Dividends and A sleep-at-night-strategy

Every day and quarter and year data is accumulated to measure different metrics to try to out perform the market. Ian Tam of Morningstar tried a theory which seems to work. He started with dividend companies; and tested going back to October 2006 or 10 years of testing to find if you bought these companies you would earn a return of 10% for a low risk strategy. The only time a company needed to be exchanged was if the stock fell out of top 30% of the ranked universe or the payout ratio exceeded 100%.

The criteria he used was:

market capitalization – higher the better

dividend yield relative to the sector median ( the stock’s yield minus the median yield of the sector to which the company belongs)

Dividend payout ratio relative to the sector median ( a low number is a good number)

Debt to equity ratio less than that of the sector median

Company              Mkt Cap      Yield Rel to       Payout        Payout Ratio Rel    D/E Ratio to   Div

$ bill              Sect Med.           Ratio %      to Sec Med              to Sec Med      Yield

AT&T                    248.848          4.26                     63.58          57.54                         0.8                     4.75

Pfizer                    207.081          3.51                     44.44           44.44                        0.94                  3.51

Phillips 66             41.357         3.19                      43.83             43.83                       0.41                   3.19

Exxon Mobil       352.796         3.53                      68.18             68.18                       0.23                  3.53

Valero Energy      25.922         4.27                     43.72             43.72                       0.42                  4.27

Abbott Labs          60.446         2.53                     42.28             42.28                      0.56                  2.53

Carnival Corp       35.658          1.87                     37.33              20.08                   0.48                    3.01

Accenture               92.688        1.99                     37.64             37.64                     0.01                   1.99

General Dynamics 46.451       0.96                     30.37             12.76                     0.43                   2.00

Honeywell               87.713        1.02                       32.94            15.33                     0.83                   2.06

Linking to dividend paying stocks, after you believe the company will continue to perform or continue to make money, then you need to make comparisons of the company versus others in the same sector. Then other sectors can be compared to and you can come up with a variety of recommendations. You will be accurate in expectation and receiving continuing dividends but you will not know the capital gains to be received. However if a company is profitable you know it will trade to the prevailing P/E multiples for the market. If your concern is the long term, a profitable company paying dividends over the long term is a good investment. With the above strategy, the time to get out is when the payout ratio goes too high and fortunately on the stock market there are many alternatives.

There are more questions than answers, till the next time – to raising questions.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s