As we continue to look for ideas for dividend bearing stocks, a Kapitall interview of Neil Hennessy, Portfolio Manager and Chief Investment Officer of The Hennessy Mutual Funds, was interesting. He said one of his investing strategies was to choose companies with price to sales ratios below 1.5.
to create a list that meets the following requirements:
- Price to Sales ratio below 1.5 (One dollar of sales in return for at least $1.50 in sales)
- Dividend yields between 3-7%
- Net institutional buying in the current quarter
- Market cap above $300 million
I am always interested in a blind filter to see how it performs. I think that $300M is pretty much the lowest you would ever want to go in looking for a dividend bearing stock, and all of these are going to be small cap stocks.
- Energy Transfer Equity, L.P. (NYSE:ETE): Midstream, intrastate, and interstate transportation and storage of natural gas. Market cap at $8.9B. Dividend yield at 6.27%.
- Cinemark Holdings Inc. (NYSE:CNK): Motion picture business. Market cap at $2.57B. Dividend yield at 3.75%.
- DCP Midstream Partners LP (NYSE:DPM): Processing, transporting, storing, and selling natural gas in the United States. Market cap at $1.83B. Dividend yield at 5.71%.
- UIL Holdings Corporation (NYSE:UIL): Operates in the energy sector in the United States. Market cap at $1.7B. Dividend yield at 5.16%.
- SUPERVALU Inc. (NYSE:SVU): Operates retail food stores in the United States. Market cap at $1.29B. Dividend yield at 5.76%. Net institutional purchases in the current quarter at 18.2M shares, which represents about 8.66% of the company's float of 210.07M shares.
- MDC Holdings Inc. (NYSE:MDC): Engages in homebuilding and financial services businesses in the United States. Market cap at $1.24B. Dividend yield at 3.87%.
- Genesis Energy LP (NYSE:GEL): Operates in the oil and gas industry in the Gulf Coast area of the United States. Market cap at $1.23B. Dividend yield at 5.78%.
- Spreadtrum Communications Inc. (NASDAQ:SPRD): Operates as a fabless semiconductor company for wireless communications and mobile television markets. Market cap at $606.34M. Dividend yield at 3.03%.
- Maiden Holdings, Ltd. (NASDAQ:MHLD): Provides non-catastrophe inland marine and property coverage reinsurance in the United States and Europe. Market cap at $595.09M. Dividend yield at 3.88%.
- FutureFuel Corp. (NYSE:FF): Specialty chemicals and bio-based products primarily in the United States. Market cap at $428.08M. Dividend yield at 3.86%.
- Hot Topic Inc. (NASDAQ:HOTT): Operates as a mall- and Web-based specialty retailer in the United States. Market cap at $417.01M. Dividend yield at 3.23%.
None of these are big companies, so there will be volatility. In addition, four of the selection are energy companies. In order for this not to be overly influenced by the energy sector, I will halve the amount of money invested in each of the energy companies. This means we get the benefits of diversifying into multiple companies without overloading the selection from the energy sector.
It will be interesting to measure them with our dividend bearing ETF portfolio:
|Asset||Fund in this portfolio|
|REAL ESTATE||(NYSEARCA:ICF) iShares Cohen & Steers Realty Majors|
|FIXED INCOME||(NYSEARCA:TIP) iShares Barclays TIPS Bond|
|Emerging Market||(NYSEARCA:VWO) Vanguard Emerging Markets Stock ETF|
|US EQUITY||(NYSEARCA:DVY) iShares Dow Jones Select Dividend Index|
|US EQUITY||(NYSEARCA:VIG) Vanguard Dividend Appreciation ETF|
|INTERNATIONAL EQUITY||(NYSEARCA:IDV) iShares Dow Jones Intl Select Div Idx|
|High Yield Bond||(NYSEARCA:HYG) iShares iBoxx $ High Yield Corporate Bd|
|INTERNATIONAL BONDS||(NYSEARCA:EMB) iShares JPMorgan USD Emerg Markets Bond|
- 11 Dividend Stocks That Meet Hedge Fund`s Requirement -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
|1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||2%||7%||71%||14%||117%||8%||59%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||5%||2%||14%||13%||102%||2%||7%|
|11 Dividend Stocks That Meet Hedge Fund`s Requirement||9%||9%||31%||21%||87%|
These are small cap stocks, and so we would expect the volatility to be high, and so it is. Even with a three year 21% return, the Sharpe ratio is lower than the more diversified and stable ETF portfolio even though it's three year returns are only 14%.
Three Month Chart One Year Chart Three Year Chart Five Year Chart
As I look at the returns graphically, I can see why a hedge fund might like this sort of performance; if you are watching carefully, perhaps you can get out and avoid some of the down spikes. Even though the long-term performance is reasonable, this is not a selection for me, as I don't know enough about the companies, and I don't like the volatility.
In a future article, I will review another strategy from Neil Hennessy that I think will likely be more stable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: 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.