN	Windstream Corporation	Here	10.22%	21.34%	9.78
DD	EI DuPont de Nemours & Co.	Here	5.37%	20.85%	30.54
RAI	Reynolds American Inc.	Here	7.70%	19.97%	44.16
CNP	Centerpoint Energy Inc.	Here	6.22%	19.69%	12.22
POM	Pepco Holdings, Inc.	Here	7.53%	19.00%	14.34
PNW	Pinnacle West Capital Corp.	Here	6.63%	18.87%	31.68
AEP	American Electric Power Co., Inc.	Here	5.40%	18.86%	30.37
GPC	Genuine Parts Co.	Here	4.34%	17.05%	36.87
FE	FirstEnergy Corp.	Here	4.91%	16.58%	44.79
KFT	Kraft Foods Inc.	Here	4.47%	15.38%	25.95
HNZ	HJ Heinz Co.	Here	4.32%	15.18%	38.85
SCG	SCANA Corp.	Here	5.51%	14.74%	34.09
BMY	Bristol-Myers Squibb Co.	Here	5.57%	13.63%	22.26
D	Dominion Resources, Inc.	Here	5.23%	13.03%	33.49
COP	ConocoPhillips	Here	4.02%	12.80%	46.8
MO	Altria Group Inc.	Here	7.78%	12.20%	17.47
MCHP	Microchip Technology Inc.	Here	5.42%	12.11%	25
DUK	Duke Energy Corporation	Here	6.24%	11.94%	15.38
NU	Northeast Utilities	Here	4.12%	11.78%	23.06
PGN	Progress Energy Inc.	Here	6.50%	10.22%	38.17
PCG	PG & E Corp.	Here	4.20%	9.89%	40
AEE	Ameren Corporation	Here	6.28%	8.64%	24.52
GAS	Nicor Inc.	Here	5.25%	8.58%	35.44
XEL	Xcel Energy Inc.	Here	5.10%	8.47%	19.2
HCBK	Hudson City Bancorp, Inc.	Here	4.64%	7.76%	12.92
CINF	Cincinnati Financial Corp.	Here	6.19%	6.92%	25.51
ED	Consolidated Edison Inc.	Here	5.85%	5.99%	40.35
SO	Southern Company	Here	5.52%	5.07%	31.73
PAYX	Paychex Inc.	Here	4.42%	5.01%	28.06
PPL	PPL Corporation	Here	4.73%	3.99%	29.16
T	AT&T, Inc.	Here	6.18%	2.12%	26.52
FTR	Frontier Communications Corporation	Here	13.76%	1.82%	7.27
LLY	Eli Lilly & Co.	Here	6.03%	1.31%	32.51
EXC	Exelon Corp.	Here	4.38%	0.80%	47.98
PBI	Pitney Bowes Inc.	Here	6.05%	0.13%	23.82
PEG	Public Service Enterprise Group Inc.	Here	4.38%	-0.10%	30.35
SVU	SUPERVALU Inc.	Here	4.84%	-1.30%	14.47
PCL	Plum Creek Timber Co. Inc.	Here	5.70%	-1.80%	29.46
SUN	Sunoco Inc.	Here	4.42%	-2.90%	27.13
Q	Qwest Communications International Inc.	Here	8.96%	-5.05%	3.57
VZ	Verizon Communications Inc.	Here	6.36%	-6.09%	29.89

Comments

[GlobalTrekker:]

This is a well-done analysis based on Schwab's report, but overall I am really suspicious of this kind of research. It's very much data-mining and has no checks for survivor-bias, data adjustment, data quality, etc.. Essentially, the differences between segments are most likely too small to be statistically significant, and the data-crunching too marred by Schwab's non-rigorous methods. Once you had accurately adjusted the equities for all true distributions, mergers, delistings, etc. I think you'll find the results are more random-walk than anything else. If you really believe in this method, try it with the above stocks on paper for the next 6 months and see how it truly performs compared to the others. I will bet you big that the results will not be what you are predicting now.

Oct 05 04:59 AM

[anonymiser:]

Interesting, but......
If one chose a 1990 to 2007 time frame, did this analysis, and had bought accordingly, what would the results have been? How many of the indicated stocks would look like real dogs today?

Oct 05 05:25 AM

[Scott's Inv...:]

To the first 2 comments: 1) An analysis of yielding stocks from 1990-2006 was done by Credit Suisse papers.ssrn.com/sol3/p... which finds similar results that the highest yielding stocks are not the top performers, however, 2) a momentum affect exists among stocks and has been well-documented. I would suggest starting here for some research on the topic: www.cxoadvisory.com

GlobalTreker- 'data-crunching too marred by Schwab's non-rigorous methods.' Please elaborate - do you know something about this particular study we're not aware of? Have you read it? There are quite a few assumptions in the comment that I suspect is not based on actually reading the study.

Oct 05 09:09 AM

[Old Rick:]

Somehow, the philosophies of momentum investing and dividend investing seem a bit incongruous. As a dividend investor actually using dividends to support my retirement. I'm a lot more concerned about the financial strength and stability of the company and the stability of the dividend than I am by what Mr. Market has done with/to the stock in the last X number of days. I guess you could argue that proper fundamental analysis of say, PM several months ago, would have had me buying the stock at $37 yielding 6.1% than buying it now on a MO basis yielding 4.2%.

Oct 05 01:20 PM

[Old Rick:]

MOmentum basis that is, not an Altria (MO) basis (which looks pretty good right now too).

Oct 05 01:21 PM

[Scott's Inv...:]

Stay tuned for part 2 in the next couple of days, which will address payout ratio...

Oct 05 03:41 PM

[Rawnoctheidiot:]

I enjoy reading this sort of article if only for what they leave out. At the very least, trading costs. With all the studying they did they could have included the average of how many stocks had to be switched out of every six months.

In a taxable account I don't see how it could be worth the trouble. I would guess since the difference is so great between the top and bottom, 11.5% down to 7%, compared to the differences in the first study, there is a lot of switching going on. If 100% are switched over the year, that 11.5% turns into 8.625% in the 25% tax bracket. You would do better throwing darts and holding instead of trading imho.

Oct 06 01:09 AM

[Living4Divi...:]

Schwab's study was only 19 years. This is too short of a period to prove that any strategy works.

Also - as Globe Trekker said, we dont know if Schwab's study had fallen victim to data mining

On Oct 05 04:59 AM GlobalTrekker wrote:

> This is a well-done analysis based on Schwab's report, but overall
> I am really suspicious of this kind of research. It's very much
> data-mining and has no checks for survivor-bias, data adjustment,
> data quality, etc.. Essentially, the differences between segments
> are most likely too small to be statistically significant, and the
> data-crunching too marred by Schwab's non-rigorous methods. Once
> you had accurately adjusted the equities for all true distributions,
> mergers, delistings, etc. I think you'll find the results are more
> random-walk than anything else. If you really believe in this method,
> try it with the above stocks on paper for the next 6 months and see
> how it truly performs compared to the others. I will bet you big
> that the results will not be what you are predicting now.

Oct 08 07:00 AM