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Once per month I run a high-yield dividend stock momentum screen and use the results to manage a hypothetical stock portfolio on Scott's Investments. The strategy did relatively well in 2010 and is one I continue to track because of its promise. In recent months I have also done a variation of this strategy with the Dividend Champions list in which I only search stocks that have had a history of raising dividends for 25+ years.

The screen looks for high yielding high momentum stocks and last month's list is here. I screen the S&P 500 for stocks yielding greater than 4% and then rank them by 6 month returns. There were 43 results on May 11th and per a previous article (see below for explanation), the highest momentum, high yield stocks have historically been the best performing so I have listed the top 10 stocks.

The article in reference was a study done by Charles Schwab, which examined the 1500 largest stocks by market capitalization from 1990-2009 and divided yielding stocks into 4 quadrants. It 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 the other yield quadrants.

As I have previously mentioned, the screen is more of a trading strategy and less of an income strategy, although the dividends do play an essential component in the overall returns. Thus, turnover could be high and the strategy is not for everyone but I have added a modification to the strategy to minimize turnover (see below).

For Thursday May 12th, the strategy is selling PBI (Pitney Bowes), CINF (Cincinatti Financial) and T (AT&T) and using the proceeds to purchase LEG (Leggett & Platt), FE (FirstEnergy), and NI (NiSource). PM (Phillip Morris), PFE (Pfizer), and SE (Spectra Energy) have dropped off the screen results because they are yielding less than 4% due to share price appreciation. However, in an attempt to limit turnover in the portfolio, stocks with yields that have fallen below 4% due to share price appreciation will remain in the portfolio. Stocks will only be sold when yield falls below 4% due to dividend cuts or when the 6 month performance lags the top 10-11 stocks.

This strategy is one of several I track for free on the right hand column of my site. Below are the top 10 high yield momentum stocks as of May 11th, however, as already noted PM, PFE, and SE remain in this month's portfolio.

Data source: Finviz

Ticker Company Industry Dividend Yield Payout Ratio Performance (Half Year) 200-Day SMA
LEG Leggett & Platt, Incorporated Home Furnishings & Fixtures
4.16% 88.09% 31.21% 18.01%
LO Lorillard, Inc. Cigarettes
4.77% 65.00% 26.83% 32.96%
FE FirstEnergy Corp. Electric Utilities 5.16% 107.64% 21.15% 16.43%
RRD R.R. Donnelley & Sons Company Business Services 5.08% 105.97% 20.06% 18.71%
NI NiSource Inc. Diversified Utilities 4.52% 106.23% 19.23% 15.87%
RAI Reynolds American Inc. Cigarettes
5.60% 80.88% 18.20% 20.00%
CNP CenterPoint Energy, Inc. Diversified Utilities 4.13% 69.65% 17.96% 20.40%
VZ Verizon Communications Inc. Telecom Services - Domestic
5.23% 153.53% 15.82% 11.65%
DTE DTE Energy Co. Electric Utilities 4.52% 64.64% 14.96% 12.41%
CMS CMS Energy Corp. Diversified Utilities
4.16% 43.91% 13.88% 10.93%

Source: High Yield Dividend Stock Portfolio for May