Looking For Quality, Total Return, And Dividends In An ETF: Another Comparative Analysis

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Includes: DGRO, DHS, DIV, JNJ, MSFT, PEY, QUAL, SCHV, SDOG, SPHD, SPLV, USMV, XOM
by: Investing Doc
Summary

In a previous article, I examined the total return performance of several dividend / quality-focused ETFs. I obviously didn't get everybody's favorite.

In this article, I take the same metrics as before and apply them to another set of ETFs, this time focused on dividend yield, quality, and low volatility.

Which ones performed best? The answer may (or may not) surprise you.

In a previous article, I examined the total return performance of several dividend / quality-focused ETFs, grading them on a composite scale looking at total returns, holding quality, and dividend growth. There was some friendly grousing that I didn't include everybody's favorite ETF in the mix, and so here I undertake the same experiment again, this time with a different selection of 10 stocks:

Ticker

Name

Expense Ratio

Focus

Historical Turnover

Yield

Current PE of Holdings

Historical PE of Holdings

Beta

Sharpe Ratio

Quality Rating

DGRO

iShares Core Dividend Growth

0.12%

Morningstar US Dividend Growth Index

47.00%

2.35%

20.53

17.25

1.02

0.458

3.64

DHS

WisdomTree High Dividend ETF

0.38%

FTSE High Dividend Yield Index

20.00%

3.11%

20.96

15.875

0.78

0.502

-0.38

SDOG

ALPS Sector Dividend Dogs ETF

0.40%

S-Network Sector Dividend Dogs Total Return Index

55.00%

3.31%

17.44

15.55

0.92

1.347

0.71

USMV

iShares Edge MSCI Min Vol USA

0.15%

MSCI USA Minimum Volatility Index

23.00%

1.97%

24.84

18.35

0.72

1.484

8.29

SPLV

PowerShares S&P 500 Low Volatility ETF

0.25%

S&P 500 Low Volatility Index

65.00%

2.00%

22.81

17.7

0.73

1.187

6.17

DIV

Global X SuperDividend™ US ETF

0.45%

INDXX SuperDividend U.S. Low Volatility Index

42.51%

7.42%

21.84

14.9

0.63

0.897

-0.92

SCHV

Schwab US Large-Cap Value ETF™

0.06%

Dow Jones U.S. Large-Cap Value Total Stock Market Index

15.00%

2.64%

20.29

15.25

0.97

0.882

0.85

QUAL

iShares Edge MSCI USA Quality Factor

0.15%

MSCI USA Sector Neutral Quality Index

26.00%

1.84%

20.81

17.9

1.09

5.691

3.84

PEY

PowerShares High Yld Eq Div Achiev™ ETF

0.54%

NASDAQ US Dividend Achievers 50 Index

N/A

3.17%

20.36

16.1

0.82

0.287

0.83

SPHD

PowerShares S&P 500® High Div Low VolETF

0.30%

S&P 500 Low Volatility High Dividend Index

48.00%

3.32%

20.41

17.225

0.65

1.569

0.26

Several of these ETFs have a slightly different bent than the ones previously examined, focusing on yield and value, for example, or focusing on low volatility. How did these stack up against each other?

10) WisdomTree High Dividend ETF (NYSEARCA:DHS):

Characteristic

Rank

Expense Ratio

7th

Yield

5th

Risk Adjusted Return Rating

8th

Holding Quality Rating

9th

Current Valuation Rating

10th

Dividend Growth Rating

10th

An expensive fund that sacrifices quality in the search for yield, the WisdomTree High Dividend ETF's value tilt can't save it from its high volatility and poor risk-adjusted returns. The fund tracks the FTSE High Dividend Yield Index, selecting the top 30% of stocks by forward dividend yield, as calculated based upon market prices at the time of each semiannual rebalancing. Each qualifying holding is weighted by the total cash payout of dividends forecast to be paid for the year, which helps balance the significant value orientation of the portfolio with a focus on larger cap firms that are theoretically better equipped to maintain dividend policies. Idiosyncratic risk is reduced with sector caps that top out at 25%, and the high number of firms included within the fund (over 400) helps with diversification. That said, any screen for higher yield inevitably dredges up firms in various degrees of financial distress, and DHS is no exception; its dividend reliability was second-worst of this group (worsted only by DIV's) and its scores on holding quality, earnings reliability, and returns on equity were all on the lower side within this group.

