High Yield Investing
Investing UniverseThe main universe for high yield investing is the one of safe companies with solid financials.
1) O'Shaughnessy'sCornerstone Value strategy that invests in the highest Dividend Yielding stocks among the Market Leaders has a correlation of 0.92 with the Dogs Of the Dow. From 1952 and 1996, Cornerstone Value returned an average annual return of 16.7% (standard deviation 17.3%) while the Dogs Of the Dow returned 16.9% (standard deviation 18.4%): basically the 2 strategies are about the same. So you may wonder: "Why bother buying High Dividend Stocks outside the Dow if they return about the same?". The answer lies in the Dividend Yield: expanding your investing universe outside the Dow will include companies with higher Yield. At time of writing (end 2005), the average dividend yield for the 10 highest Dow yielding stocks is 4.6%; expanding the universe to the 10 highest yielding S&P500 stocks gives a yield of 7.7%. So, if Dividends is a major criterion in your investing - and it is for income investors - then you should expand your horizon beyond the Dow Jones Industrial Average. 2) Another Investing Universe worth of interest if you're an Income Investor is that of Preferred Stocks. Stock Screeners unfortunately do not provide screening for preferred stocks. The best source of info is QuantumOnline: you can access the tables with ranking possibilities with a free registration. Preferred Stocks are Fixed Income investment, however many of them qualify for the same preferred Tax treatment as ordinary stocks: Quantum Online allows to easily screen for those ones. Primary Theme Go back to TopThe Primary Theme is Value Investing through a High Dividend yield.Income investors typically use a threshold setting a minimum Yield, it can be:
Secondary theme Go back to TopQuality is often used to increase the robustness of a High Yield Investment Strategy. Quality criteria includes low Debt or good Credit Ratings (hardly available in stock screeners, use stock ratings instead) and sufficient Cash Flow to cover the Dividends.The latter usually translates into Cash Flow > N*Dividend (with 1 ≤ N ≤ 1.2). Now, many screeners do not have Cash Flow or Dividend as screening criteria. You can manipulate the above formula so that it becomes (Price/Cash-Flow) / (Dividend/Price) <1/N, or simply (Price/Cash-Flow)/(Dividend Yield) < 0.8 or <1. Price/Cash-Flow and Dividend Yield are readily available in stock screeners. This is how it looks like using MSN Deluxe Stock Screener that allows you to build your own screening criterion:  If your Investing Universe does not have a built-in Quality criterion (for instance a Stock Rating focusing on Quality/financial strength or a special index membership), then add a quality theme in your screening. Ranking Go back to TopDividend Yield is the main ranking parameter. Income Investors will stick to this criterion.Caution: High Dividend stocks may be concentrated in the same industry/sector and a portfolio may suffer "sector concentration". Screening relative to industry/sector can be used. Industries with high yield usually include: Utilities, REITs, Financial, Healthcare...(Note: Dividends from REITs do not qualify for preferred Tax Treatment). Value Investors may be interested in another Ranking possibility, namely the Shareholder Yield: Shareholder Yield: Since Dividends are taxed less favorably than Capital Gains (not true anymore since 2003), some companies prefer to buy back shares rather than paying a Dividend. Shares Buyback increases the Earning Per Share because there are fewer shares outstanding: this should subsequently be followed by an increase in the stock's price. The result is that instead of a Dividend, you get a Capital Gain, which are treated differently by the Tax law. Shares Buyback is a kind of Dividend Distribution and some investors argue that the Dogs Of the Dow strategy should be modified to take this into account. In the latest edition of What Works On Wall Street, James O'Shaughnessy modified his Cornerstone Value strategy to take Shares Buyback into account together with Dividend Yield: he named it Shareholder Yield. Note: with the 2003 changes in Tax Law, this strategy seems less compelling. In addition, not many stock screeners include shares buyback as screening criterion. Added May 2008: check this improved Dogs of the Dow version that uses the Shareholder Yield. Holding Period Go back to TopHolding period should be at least 1 year to collect the full dividend and especially qualify for lower Capital Gain Tax.Income investors typically hold their stocks for longer than 1 year, hence the emphasis on Quality companies. High Yield Investing characteristicsGo back to TopHigh Yield Investing often exhibits the following characteristics:
Sample High Yield Investment Strategies Go back to TopThe following table summarizes the main criteria to successfully invest in high yield stocks. In addition, a simple strategy from James O'Shaughnessy's How to Retire Rich is presented.
As you can see, High Yield Investing is pretty simple. |
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