The screen looks for high yielding high momentum stocks and last month's list is
. I screen the S&P 500 (
) for stocks yielding greater than 4% and then rank them by six-month returns. There were 64 results on September 12, and
(see below for explanation), the highest momentum, high-yield stocks have historically been the best performing so I have listed the top 10 stocks below.
The article in reference was a study done by Charles Schwab, which examined the 1,500 largest stocks by market capitalization from 1990-2009 and divided yielding stocks into four quadrants. It ranked the highest yielding stocks by six month price momentum, divided them into five segments, and found that highest yield stocks with the highest six 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.
I was eager to look at this month's results. The recent market sell-off has increased the dividend yield on most stocks as share prices drop. Thus, we have more total stocks on this month's preliminary list then we have seen in previous months. Also, the intermediate trend (6 month returns) can help identify stocks that have held up better during periods of turmoil. The market sell-off could continue, so investors should be patient and ease into any long position. It is clear from this month's list that Utility stocks have been holding up well relative to the rest of the market.
For nimble and patient investors, the recent sell-off presents potential opportunities to purchase dividend stocks at a discount. This strategy is but one approach for identifying these potential stocks. 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 September 12th the strategy is selling Philip Morris (PM
) and Dominion Resources (D
) and using the proceeds to purchase Souther Company (SO
) and Ameren Corporation (AEE
). Keep in mind this is a hypothetical and for tracking purposes it is fully invested at all times and does not use stop losses. SO currently yields 4.57% and has 6 month returns of 12.57%. AEE yields 5.27% and has 6 month returns of 9.86%. I frequently detail additional timing and hedging strategies. One potential strategy an income investor could employ would be to sell covered calls against some or all of the positions. For example, Lorillard (LO
), which is currently up over 13% in the portfolio (excluding dividends), has multiple covered call strategies. Using Born To Sell
, the October 115 call traded on September 12th for $2.13 and the October 120 last traded for $.95. They have a 31.8% and 30.12% implied volatility, respectively. The December 130 call last traded for $1.30 and an implied volatility of 32.86%.
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 six-month performance would otherwise lag the top 10-11 stocks in the screen.
This strategy is one of several I track with real-time results on the right hand column of Scott's Investments. Year to date the portfolio is up 1.01% (returns exclude commissions, taxes and slippage).
Below are the top 10 high yield momentum stocks as of September 12th.
Data source: Finviz.
No current positions
|Ticker ||Company ||Industry ||Dividend Yield ||Payout Ratio ||Performance (Half Year) |
|LO ||Lorillard, Inc. ||Cigarettes ||4.76% ||66.45% ||41.77% |
|CNP ||CenterPoint Energy, Inc. ||Diversified Utilities ||4.04% ||64.87% ||26.64% |
|FE ||FirstEnergy Corp. ||Electric Utilities ||5.09% ||122.78% ||15.72% |
|NI ||NiSource Inc. ||Diversified Utilities ||4.36% ||102.53% ||15.36% |
|BMY ||Bristol-Myers Squibb Company ||Drug Manufacturers - Major ||4.48% ||85.05% ||15.09% |
|ED ||Consolidated Edison Inc. ||Diversified Utilities ||4.30% ||65.25% ||14.35% |
|PPL ||PPL Corporation ||Electric Utilities ||5.00% ||57.99% ||13.65% |
|RAI ||Reynolds American Inc. ||Cigarettes ||5.74% ||86.56% ||13.19% |
|SO ||Southern Company ||Electric Utilities ||4.57% ||77.99% ||12.57% |
|AEE ||Ameren Corporation ||Diversified Utilities ||5.27% ||394.34% ||9.86% |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.