Picking Dividends With A 52-Year-Old Formula

Seeking AlphaDividend StrategyPicking Dividends With A 52-Year-Old FormulaOct. 27, 2020 12:49 AM ET|| Includes: AMLP, DVY, REM, RSP, SCHD, SDY, SPY, SPYD, VYMby: Fred PiardFred Piard Quantitative Risk & ValueExclusive market risk indicator paired with data-driven model portfolios.SummaryThis article suggests a solution to pick dividend stocks in a safer way.
First, it shows a subset of dividend stocks that beats the market.
Then, it presents the Altman Z-score and how to use it.
High yields often come with high volatility and capital decay. All high-dividend equity ETFs (VYM, SDY, SCHD, DVY, SPYD, etc.) have lagged the benchmark (SPY) in total return for years. In 2020, mortgage REITs and MLPs have been decimated. The iShares Mortgage Real Estate Capped ETF (REM) is still 46% below its 52-week high, and the ALPS Alerian MLP ETF (AMLP) is 52% below it. It means they need respective gains of 85% and 108% to fully recover, something which is not going to happen anytime soon. I really feel for investors who have bought MLPs and Mortgage REITs before the meltdown, attracted by a juicy yield. There is no magic formula to avoid all value traps and sucker yields. But there is one that cuts the probability of picking a rotten fruit.
What history tells you about yields
A recent article of mine shows that high dividend yields bring a significant and measurable risk of capital decay and volatility.

The sign your broker should show you before you buy high-yield stocks (Source: Pixabay)
However, stocks with a moderate dividend have had a better total return than the broad market over the long run. The next table shows the performance of a S&P 500 subset holding stocks paying dividends between 2% and 6%. The subset is reconstituted and rebalanced in equal weight every quarter since 1999.
Total Return
CAGR
DrawDown
Sharpe R
Volatility
S&P 500 2-6% yield subset
606.46%
9.40%
-56.65%
0.54
15.87%
S&P... Read more