Source: data from FTSE.com, calculations by author

Despite the orientation to larger cap firms, the fund's value tilt also predisposes it to higher volatility, making it a riskier option for investors looking for steady returns. Even with this volatility, it has lagged the S&P 500 since its inception, and the fund's risk-adjusted returns lag those of its peers by significant margins (Sharpe ratio 0.50). At the time of this writing, the fund's holdings were almost uniformly overvalued, with the average firm trading 2% above analyst consensus targets, and a composite PE of 21 compared to 16 historically. Combined with a high expense ratio, the fund's poor returns and holding quality severely limit its attractiveness, and it might be best used to add some diversification and income as a satellite holding within a broader portfolio-though prospective investors would do well to wait for a better entry point.

9) Global X SuperDividend US ETF (NYSEARCA:DIV):

Characteristic

Rank

Expense Ratio

9th

Yield

1st

Risk Adjusted Return Rating

7th

Holding Quality Rating

10th

Current Valuation Rating

8th

Dividend Growth Rating

8th

Without question, the Global X SuperDividend US ETF is about yield. And what a yield it is; at 7.42%, it sits about 400 basis points over its closest competitor in this analysis. But in its quest for yield, DIV sacrifices holding quality, dividend growth, and total return, and ranks near the bottom in all three of these categories. The fund tracks the INDXX SuperDividend U.S. Low Volatility Index, which seeks out the 50 highest-yielding U.S. dividend-paying securities, including MLPs and REITs, after applying a screen for lower volatility. These stocks are equally weighted within the portfolio, with sector caps at 25%, and no single stock greater than 2% of the portfolio. Despite these caps, the fund does have some higher sector allocations than expected (financials and utilities make up over 40% of the fund at present, with almost nothing dedicated to healthcare), and the fund may be guilty of making outsize bets from time to time.

The fund's screen for lower volatility companies grants the fund a beta of only 0.63, and its standard deviation hovers around a reasonably low 9.7%. But while the fund's holdings may exhibit low price volatility, earnings and dividend volatility don't necessarily follow suit, especially with firms that may be offering higher yields to compensate for other risks. DIV's average market cap is the smallest of all the ETFs compared here, which predisposes it to select companies without sustainable competitive advantages. Median ROEs of its holdings are a mere 11-12 generally, with significant amounts of year-to-year volatility. EPS CAGR for these companies has also been unimpressive, hovering around -2%.

This results in a dividend reliability rating for DIV that is the lowest of this bunch, with almost 10% of its holdings having had to suspend or reduce dividend payouts over the most recent 10 years, over 50% of them having unsustainable trailing payout ratios, and with some 10% of them with a history of periods of unprofitability. The fund's current holdings have exhibited the second-lowest dividend growth profile of this group at a mere 3.6% CAGR. Perhaps consequently, the index has only marginally outperformed the broader market since inception, and with the fund's unattractive expense ratio (0.45%), DIV has actually managed to underperform the S&P 500 on a total return basis.

Source: Yahoo! Finance

Despite the aforementioned quality warts, stocks in the fund aren't trading at much of a discount, especially compared to the holdings of the other funds here. Given the lack of a performance track record and the high expense ratio, this fund can't be recommended for most investors and ought to be considered for only highly risk-tolerant current income-seekers who aren't as focused on capital appreciation.

8) PowerShares High Yield Equity Dividend Achievers ETF (NASDAQ:PEY):

Characteristic

Rank

Expense Ratio

10th

Yield

4th

Risk Adjusted Return Rating

9th

Holding Quality Rating

6th

Current Valuation Rating

7th

Dividend Growth Rating

7th

This expensive ETF tracks the NASDAQ U.S. Dividend Achievers Index, which, on the face of it, has a certain appeal. The index comprises companies that have increased their cash dividend payments each year for the at least the previous 10 years, with a market capitalization of over $10 billion. Companies that are able to continuously raise their dividends typically have defensible competitive positions (or "economic moats"), which themselves are generally characterized by high, steady returns on equity. As one would expect, PEY's holdings rank highest in terms of trailing dividend reliability and raises, and some of the lowest rates of unprofitability. A focus on such companies ought to suggest steady excess returns, and yet - despite these positive attributes - both PEY and the Dividend Achievers Index have underperformed over the past several years.

