What are we looking for?
A low-maintenance U.S. dividend strategy.
The screen
As exciting as being invested in fast-moving momentum stocks can be, the typical retail investor often doesn't have the bandwidth to consistently monitor these names, nor react quickly enough to move in or out of these positions. For more conservative investors, a low-turnover, low-maintenance portfolio that pays a steady dividend may be a better way to go. This week, I design a strategy that does just this, ranking U.S.-listed stocks on the best combination of:
- Market cap (larger, steadier names are preferred here);
- Dividend yield relative to the sector median (this figure represents the stock’s yield minus the median yield of the sector to which the company belongs);
- Dividend-payout ratio relative to the sector median (recall the dividend-payout ratio is the expected dividend divided by the earnings per share of the stock; here we compare this figure with the median of the sector to which the stock belongs; lower numbers preferred).
To qualify, stocks must have a debt-to-equity ratio less than that of the sector median, to ensure that overly leveraged companies were excluded. Companies with a limited partnership structure were also excluded.
More about Morningstar
Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
I used CPMS to back-test the strategy from August, 2006, to August, 2016. During this process, 10 stocks were purchased and equally weighted with a maximum of three stocks a sector.
Stocks would be sold if they fell outside the top 30 per cent of the ranked universe, or if the stock's payout ratio exceeded 100 per cent.
Over this period, the strategy produced an annualized total return of 10.3 per cent while the S&P 500 total return index advanced 7.5 per cent. The average turnover on this strategy over the same period was just 7 per cent a year (that is, one trade a year, on average). The top 10 stocks that qualify for purchase today are listed in the table below.
As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.