Comparing Two Dividend Strategies

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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 Seeking Alpha . 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)

Ticker Company 10/8/10* 11/15/10* Change**

Yield on 10/8

[[Q]] Qwest Inc. 6.34 6.85 8.04% 5.05%
[[MO]] Altria Group Inc. 24.51 24.69 0.73% 5.79%
[[FTR]] Frontier Communications 8.39 9.10 8.46% 11.20%
[[PGN]] Progress Energy Inc. 44.57 44.38 -0.43% 5.56%
[[POM]] Pepco Holdings, Inc. 19.11 18.85 -1.36% 5.65%
[[WIN]] Windstream Corporation 12.14 13.05 7.50% 8.24%
[[CTL]] CenturyLink, Inc. 39.76 42.33 6.46% 7.24%
[[SO]] Southern Company 37.26 38.33 2.87% 4.83%
[[TEG]] Integrys Energy Group, Inc. 53.07 51.48 -3.00% 5.13%
[[CNP]] CenterPoint Energy, Inc. 15.90 16.22 2.01% 4.91%
[[HCP]] HCP, Inc. 35.83 33.18 -7.40% 5.19%
Average Return: 2.17%

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 ( BEC ) rose 16.26% while the SI best performer, Frontier Communications ( FTR ), 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, 2010)

Ticker Company 10/8/2010* 11/15/2010* Change** 10/08 Yield
[[CL]] Colgate-Palmolive Co. 74.39 78.37 5.35% 2.73%
[[CAG]] ConAgra Foods, Inc. 21.65 21.61 -0.18% 3.83%
[[NTRS]] Northern Trust Corp. 48.35 51.30 6.10% 2.32%
[[WST]] West Pharmaceutical 34.94 38.33 9.70% 1.95%
[[BBT]] BB&T Corp. 23.43 25.05 6.91% 2.56%
[[MDT]] Medtronic 33.45 34.66 3.62% 2.57%
[[BEC]] Beckman Coulter 47.78 55.55 16.26% 1.53%
[[SBSI]] Southside Bancshares 18.98 19.92 4.95% 4.37%
[[USB]] U.S. BanCorp. 22.31 24.94 11.79% 0.90%
[[WFSL]] Washington Federal 15.27 15.24 -0.20% 1.31%
[[FUL]] HB Fuller Company 20.24 21.15 4.50% 1.38%
Average Return: 6.25%

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 ( CAG ) fell by -0.20% while the SI worst performer, HCP Inc. ( HCP ), 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 yields.


*based on closing price of October 8, 2010 and November 15, 2010

**all prices for Oct 8th and Nov 15th are adjusted for dividends

Disclosure: Author holds long positions in [[NTRS]], [[WST]]

See also Principles of Valuation (Part 1): Price Is What You Pay, Value Is What You Get on

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
Referenced Symbols: BEC , CAG , FTR , HCP , SPY

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