Source: Invesco

Relative to the S&P 500, the fund and its index have underperformed by over 150 basis points per year (in terms of total return), with the fund also held back in no small part by its fairly high expense ratio (0.54%). What gives? For one, the fund focuses on the highest yielding firms, which, despite their track record of dividend raises, may be trading with lower prices (and higher forward yields) due to any number of adverse reasons. This leads to periods of higher volatility: the fund significantly underperformed the broader U.S. Select Dividend Index during the 2008 financial crisis and again in the drawdown in 2011. Such volatility weighs upon the fund's risk-adjusted returns (Sharpe ratio a mere 0.28).

Source: Invesco

Furthermore, the fund's value tilt is paired with a tilt towards smaller firms, with an average market cap far below that of better-performing ETFs. Smaller firms may offer better growth opportunities in general, but may lack sustainable advantages and do not exhibit the steady, robust returns on equity seen by larger firms. In addition, smaller firms that are paying out dividends may see less opportunity for internal reinvestment, suggesting a limited runway for further growth. Indeed, PEY's holdings have a median ROE and yearly standard deviation that fall in the bottom half of this list, and median EPS CAGR in its holdings is a far-from-impressive 3%. This may account for the fund's surprising lack of dividend growth as well:

Source: Yahoo! Finance

For these reasons, PEY is probably best suited for risk-tolerant investors looking for current income-but with better options out there, and with the fund trading somewhat above fair value estimates, it wouldn't be the first place I would look.

7) iShares Core Dividend Growth ETF (NYSEARCA:DGRO):

Characteristic

Rank

Expense Ratio

2nd

Yield

7th

Risk Adjusted Return Rating

10th

Holding Quality Rating

4th

Current Valuation Rating

3rd

Dividend Growth Rating

9th

A poor dividend growth history and a disappointing total return track record keep DGRO from rising further in the rankings. The fund tracks the Morningstar US Dividend Growth Index, which looks for stocks (excluding REITs) with an uninterrupted 5-year track record of increasing dividends, positive earnings forecast, forward payout ratio < 75%, and ideally a healthy balance sheet. The index automatically lops off the top 10% yielding stocks (on a trailing basis), which helps to exclude at least some companies whose dividends might be unsustainable or which the market deems likely to be cut. The remaining stocks are weighted by total cash dividends paid (dividends per share times shares outstanding times free float factor); as with other funds, such a weighting system tilts the fund towards larger companies with high dividend payouts. Companies already in the index that do not increase their dividend payment but return money to shareholders instead through share repurchases are allowed to remain in the index.

All this sounds well and good, and, in fact, DGRO scores reasonably well on quality metrics. The twin screens for uninterrupted dividend growth with lower payout ratios ensures that the vast majority of DGRO's holdings are both profitable and growing. Current holdings have historical returns on equity are in a healthy 15-16 range for the most part, with only a moderate amount of year-to-year variability. The index itself has outperformed the S&P 500 by about 100-150 basis points yearly with essentially the same amount of volatility.

Source: Google Finance

What holds the fund back is its history of dividend growth-or rather, its lack thereof. Despite its holdings having excellent track records of dividend growth (9% CAGR, on average), as well as above-average reliability (fewer than 5% of its holdings have histories of cutting dividends over the past 10 years) the fund itself has not grown its dividend since inception. Thus, while mildly superior capital appreciation has helped the fund beat the broader market, its lack of dividend growth since inception (a mere 2 years, at this point) weighs on its total return, and so it trails the other funds in this analysis. Given time, I would expect the fund's methodology, quality screens, and broad reach (over 400 stocks) as well as razor-thin expense ratio to win out-there just isn't data to support such a claim yet. For now, it bears watching, and with its holdings generally trading just slightly below fair value estimates, the fund may be worth considering for risk-tolerant investors.

6) PowerShares S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD):

Characteristic

Rank

Expense Ratio

6th

Yield

2nd

Risk Adjusted Return Rating

5th

Holding Quality Rating

8th

Current Valuation Rating

4th

Dividend Growth Rating

5th

In many ways, SPHD looks a lot like DIV: sacrificing quality in favor of yield. Where SPHD manages to win out is in its risk-adjusted return. SPHD tracks the S&P 500 Low Volatility High Dividend Index, which takes a universe of some 2000 stocks and ranks them by trailing 12-month dividend yield. The top 75 of these are selected, with each GICS sector topping out at 10 total selections. These are then re-ranked according to trailing 1-year volatility, with the 25 most volatile of these being discarded; the remaining 50 form the index.

