High Yield Dividend and Momentum Portfolio for June

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Includes: CNP, ENB, FE, HCP, LLY, LO, MO, NI, PFE, PM, RAI, RRD
by: Scott's Investments

Once per month I run a high-yield dividend stock momentum screen and use the results to manage a hypothetical stock portfolio on Scott's Investments. The strategy did relatively well in 2010 and is one I continue to track because of its promise. In recent months I have also done a variation of this strategy with the Dividend Champions list in which I only search stocks that have had a history of raising dividends for 25-plus years.

The screen looks for high yielding high momentum stocks and last month's list is here. I screen the S&P 500 for stocks yielding greater than 4% and then rank them by six-month returns. There were 47 results on June 9th (as opposed to 43 last month) and per a previous article (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.

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 Friday June 10th, the strategy is selling Verizon Communications (NYSE:VZ) and Leggett & Platt (NYSE:LEG) and using the proceeds to purchase CenterPoint Energy (NYSE:CNP) and Dominion Resources (NYSE:D). Phillip Morris (NYSE:PM), Pfizer (NYSE:PFE) and Spectra Energy (NYSE:SE) have dropped off the screen results because they are yielding less than 4% due to share price appreciation. However, 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 2.06%.

Below are the top 10 high yield momentum stocks as of June 10th, however, as already noted PM, PFE and SE remain in this month's portfolio.

Data source: Finviz.

Ticker Company Industry Dividend Yield Performance (Half Year) Price
LO Lorillard, Inc. Cigarettes 5.12% 26.81% 101.66
FE FirstEnergy Corp. Electric Utilities 5.03% 26.04% 43.75
CNP CenterPoint Energy, Inc. Diversified Utilities 4.20% 23.17% 18.82
RAI Reynolds American Inc. Cigarettes 5.56% 21.59% 38.12
RRD R.R. Donnelley & Sons Company Business Services 5.24% 18.39% 19.83
NI NiSource Inc. Diversified Utilities 4.70% 17.94% 19.59
D Dominion Resources, Inc. Electric Utilities 4.11% 17.17% 47.98
HCN Health Care REIT Inc. REIT - Healthcare Facilities 5.59% 16.05% 51.13
MO Altria Group Inc. Cigarettes 5.54% 15.96% 27.46
LLY Eli Lilly & Co. Drug Manufacturers - Major 5.20% 12.90% 37.72
HCP HCP, Inc. REIT - Healthcare Facilities 5.33% 12.42% 36.02

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.