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Dan Caplinger of the Motley Fool comes up with an interesting filter for stock selection. In the current market, dividend growth is back in fashion over pure stock price increase. It is likely that profits will continue to benefit from a drive for efficiency and cost cutting as we navigate these choppy waters. Even technology companies, eternal holdouts from paying dividends, offer payouts to shareholders In addition, companies offering increased dividends see their stock rise after the announcement.

Based on this, Dan looked for large-cap companies that kept dividends constant for at least five years. In addition, he selected companies that earned at least twice as much as they're currently paying in dividends. Here are seven of the stocks that passed both tests:

Stock

Current Yield

Payout Ratio

Global Payments (NYSE:GPN) 0.2% 3.1%
Cooper Cos. (NYSE:COO) 0.1% 1.6%
Hess (NYSE:HES) 0.7% 4.9%
Southwest Airlines (NYSE:LUV) 0.2% 2.6%
RadioShack (NYSE:RSH) 2% 16.3%
Tyson Foods (NYSE:TSN) 0.9% 6.9%
Anadarko Petroleum (NYSE:APC) 0.5% 21.3%

Source: Capital IQ; Yahoo! Finance.

This is an interesting filter for those looking for long term strength mixed with dividends and we will compare this with our benchmark set of dividend bearing ETFs.

The benchmark ETFs are:

Asset Fund in this portfolio
REAL ESTATE ICF (iShares Cohen & Steers Realty Majors,
CASH CASH
FIXED INCOME TIP (iShares Barclays TIPS Bond,
Emerging Market VWO (Vanguard Emerging Markets Stock ETF,
US EQUITY DVY (iShares Dow Jones Select Dividend Index,
US EQUITY VIG (Vanguard Dividend Appreciation ETF,
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx,
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd,
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond,

Portfolio Performance Comparison

Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate 9% 81% 11% 85% 10% 69%
Retirement Income ETFs Strategic Asset Allocation Moderate 11% 76% 5% 22% 4% 16%
7 Stocks Overdue for a Dividend Hike 29% 119% -0% -2% 5% 12%

In the short term, the returns have been good but, over the long term, both the returns and the Sharpe ratio are at the bottom of the pile. There is strong potential in these companies but that clearly isn't the whole story and there is too much volatility in this portfolio.

Three Month Chart
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One Year Chart
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Three Year Chart
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Five Year Chart
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Full details

I like the theory. I like the fact that this introduces equities that are new and different. I don't like the returns. This is a filter that is worth watching to see if dividends are increased and the returns pop but I am not prepared to risk it.

For now, I'm sticking with the diversified set of ETFs

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.0 I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 7 Stocks Overdue For A Dividend Hike