The appeal of a minimum volatility portfolio strategy has been well-studied and its advantages well-known at this point, but the strategy nevertheless continues to work well for investors by generating superior risk-adjusted returns. Essentially, the theory goes, with most investors gravitating towards higher volatility stocks in a search for higher returns, prices of such stocks become expensive-conversely improving the risk-reward profile of lower volatility stocks. Such a strategy may be prone to underperforming in all-out bull markets, but a focus on low volatility should help to reduce sensitivity to larger market perturbations.

As with other funds, SPHD's orientation towards yield gives it a value tilt at the cost of quality; a fair number of the firms it includes are underwater in terms of payout ratio, and its current holdings show a slightly negative EPS CAGR over the trailing 10-year period. Yet this value tilt hasn't hurt total returns, which - given a fund distribution CAGR hovering around 1% - has been almost entirely due to capital appreciation.

At least part of this outperformance can be explained by some of the more appealing aspects of a low-volatility strategy: improved risk-adjusted returns as measured by the Sharpe ratio (a solid 1.57 for SPHD) and improved performance in "risk-off" situations. Certainly this has been the case for SPHD: by combining yield and value seeking with low volatility, the resulting outperformance has been dramatic over the past several months:

And yet, despite these positives, I can't bring myself to cheer for SPHD with gusto. Its score on total return is driven in considerable part by only a few months' worth of outperformance; it is worth noting that for long stretches prior to last year, the fund actually underperformed the S&P 500 in total return, consistent with the low quality characteristics of its holdings. This may have something to do with the fact that the low volatility of its holdings does not necessarily equate to low risk-but with investors largely flocking to stocks perceived as safe (that is, low volatility offerings), the fund has outperformed. Such results probably wouldn't be expected to be replicated in a more "risk-on" setting, or should the fund's underlying holdings begin to show earnings results consistent with their history: while SPHD's constituents have a median ROE of 14 or so, year-to-year volatility has been high, on the scale of about 18%, belying the basis for their low volatility. Should the market begin to grade the fund's holdings more critically, SPHD might be expected to fall back to earth.

5) Schwab U.S. Large-Cap Value ETF (NYSEARCA:SCHV):

Characteristic

Rank

Expense Ratio

1st

Yield

6th

Risk Adjusted Return Rating

6th

Holding Quality Rating

5th

Current Valuation Rating

6th

Dividend Growth Rating

3rd

Despite lagging somewhat in terms of total return, SCHV's dividend growth rate, holding quality, and razor-thin expense ratio are enough to keep it competitive. The fund's lower returns are explained somewhat by its focus on slower-growing companies: its biggest names include such giants as Microsoft (NASDAQ:MSFT), Exxon Mobil (NYSE:XOM), and Johnson & Johnson (NYSE:JNJ), all companies whose headiest growth days are likely behind them. The fund is based upon the Dow Jones U.S. Large-Cap Value Total Stock Market Index, which grades a universe of 750 stocks upon 6 criteria: forward price/earnings, earnings projections, price/book, dividend yield, trailing revenue, and historical earnings growth. After ranking stocks according to this grade, the index adds stocks sequentially, weighting each by market capitalization, until the index represents about half of the assets in the broader Large Cap Total Stock Market index.

The value orientation of the portfolio is limited by a couple factors. The focus on larger stocks and market-cap weighting means that the fund focuses on well-known names, which are less likely to be mispriced by the market. Secondly, the fund allows a stock's grade to fall 15% for up to 2 consecutive annual reviews before removing it from the index; while this limits turnover, it does mean that in a stocks that have lost their "value" characteristics blunt the value of others in the portfolio. The fund's broad reach (over 300 stocks), cap-weighting, and limited turnover means-for better or for worse-it generally mimics the market, with a beta of 0.97. While this limits exposure to excessively cheap stocks, putting the brakes on risk, it comes at the cost of sacrificing the potential for outperformance.

Source: Yahoo! Finance

But at least in terms of dividends, SCHV does quite well. The fund's distributions have grown at a solid 13% CAGR, which, in addition to the fund's reasonable dividend yield, have provided the vast bulk of the fund's 100 basis point outperformance. Though this is hardly enough to recommend the fund on a total return basis in comparison to its competitors, the fund's low cost, high degree of diversification, and dividend growth characteristics make it suitable for consideration as a core holding for income-oriented investors.

