High Yield Stock Momentum Portfolio

Includes: AOR, CTL, DTE, MO, SPY, WELL
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 52 results, one less than last month.

Per a previous article, the highest momentum, high-yield stocks have historically outperformed 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 October. Altria Group (NYSE:MO) was sold for a gain of 2.89% and a purchase date of May 11th. CenturyLink (NYSE:CTL) was sold at a loss of 7.9% and an original purchase date of August 9th. While the portfolio tracks dividends as a whole, discussions of individual security returns exclude dividends.

The proceeds were used to purchase positions in Health Care REIT (HCN) and DTE Energy (NYSE:DTE). HCN currently yields 4.98% and has 6 month returns of 14.43%. DTE yields 4.08% with 6 month returns of 14.3%.

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 October 11th. 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 Trend Dividend Yield Performance (Half Year) 200-Day SMA
VZ Verizon Communications Inc. Trend 4.56% 24.04% 11.47%
FTR Frontier Communications Corporation Trend 8.23% 23.98% 18.41%
T AT&T, Inc. Trend 4.85% 21.60% 10.39%
GCI Gannett Co., Inc. Trend 4.51% 21.42% 22.74%
AEP American Electric Power Co., Inc. Trend 4.25% 21.41% 11.15%
HCP HCP, Inc. Trend 4.42% 18.98% 8.26%
CINF Cincinnati Financial Corp. Trend 4.22% 16.62% 9.52%
HCN Health Care REIT, Inc. Trend 4.98% 14.43% 6.36%
DTE DTE Energy Co. Trend 4.08% 14.30% 8.59%
LEG Leggett & Platt, Incorporated Trend 4.68% 14.02% 12.81%
CMS CMS Energy Corp. Trend 4.02% 13.07% 6.25%
PPL PPL Corporation Trend 4.89% 12.91% 6.52%
PEG Public Service Enterprise Group Inc. Trend 4.34% 12.68% 6.10%
SCG SCANA Corp. Trend 4.08% 11.85% 6.01%
ETR Entergy Corporation Trend 4.70% 10.50% 5.31%

Current Holdings:

Position Shares Purchase Price Purchase Date Cost Basis Current Value
HCN 175 59.39 10/11/2012 $10,393.25 $10,393.25
VZ 236 44.9 7/11/2012 $10,596.40 $10,667.20
CINF 312 34.45 2/10/2012 $10,748.40 $12,061.92
FTR 2349 4.71 8/9/2012 $11,063.79 $11,416.14
LLY 230 46.52 9/10/2012 $10,699.60 $11,638.00
T 295 33.59 5/11/2012 $9,909.05 $10,696.70
HCP 231 46.28 9/10/2012 $10,690.68 $10,457.37
DTE 171 60.76 10/11/2012 $10,389.96 $10,389.96
GCI 656 16.3 9/10/2012 $10,692.80 $11,637.44
AEP 246 43.39 9/10/2012 $10,673.94 $10,883.04

Since inception, the portfolio is up 10.29% 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 (NYSEARCA:AOR), the iShares S&P Growth Allocation ETF:

Disclosures: None