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Harris Roen
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Harris Roen is a financial writer with a passion for understanding the economic activity of our interconnected world. His previous experience of over 15 years as a professional portfolio manager helps him ground-truth the hype through independent research and analysis, providing valuable... More
My company:
Swiftwood Press LLC
My blog:
Roen Financial Report
  • Green Dividend Yield Portfolio 0 comments
    Feb 27, 2014 1:08 PM

    There is a new and growing interest in the world of alternative energy investing, the search for high-quality dividend yield among green investments. To this end, the Roen Financial Report has created a Green Dividend Yield Portfolio, a select group of high-yield alternative energy stocks. Together, this selection of companies can produce a steady stream of income for the alternative energy investor.

    A New Source for Dividend Yield

    (click to enlarge)

    The Green Dividend Yield Portfolio is a collection of high-yield stocks that are in the alternative energy business. Companies that fall in the "sweet-spot" of dividend yield are included, which I consider to be between 3.5% and 7.0% yield. Anything lower and the yield is not meaningful enough to be of interest, anything higher and the risks are just too great. By having a range of yields from a variety of alternative energy stocks in this sweet spot, a significant yield can be achieved with reduced risk to stock price fluctuation. Subscribers to the Roen Financial Report get access to a list of all companies in the Green Dividend Yield Portfolio along with their ranks, dividend quality rating, exclusive company reports and monthly updates.

    The 15 companies currently in the Green Dividend Yield Portfolio have yields ranging from 3.5% to 6.2%. The average yield of the Green Dividend Yield Portfolio is 4.4%, which is a better than going all the way out to the 30 year U.S.Treaury. Even for lower investment grade corporate bonds (A rated), an investor would need to go to 10 years to get an equivalent yield.

    Ranked Dividend Yield Stocks

    Alternative energy companies in the Green Dividend Yield Portfolio are evaluated on many criteria important in determining the quality of dividend yield that a company puts out. These include dividend growth, earnings per share, free cash flow, return on equity and yield to debt risk. Companies are then compared to each other and given a dividend quality rank of 1 to 5, with 1 being the highest. This ranking gives dividend yield investors a simple yet powerful way to gauge the likelihood that a stock will be able to offer consistent or growing yields into the future.

    Dividend Yield Quality

    (click to enlarge)

    An example of how the concept of yield quality applies is clearly shown in the chart at right. The graph shows the correlation between the quality of yield, as determined by the Roen Financial Report, to the amount of dividend yield that a company is able to pay out. The theory is that the more risk the investor is willing to take on, the higher yield a company is willing to pay.

    The top 25 yielding alternative energy companies that the Roen Financial Report tracks are shown in the graph. Stocks determined to have higher quality yield are on the left, and those with lower quality yield are on the right. Though it is not a perfect fit, the stocks do graph along a clear trend line. A statistical way to determine the validity of a trend line is to look at its R2 value. This trend line has an R2 value of 0.4, which implies a significant correlation.

    For many investors, owning a diversified basket of high-yield stocks is a very good strategy as part of a well-balanced portfolio. As a word of caution, though, there are dangers to weighting a portfolio too heavily in high dividend yield stocks. This is especially true in a rising interest rate environment, so be aware of the risks. Having said that, owning a collection of these high-yield alternative energy stocks can be a very attractive way to add income to a green investor's portfolio.

    Disclosure: I am long PW.

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