High Yield Momentum Portfolio, August Update

Includes: CTL, DTE, FE, FTR, KIM, LO
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 49 results, six less than last month.

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 10-11 stocks in the screen. .

The portfolio has turnover in three positions for August. Kimco Realty (NYSE:KIM), FirstEnergy (NYSE:FE), and Lorillard (NYSE:LO) are all being sold. FE lost 6.47% in its brief one month stint in the portfolio. KIM was closed at a 9.72% gain in 4 months and LO for a .69% gain in eight months. Individual security returns exclude dividends.

The proceeds were used to purchase positions in DTE Energy (NYSE:DTE), CenturyLink (NYSE:CTL), and Frontier Communications (NYSE:FTR). DTE currently yields 4.12%, CTL 6.82%, and FTR 8.49%.

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). 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 August 9th. 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.

Since inception the portfolio is up 9.27% including dividends. Returns exclude commissions, taxes, and are hypothetical:

Data source: Finviz

Ticker Company Trend Dividend Yield Performance (Half Year) Price
T AT&T, Inc. Analysis 4.73% 27.46% 37.23
MO Altria Group Inc. Analysis 4.72% 21.61% 34.72
FTR Frontier Communications Corporation Analysis 8.49% 19.85% 4.71
VZ Verizon Communications Inc. Analysis 4.51% 19.81% 44.34
FII Federated Investors, Inc. Analysis 4.69% 18.20% 20.46
CTL CenturyLink, Inc. Analysis 6.82% 16.17% 42.54
RAI Reynolds American Inc. Analysis 5.20% 16.03% 45.39
CINF Cincinnati Financial Corp. Analysis 4.22% 13.87% 38.18
DTE DTE Energy Co. Analysis 4.12% 13.28% 60.22
TEG Integrys Energy Group, Inc. Analysis 4.63% 13.25% 58.8
PCG PG&E Corp. Analysis 4.01% 12.27% 45.39
AEE Ameren Corporation Analysis 4.65% 11.89% 34.43
AEP American Electric Power Co., Inc. Analysis 4.33% 11.52% 43.37
HCP HCP, Inc. Analysis 4.39% 11.28% 45.57
CMS CMS Energy Corp. Analysis 4.05% 11.26% 23.72

Current positions including the new updates:

Position Shares Purchase Price Purchase Date Cost Basis Current Value Percentage Gain/Loss Excluding Dividends
MO 312 31.79 5/11/2012 $9,918.48 $10,832.64 9.22%
VZ 236 44.9 7/11/2012 $10,596.40 $10,464.24 -1.25%
CINF 312 34.45 2/10/2012 $10,748.40 $11,912.16 10.83%
FTR 2349 4.71 8/9/2012 $11,063.79 $11,063.79 0.00%
FII 529 20.89 3/12/2012 $11,050.81 $10,823.34 -2.06%
T 295 33.59 5/11/2012 $9,909.05 $10,982.85 10.84%
RAI 231 45.7 7/11/2012 $10,556.70 $10,485.09 -0.68%
CTL 260 42.54 8/9/2012 $11,060.40 $11,060.40 0.00%
PCG 233 45.06 6/11/2012 $10,498.98 $10,575.87 0.73%
DTE 183 60.22 8/9/2012 $11,020.26 $11,020.26 0.00%

Disclosures: None