5 Top Yielding Stocks That Outperform The S&P 1500
Barron’s columnist Mike Hulburt has identified five high yielding stocks that have strong growth potential, using Dow Theory Forecasts, a longtime newsletter that focuses on high yielding stocks.
In summarizing the five stocks – Washington Prime Group (WPG), Consolidated Communications Holdings (CNSL), Seagate Technology PLC (STX), Hersha Hospitality Trust (HT) and Macy’s (M), Hulburt explores the rationale behind Dow Theory Forecasts. He cited a new study from the Dow Theory Forecasts newsletter on a portfolio of stocks with the highest dividend yields that have outperformed the S&P 1500 since 1990 by an average annualized 1.3 percentage points.
Many stocks in the portfolio lost money over the years while their dividends got cut or eliminated, Hulburt noted. General Electric, for example, recently cut its dividend in half as its stock lost nearly 40% in a year the S&P 1500 index gained 19%. The portfolio nonetheless improved sufficiently with its other stocks to more than compensate for the losses and outperform the market as a whole.
The Dow Theory Forecasts built a hypothetical high dividend performing portfolio to optimize the chance of owning a stock with a dividend that would soon be cut. This was accomplished by investing only in S&P 1500 stocks with the highest yields, yields beyond 8%. Only 24 stocks – 1.6% of the total – posted yields at that level, according to FactSet, a financial data and software provider. Since 1994, only nine stocks posted this performance at any given time.
A portfolio with high yielding stocks is not typically conservative, Hulburt observed. During the financial crisis, stocks at the October 2007 high yielded more than 8%. By the March 2009 low, they had fallen by 63.1% on average, according to FactSet. The Dow Jones Industrial Average, by comparison, lost 53.8%.
The conventional wisdom holds that high dividend paying stocks are more conservative than growth stocks paying no dividends. This is the case for higher quality dividend paying stocks, but not for those with the top dividend yields, Hulburt noted.
The Dow Theory Forecasts does not recommend automatically investing in a stock on the basis of having a high dividend yield. It recommends taking into account factors including the portion of earning paid out in dividends and balance sheet strength.
The Dow Theory Forecasts’ Stock Rating System
Dow Theory Forecasts’ proprietary Quadrix stock-rating system uses more than 90 variables to score stocks in six categories: momentum – defined as recent operating performance; quality; value; financial strength; earnings estimates; and performance, defined as stock price action, according to the company’s website.
For these six categories and the overall score, the system scores stocks on a percentile basis, with zero the lowest and 100 the highest. A score of 95, for example, signifies the stock outperforms 95% of the approximately 5,000 U.S. stocks in the system’s universe.
Stocks cannot be reduced to numerical equations, however, and a numbers-based ranking system cannot replace individual company analysis. But a Quadrix type of system can provide a solid starting point for building portfolios.
Since the system only uses quantifiable factors, it identifies stocks achieving superior results. Similarly, because the system is not influenced by emotions that can cloud the investor’s judgment, it provides a way to track current portfolio holdings.
After the system has winnowed stocks from the vast universe, a team of Dow Theory Forecasts research analysts examine individual company performance.
Following are the five stocks that have the highest yields in the S&P 1500, and which also are recommended by at least one of the top-performing newsletters that Hulburt tracks.
Washington Prime Group (WPG)
Washington Prime Group (WPG), a mall and shopping center REIT, had a 1.2% yield, 35.7 forward price-per-earnings ratio and a 33% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.
For the fiscal year ended Dec. 31, 2017, net income attributable to common shareholders was $183 million, or $0.98 per diluted share, compared to $53.1 million, or $0.29 per diluted share, in the prior year. The increase in net income relates primarily to a $124.8 million gain on disposition of assets recognized during 2017 and a $56 million increase in gains on debt extinguishment in 2017, partially offset by a $45 million increase in non-cash impairment charges in 2017 and lower net revenues in 2017.
Additionally, fiscal year 2016 results include merger, restructuring and transaction costs of $29.6 million, and there were no such costs in 2017.
Consolidated Communications Holdings (CNSL)
Consolidated Communications Holdings (CNSL), a broadband and business communications provider, had a 12.3% yield, 38.4 forward price-per-earnings ratio and a 4% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.
For the full year 2017, the company’s pro forma operating revenue totaled $1,460.6 million, down 6.8% from fiscal 2016. Approximately 44% of the revenue decline is attributed to the divestiture of the equipment services business and the Iowa ILEC in 2016. The balance of the year-over-year decline is primarily due to the continued erosion of legacy voice services and access revenues as well as the step down in transition funding in CAF II support.
Seagate Technology PLC (STX)
Seagate Technology PLC (STX), a provider of digital storage solutions, had a 6.% yield, 9.44 forward price-per-earnings ratio and a 3% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.
Seagate Technology PLC reported revenue of approximately $2.9 billion for the second quarter of 2018, and GAAP and non-GAAP gross margin of approximately 30%. The company expects to report record exabyte shipments of approximately 88 exabytes, reflecting drive shipments of approximately 40 million and record average capacity per drive of 2.2 terabytes.
The strength in the company’s revenue and gross margin for the quarter was driven primarily by better-than-expected demand for the company’s HDD mass-storage solutions portfolio and operational execution.
Hersha Hospitality Trust (HT)
Hersha Hospitality Trust (HT), a provider of high quality hotels in urban gateway markets and coastal destinations, had a 6.3% yield, -217.8 forward price-per-earnings ratio and a 17% loss in its 52-week share price movement through Dec. 6, 2017, according to Thomson Reuters as reported by Investopedia.
Hersha Hospitality Trust reported net income applicable to common shareholders was $75.7 million, or $1.79 per diluted common share, in 2017, compared to net income applicable to common shareholders of $95.6 million, or $2.18 per diluted common share, in 2016.
The decrease in full year 2017 net income and net income per diluted common share was mainly due to a decline in gains on the dispositions of hotel assets.
Macy’s sales in fiscal 2017 totaled $24.837 billion, down 3.7% from total sales of $25.778 billion in fiscal 2016. Comparable sales on an owned basis fell 2.2% in fiscal 2017, while comparable sales on an owned plus licensed basis dropped by 1.9%. Total sales for fiscal 2017 reflect a 53rd week, whereas comparable sales are on the same 52-week basis as fiscal 2016.
Macy’s, Inc.’s 2017 operating income totaled $1.807 billion, or 7.3% of sales, compared to operating income of $1.315 billion, or 5.1 of sales in fiscal 2016. Operating income for fiscal 2017 totaled $2.098 billion, or 8.4% of sales, excluding $186 million of restructuring and other costs, and $105 million of non-cash retirement plan settlement costs.
Macy’s is strategically investing to accelerate the rollout of near-term growth initiatives impacting stores, technology and merchandising. The company has also created an employee incentive program to improve engagement with associates at every level of the organization.
Other Strategies To Consider
Hulburt noted there are other investment strategies to consider.
The Investment Quality Trends, edited by Kelley Wright, offers another investment approach to identify risk adjusted performance over the trailing 20- and 30-year time periods monitored.
Wright suggests stocks with the highest “relative dividend yields.” A stock’s relative yield is the way its current yield stacks up against its range of past yields. If the underlying company meets certain criteria for financial strength, Wright recommends it when the yield reaches the high end of its range.
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