Using a dividend yield investing strategy as a sample strategy was not part of my plan for this site. However, in response to a request to make a presentation on the topic, I came to realize what a powerful strategy it can be. Both as part of a portfolio of strategies or as part of a core investment/retirement plan.
As part of our process to create personal investment strategies, we will once again stand on the shoulders of an investing legend - Geraldine Weiss. Often referred to as "The Grand Dame of Dividends", she is the founder of the advisory newsletter, Investment Quality Trends, and co-author of 2 books.
As you can image, dividends are a core component of the strategy. Not only as yield, but growth and stability as well.
But it is not just about dividends. Overall, the components as described by Weiss are:
There are 3 financial strength ratios:
Over time, Weiss recommends creating a portfolio of about 20 companies.
She is not a proponent of buy and hold forever but expects to hold a company for 3 years on average. Unusual for a published strategy, reasons to sell are explicit and stocks in the portfolio are examined regularly:
Blue Chip is a reference to the quality of the universe of acceptable companies. This will be the most difficult part of the strategy to implement dynamically with stock screening tools, but there are several static lists which can be accessed without charge.
Dividend Champions are companies paying dividends for at least 25 years. While this is beyond the historical data available in most screeners, a list of these companies (and companies with less impressive dividend histories) are readily available online. To use these companies in a screener, simply download the list from one of the online sources and then upload to your screener.
You can get the list at Drip Investing or do an internet search for Dividend Champions to check other sources.
Once you decide how to move forward with the universe, everything else is very straightforward.
At least one screener, AAII Stock Investor Pro, has an existing implementation of the Weiss Dividend Investing Strategy. The primary deviation from the "pure" strategy is the Blue Chip universe. Not enough historical data is available in the SI Pro database and neither are the S&P ratings.
If you are an AAII member, you can login and examine their discussion of the strategy as well as the performance chart from 1998. Otherwise, you will only be able to see the performance numbers shown to the right.
While this may not seem like dazzling performance, it is very good considering the AAII performance numbers are created by running a screen at the end of every month and calculating the total return for the month as the average of the performance of each company passing the screen.
Keep in mind that SI Pro will screen against a portfolio so you would be able to upload a list of Dividend Champions (or any custom list of companies). Once the portfolio is uploaded, modify the AAII pre-built screen to remove the rules pertaining to the universe.
One of the unique features of the Weiss dividend investing strategy approach is the use of average historical high and low yield to identify value. Either of the Weiss books listed in the bibliography below is loaded with price charts of companies used as examples of their analysis. Every chart has an upper limit and a lower limit which represents the buy range and sell range in terms of yield. Below is a graphic representation from an AAII article discussing the strategy.
Although dividend investing is one of the most mature strategies, a variation was introduced that considered more than just the dividend. Net payout yield (aka shareholder yield) is the ratio of the net payout per share as a percentage of the stock price. Net payout is the amount a company spends on purchasing its own stock and paying dividends less the amount received from issuing new stock.
There are (at least) 3 distinct schools of thought regarding a dividend investing strategy:
With an understanding of the strategy, the next step is to put together an implementation plan that matches your needs and availability.
NEXT: Implementing the Dividend Yield investing strategy
The following books are focused on dividend yield and income investing. The books by Kelley Wright (current manager of the Weiss newsletter) and Weiss are the core books. The others represent other views and some variations in the screening criteria.
Peters, Josh. The Ultimate Dividend Playbook: Income, Insight and Independence for Today's Investor
Weiss,Geraldine and Weiss,Gregory. The Dividend Connection: How Dividends Create Value in the Stock Market
Weiss,Geraldine and Lowe, Janet. Dividends Don't Lie: Finding Value in Blue-Chip Stocks
Wright, Kelley. Dividends Still Don't Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market
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