4) ALPS Sector Dividend Dogs ETF (NYSEARCA:SDOG):

Characteristic

Rank

Expense Ratio

8th

Yield

3rd

Risk Adjusted Return Rating

2nd

Holding Quality Rating

7th

Current Valuation Rating

1st

Dividend Growth Rating

4th

This fund's ratings should really come as no surprise. SDOG tracks the S-Network Sector Dividend Dogs Total Return Index, which is really just a fancy way of saying that it takes the S&P 500 index, divides it into the 10 GICS sectors, and selects the 5 highest-yielding securities, giving each sector and stock an equal weighting. The strategy is, of course, based upon the well-traveled "Dogs of the Dow" strategy, which is predicated on the notion that large cap (or "blue-chip") firms generally don't change their dividend policies in response to market noise. The theory essentially goes that the higher the yield, the lower the valuation, and the higher the potential upside once the yield normalizes.

The theory has its risks, however. Companies may not change their dividend payouts according to market noise, but the market often sets a yield in response to what it sees as deteriorating company conditions. SDOG's holdings are no exception to this rule; some 32% of its holdings have payout ratios > 1; the median ROE of its holdings can vary wildly year-to-year, suggesting a tendency towards high cyclicality; and its median debt/equity ratio is higher-than-average. In reaching for yield, the strategy is clearly willing to sacrifice quality. This shows up in the discrepancy between the fund holdings' historical dividend growth rates and the fund's distribution CAGR: while the former is a healthy 8.5%, the latter is a measly 2.3%, suggesting that by selecting stocks who have fallen on hard times, the fund focuses on companies whose ability to raise their dividends is extremely limited-or at least more limited than it had been before.

Source: S-Net Global Indexes

Nevertheless, the strategy has its merits as well, the most notable of which is simply that it appears to work. Since inception, SDOG has outperformed the S&P 500 by a whopping 500 basis points per year on a total return basis, and this outperformance holds up when adjusting for both standard deviation (a somewhat high 11.85%) and beta (a reasonable 0.92). Its high expense ratio (0.40%) cuts into these returns somewhat, but nevertheless the fund would appear to be a reasonable adjunctive holding for risk-tolerant investors looking for total return, without a focus on a growing dividend.

3) PowerShares S&P 500 Low Volatility ETF (NYSEARCA:SPLV):

Characteristic

Rank

Expense Ratio

5th

Yield

8th

Risk Adjusted Return Rating

3rd

Holding Quality Rating

2nd

Current Valuation Rating

5th

Dividend Growth Rating

6th

This low-volatility offering from PowerShares offers many of the advantages of SPHD, while boasting an improved holding quality profile. Median ROE standard deviation for its holdings was a mere 8.2% (compared with 18% for SPHD), and periods of unprofitability were significantly fewer (2.8% versus 4%). The fund tracks the S&P 500 Low Volatility Index, which holds the 100 lowest-volatility stocks in the S&P 500 and weights them in inverse proportion to their volatility (so that the lowest-volatility stocks receive the highest weighting). In contrast to SPHD and the higher-rated USMV, SPLV does not employ systemic guards to limit risk correlation or sector overweighting, and while its quarterly rebalancing and reconstitution helps keep it nimble (and permits it to target the lowest volatility portfolio possible), it does lead to the highest turnover ratio of the group (65%, compared to 48% for SPHD and 23% for USMV).

While SPLV's total excess return in relation to the S&P 500 was a good 100 basis points higher than that of USMV, its distribution growth also pales a bit in comparison to USMV (5% versus 17%), which dampens my enthusiasm for it somewhat. But the fund's total return profile remains highly compelling, with its outperformance having persisted basically since the fund's inception, and its performance during the 2011 downturn highly encouraging. All in all, the fund is probably best suited for risk-averse investors who are willing to pay for the privilege with both a slightly higher expense ratio and a three-fold increase in turnover.

