In an effort to contrast our work with our peers', we recommend
that readers review the article titled "
11 High Yield Stocks to Buy Now
" published October 10, 2010 on
. This list of companies is compiled by Scott's Investments blog
and was intended to provide top choices for income investors with
an interest in trading dividend stocks. Although we have always
indicated that our list of stocks is useful for both long and
short-term investors, we couldn't help but attempt to contrast our
October 8, 2010
NLO Dividend Watch List
[NLO] with the performance of Scott's Investments [SI].
Because both articles were generated and posted on the internet
after the market closed on Friday, October 8, 2010 and before the
market open on Monday October 11, 2010, we thought it would be
possible to make a few observations about the performance of the
stocks on each list.
In order to make our observations, we have attempted to ensure
data integrity by making a few assumptions. First of all, we
decided to make our list from October 8th only the top eleven
companies to match the number of companies on the SI list. Next, to
determine the performance of each stock, we used the October 8th to
November 15th closing prices as our benchmark. Finally, we
calculated the adjusted closing price for all of the stocks that
paid a dividend between October 8, 2010 and November 15, 2010.
Our first observation on the performance between the NLO
Dividend Watch List [NLO] and Scott's Investments [SI] is that the
NLO list accomplished a gain of 6.25% compared to SI's gain of
2.17%. There is little to explain why there is such a disparity in
the two lists. Especially, the [SI] list is tailor-made for
individuals interested in dividend income at a time when investors
of all stripes are more aware of the need for an income component
to their portfolio. This is contrasted with the NLO list, which
only has the requirement that the stocks have, or have had, a
history of dividend increases of more than 10 years in a row and
within 20% of the 52-week low.
From our perspective, we normally choose the stocks nearest the
new low and then work our way up from a qualitative standpoint
based on fundamental and technical attributes.
Scott's Investments: '11 High Yield Stocks to
Buy Now' (October 10, 2010)
Yield on 10/8
||Altria Group Inc.
||Progress Energy Inc.
||Pepco Holdings, Inc.
||Integrys Energy Group, Inc.
||CenterPoint Energy, Inc.
Our next observation is that, although the NLO list rose at a
much more torrid pace than the SI list, the best and worst
performers for the NLO list outpaced the SI comparables. Of the
best performing stocks, the NLO's Beckman Coulter (
) rose 16.26% while the SI best performer, Frontier Communications
), rose 8.46%. The Beckman Coulter rise outpaced Frontier
Communications by 92%. This suggests that the positions taken in
the NLO list are likely to be higher risk.
NLO: 'Dividend Watch List' (October 8,
||ConAgra Foods, Inc.
||Northern Trust Corp.
||HB Fuller Company
When comparing the worst performing stocks from each list, we
get a picture that may suggest that the overall risk, at least in
the short run, in the NLO list might be worthwhile. Of the worst
performing stocks, the NLO's ConAgra (
) fell by -0.20% while the SI worst performer, HCP Inc. (
), fell by -7.40%. The loss incurred in HCP Inc. was 37 times the
loss of CAG. However, we cannot be certain, based on the results,
whether or not the high performance of the NLO list is clear
evidence of the high-risk nature of the stocks or that the NLO
selection process is calibrated for better performance. We would
rather err on the side of caution and assume that the NLO list is
biased towards higher risk.
Though not significant, another potential factor that
contributed to the gains for the NLO list was the fact that more
dividend payments were made within the last month than were the
case for the SI list. However, this dispels the claim that because
a dividend payment is made the stock price is adjusted lower. To
the shareholder of a dividend paying stock, the cost basis is
adjusted lower, and not the stock price prior to, at the time of or
after a dividend payment.
The author of the "
11 High Yield Stocks to Buy Now
" does indicate that the stocks were ideally suited for the purpose
of trading. However, the full benefit of such stocks is likely to
be recognized over a period of at least a year. After all, if the
high yield is never recognized due to trading then it seems as
though better alternatives that don't pay a dividend may be
overlooked in the process.
Since we suspect that the SI portfolio will perform quite well
over an extended period of time, we will review these same
portfolios after a year to determine if there are any new lessons
to be learned from selecting stocks based on high dividend
*based on closing price of October 8, 2010 and November 15,
**all prices for Oct 8th and Nov 15th are adjusted for
Author holds long positions in [[NTRS]], [[WST]]
Principles of Valuation (Part 1): Price Is What You
Pay, Value Is What You Get