Once upon a time, high-
tended to trade at discounts to the rest of the market. Today? No
In a recent piece for his blog, "The Investor's Field Guide",
Patrick O'Shaughnessy provided data showing that
high-dividend-yield stocks did at one time enjoy a valuation
advantage over other stocks. "[But] their valuation advantage has
collapsed," he wrote. Prior to 2009 -- when the bear market
bottomed -- higher yielders (stocks with dividends over 4%) were
cheaper than those with yield in the 2-4% range 92% of the time,
O'Shaughnessy says. Since then, they've been cheaper just 30% of
What gives? O'Shaughnessy offers a very plausible theory: "This
is impossible to confirm, but the easiest explanation is that
investors (especially older ones) have needed more income in this
low rate environment, and have bid up the valuations of high
yielders," he says.
O'Shaughnessy also notes that the overall correlation between
dividend yield and valuation has been declining for many years.
This, he says, has implications for investors. With dividend yield
itself no longer acting as a valuation tool, investors looking for
high-yielders must be careful to use other metrics to gauge value.
I couldn't agree more. Rushing blindly into high-dividend stocks
simply because they have a high yield is not good investing.
Sometimes, the dividend yield will be high because the price of the
stock is very low, and low for good reason (i.e., the firm is a dog
and its shares are going nowhere). And, after all, what's the point
of getting a high dividend payment if the stock costs you money by
So, if you're going to look for income through stock dividends,
you need to make sure that -- as with any stock you buy -- the
stock's fundamentals are strong and the company's balance sheet is
solid. With that in mind, I recently used my Guru Strategies (each
of which is based on the approach of the different investing great)
to find some stocks that not only have high dividend yields, but
also have attractively priced shares and solid financials. I found
a number that fit the bill, and are good candidates not just for
steady income but for capital appreciation as well. Here are some
of the best of the bunch.
Douglas Dynamics (
Wisconsin-based Douglas makes vehicle attachments and equipment,
such as snow and ice management attachments, turf care equipment,
and industrial maintenance equipment. It currently offers a 4%
The model I base on the writings of hedge fund guru Joel
Greenblatt is particularly high on Douglas ($450 million market
cap). Greenblatt's approach is a remarkably simple one that looks
at just two variables: earnings yield and return on capital. My
Greenblatt-inspired model likes Douglas's 10.9% earnings yield and
Taiwan Semiconductor Manufacturing (
This Taiwan-based firm offers integrated circuits and other
semiconductor devices. The $103-billion-market-cap firm currently
offers a 3.6% dividend.
TSM gets high marks from the strategy I base on the writings of
mutual fund legend Peter Lynch. The Lynch strategy considers it a
"fast-grower" -- Lynch's favorite type of investment -- thanks to
its impressive 20% long-term EPS growth rate. (I use an average of
the three-, four-, and five-year EPS growth rates to determine a
long-term rate.) Lynch famously used the P/E-to-Growth ratio to
find bargain-priced growth stocks, and when we divide TSM's 11.4
price/earnings ratio by that long-term growth rate, we get a P/E/G
of 0.56. This model considers anything below 1.0 a bargain.
Lynch also liked conservatively financed firms, and the model I
base on his writings targets companies with debt/equity ratios less
than 80%. TSM's D/E is 21%, another good sign.
Johnson & Johnson (
JNJ offers a range of products in the health care field, with more
than 265 operating companies conducting business around the world.
It makes consumer healthcare/wellness products, pharmaceuticals and
medical devices. The $260-billion-market-cap firm's shares come
with a 3.2% dividend yield.
My James O'Shaughnessy-based value stock model is high on JNJ.
When looking for value plays, O'Shaughnessy targeted large firms
with strong cash flows and high dividend yields. JNJ is plenty big
enough, has $7.16 in cash flow per share (more than four times the
market mean), and that solid 3.2% yield, all of which help it pass
the O'Shaughnessy-based model.
Siliconware Precision Industries (
): This provider of semiconductor packaging and testing services
offers advanced packages, substrate packages and lead-frame
packages, as well as testing for logic and mixed signal devices.
The $4-billion-market-cap firm's shares come with a 7.4% dividend
My David Dreman-inspired contrarian approach thinks SPIL is a
good contrarian bet. It considers it a contrarian play because its
price/cash flow, price/earnings, and price/dividend ratios fall
into the market's cheapest 20%. Dreman realized that sometimes,
however, a stock is cheap because everyone knows it's a dog, so he
also used an array of fundamental and financial tests. This model
likes SPIL's solid 18% return on equity, 17.6% pre-tax profit
margins, and 41% debt/equity ratio, which is low for a
semiconductor firm (the industry average is 108%).
Maiden Holdings (
Maiden serves regional and specialty insurers in the United States,
Europe and select other global markets by providing reinsurance
solutions designed to support their capital needs. It has a
portfolio of property and casualty reinsurance business focusing on
regional and specialty property and casualty insurance companies.
Currently its shares come with a 3.6% dividend.
Maiden ($1 billion market cap) gets high marks from the model I
base on the writings of mutual fund legend John Neff. Neff focused
on the P/E ratio, looking for stocks with P/Es between 60% and 80%
of the market mean. (P/Es that were too low could be a sign the
company was a dog, he found). Maiden's 10.7 P/E makes the
Neff also targeted firms with solid growth, but not spectacular
growth -- he found that firms with extremely high growth rates were
often too pricey. The Neff-based model thus likes Maiden's solid
14.5% long-term earnings per share growth rate and its 16.7%
long-term sales growth rate. Finally, Neff was a big believer in
the importance of dividends, and he liked to use the total
return/PE ratio, which combines a stock's growth rate and dividend
yield and divides it by its P/E ratio. Neff liked it when this
figure was twice the market average or a stock's industry average,
and Maiden's total return/PE of 1.69 is well over twice the market
average of 0.6.
I'm long SPIL, TSM, PLOW, MHLD.