High Yield Momentum Portfolio: December Update

Includes: CVC, DTE, STX, VZ
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 57 results, 5 less 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 December. Verizon (NYSE:VZ) was sold at a loss of 1.94% since its purchase on July 11th, 2012. DTE Energy (NYSE:DTE) was sold for a .64% gain and was purchased two months ago. While the portfolio tracks dividends as a whole, discussions of Individual security returns exclude dividends.

The proceeds were used to purchase positions in Cablevision Systems (NYSE:CVC) and Seagate Technology (NASDAQ:STX).

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 December 10th. 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. 4.48% 43.72%
FTR Frontier Communications Corporation 8.49% 42.30%
LEG Leggett & Platt, Incorporated 4.34% 32.89%
CVC Cablevision Systems Corporation 4.19% 26.28%
STX Seagate Technology PLC 5.26% 26.19%
HRB H&R Block, Inc. 4.34% 22.27%
LMT Lockheed Martin Corporation 4.98% 13.57%
CINF Cincinnati Financial Corp. 4.02% 12.94%
AEP American Electric Power Co., Inc. 4.33% 11.63%
HCP HCP, Inc. 4.41% 11.20%
COP ConocoPhillips 4.56% 9.77%
HCN Health Care REIT, Inc. 4.96% 9.34%
KMI Kinder Morgan, Inc. 4.28% 8.90%
WMB Williams Companies, Inc. 4.16% 8.44%
FII Federated Investors, Inc. 4.85% 8.26%

Current Holdings

Position Purchase Price Purchase Date Percentage Gain/Loss Excluding Dividends Current Yield
LEG 26.72 11/9/2012 -0.04% 4.34%
CVC 14.32 12/10/2012 0.00% 4.19%
CINF 34.45 2/10/2012 17.79% 4.02%
FTR 4.71 8/9/2012 0.00% 8.49%
LLY 46.52 9/10/2012 7.74% 3.91%
HRB 17.77 11/9/2012 3.83% 4.34%
HCP 46.28 9/10/2012 -1.97% 4.41%
STX 28.91 12/10/2012 0.00% 5.26%
GCI 16.3 9/10/2012 9.51% 4.48%
AEP 43.39 9/10/2012 -0.05% 4.33%

Since inception the portfolio is up 10.39% 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