2) iShares Edge MSCI Minimum Volatility USA ETF (BATS:USMV):

Characteristic

Rank

Expense Ratio

3rd

Yield

9th

Risk Adjusted Return Rating

4th

Holding Quality Rating

1st

Current Valuation Rating

9th

Dividend Growth Rating

2nd

USMV leverages a low-volatility strategy in combination with a focus on high quality, and with its appealing blend of total return, distribution growth, and holding quality, the only major knocks on it are the middling yield (1.97%) and current overvaluation. In comparison to SPHD, USMV doesn't sacrifice quality for yield, as its holdings exhibit a median ROE in the 15-16 range with only mild year-to-year variability. Debt-to-equity ratios are almost uniformly less than 0.5 (86% of holdings), and while payout ratios have grown, periods of unprofitability are amongst the least frequent in this group. The fund follows the MSCI USA Minimum Volatility Index, which uses a Barra Optimizer to set limits on constituent and sector weighting, turnover ratio, and sensitivity to risk factors. Stocks are selected from a universe of low-volatility stocks, with a minimum weighting of 0.05% and a maximum weighting of 1.5%. With about 170 holdings as of this writing, this methodology helps maintain diversification while limiting turnover (capped at 10% for each semiannual reconstruction), though it does limit how well the fund can capture a portfolio with the absolute lowest level of volatility.

Like SPHD, much of USMV's outperformance has come over the past several months. So why does USMV rate higher? Simply because its holdings are of higher quality: while both USMV and SPHD have reasonably close ratings on debt ratios, payout ratios, and periods of unprofitability, USMV wins out with much steadier returns on equity (ROE year-to-year standard deviation of only 9% versus 19%). In other words, whereas both funds target low volatility, only USMV manages to do so with less performance risk, and its ability to preserve capital in adverse conditions would probably be better in turn. While the fund's yield isn't appealing at this point, and its shares are relatively expensive, this is certainly a fund worth considering as a core holding, particularly should prices fall from here.

1) iShares Edge MSCI USA Quality Factor (BATS:QUAL):

Characteristic

Rank

Expense Ratio

3rd

Yield

10th

Risk Adjusted Return Rating

1st

Holding Quality Rating

3rd

Current Valuation Rating

2nd

Dividend Growth Rating

1st

Even though it's somewhat surprising to see that an ETF named for quality doesn't rank first in the quality metric, QUAL still manages to win this little competition by a country mile. The fund ranks first in terms of risk-adjusted returns and dividend growth, and its slim expense ratio means that investors don't need to pay through the nose for the privilege. The fund's index, the MSCI USA Sector Neutral Quality Index, targets both large- and mid-cap companies that are screened for all the things typically associated with quality companies: high returns on equity, low debt/capital, and low volatility of year-to-year EPS growth. After assigning stocks in the MSCI USA index a composite score based upon these metrics, the fund selects the top-performing ones from each sector, weighting the sectors based upon the larger index weightings every time the fund is rebalanced, with adjustments made based upon sector composite quality scores. As suggested by its name, the index attempts to be sector neutral, which blunts QUAL's quality orientation somewhat (and which may explain the fund's quality ranking), but helps ensure broad diversification.

While the fund's high quality and dividend growth have helped earn it top marks in terms of risk-adjusted total returns, there are some caveats. Unlike the rest of the funds here, the fund does not target yield (thus its last-place ranking in this aspect) or lower price ratios, and as such lacks any tools to account for valuation. While this probably helps promote lower volatility, it is also probable that investors buying the fund may find themselves buying the most expensive stocks on the market, depending on the stage of the market cycle.

Nevertheless, the fund's obvious quality tilt, high degree of diversification, strong dividend growth record, and very reasonable cost make it a highly attractive option for a core holding for investors with a long time horizon and moderate tolerance for risk. Its valuation at the time of this writing is also amongst the most reasonable of this bunch, with stocks trading at about a 7% discount to analyst consensus estimates, and P/E ratios only some 16% above historical norms.

Conclusion:

Of the funds examined here, the top-ranking ones - QUAL, USMV, and SPLV, for example - all were oriented significantly more towards quality than yield, especially in comparison with the lowest ranking ones (DHS, DIV, and PEY). Their subsequent outperformance in total return is probably instructive: the market often sets higher yields for a reason, and chasing those yields without a strong reason is often a recipe for poor returns. It could also be argued that the underperformance of yield-oriented portfolios may have to do with the risks of a value strategy in general, but I would argue that this conflation of yield and value would be incorrect. What determines the sustainability and value of a stock's yield is the company's quality and prospects. And while there is no single formula for quality, a company's pedigree-as suggested by its historical returns on equity, volatility of earnings growth, and its freedom from debt-is often telling. Strategies that focus on quality may not always outperform, but odds are certainly in their favor. In my next article, I hope to re-rank the top performers from each of these articles, and examine correlations between total returns, dividend growth, and quality.

Disclosure: I am/we are long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.