High Yield Momentum Stock Portfolio Update

by: Scott's Investments

Once per month I update a high yield dividend stock momentum portfolio on Scott's Investments. The portfolio is comprised of the highest yielding stocks in the S&P 500 with high price momentum.

The portfolio is a simple quantitative strategy and begins by screening the S&P 500 for stocks yielding greater than 4%. The results are then ranked by their 6 month returns. The top stocks are then added to a hypothetical portfolio and tracked publicly on Scott's Investments. This month there were 62 results, ten more than last month due in part to the recent equity market sell-off resulting in higher dividend yields.

Per a previous article, the highest momentum, high-yield stocks have historically out-performed lower yielding, lower momentum stocks. The screen is more of a trading strategy and less of a passive 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 one modification to the strategy to minimize turnover.

In order to limit turnover, 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 12 stocks in the screen.

The portfolio has turnover in two positions for November. Health Care REIT, Inc. (NYSE:HCN) was purchased in October and sold at a loss of 1.26%. AT&T (NYSE:T) was purchased in May and sold at a loss of 0.15%. While the portfolio tracks dividends as a whole, discussions of individual security returns exclude dividends.

The proceeds were used to purchase positions in Leggett & Platt, Incorporated (NYSE:LEG) and H&R Block, Inc. (NYSE:HRB). LEG currently yields 4.34% and has 6 month returns of 31.69%. HRB yields 4.5% and has 6 month returns of 24.96%.

The High Yield Momentum Portfolio was designed to be fully invested at all times regardless of market conditions. However, as part of a larger portfolio there may be additional steps an investor can take to reduce risk and diversify strategies. For example, the Ivy Portfolio uses a 10 month moving average to dictate an invested or cash position (signals are updated daily at Scott's Investments and many equity indices are currently very near their 10 month average). An investor could hedge long positions by shorting (or purchasing an inverse ETF) an equity market index such as the S&P 500 when it trades below a long-term moving average.

Below are the top 15 high yield momentum stocks as of November 11th. Keep in mind that only 10 stocks are held in the portfolio, the current holdings can be viewed on the right-hand side of Scott's Investments and in the second table below.

Data source: Finviz

Ticker Company Dividend Yield Performance (Half Year)
GCI Gannett Co., Inc. 4.68% 32.23%
LEG Leggett & Platt, Incorporated 4.34% 31.69%
FTR Frontier Communications Corporation 9.20% 30.63%
HRB H&R Block, Inc. 4.50% 24.96%
CVC Cablevision Systems Corporation 4.06% 22.13%
LLY Eli Lilly & Co. 4.13% 16.35%
AEP American Electric Power Co., Inc. 4.50% 11.41%
CINF Cincinnati Financial Corp. 4.17% 10.45%
PAYX Paychex, Inc. 4.10% 9.87%
HCP HCP, Inc. 4.53% 9.12%
VZ Verizon Communications Inc. 4.83% 7.51%
DTE DTE Energy Co. 4.19% 7.23%
GME GameStop Corp. 4.52% 7.17%
LMT Lockheed Martin Corporation 5.11% 6.92%
HCN Health Care REIT, Inc. 5.05% 6.85%
Click to enlarge

Current Holdings:

Position Shares Purchase Date Cost Basis Percentage Gain/Loss Excluding Dividends Current Yield
LEG 384 11/9/2012 $10,260.48 0.00% 4.34%
VZ 236 7/11/2012 $10,596.40 -5.03% 4.83%
CINF 312 2/10/2012 $10,748.40 13.50% 4.17%
FTR 2349 8/9/2012 $11,063.79 -7.64% 9.20%
LLY 230 9/10/2012 $10,699.60 2.04% 4.13%
HRB 579 11/9/2012 $10,288.83 0.00% 4.50%
HCP 231 9/10/2012 $10,690.68 -4.60% 4.53%
DTE 171 10/11/2012 $10,389.96 -2.58% 4.19%
GCI 656 9/10/2012 $10,692.80 4.97% 4.68%
AEP 246 9/10/2012 $10,673.94 -3.66% 4.50%
Click to enlarge

Since inception the portfolio is up 5.79% including dividends. Returns exclude commissions and taxes. Given the high turnover of the strategy, the results to this point are underwhelming. The chart below compares the returns of this strategy to SPDR S&P 500 ETF (NYSEARCA:SPY) and AOR, the iShares S&P Growth Allocation ETF:

Click to enlarge

Click to enlarge