What are we looking for?
High-yielding U.S. momentum stocks.
The screen
Several weeks back I explored a strategy searching for Canadian momentum stocks that pay a high dividend yield. Today, I'm going to repeat this exercise for U.S.-listed stocks.
Momentum stocks can be a great way to benefit from market upside, while dividend stocks are idyllic for investors seeking income and less volatility. Though both investment styles have their benefits, I believe that they are stronger used together rather than apart.
Today's strategy ranks stocks based on a mix of their dividend yield and the price change from the stocks' 12-month high (a momentum factor – least-negative value is best).
In order to qualify, stocks must be in the top 25 per cent of the CPMS universe based on the ranking criteria above (universe currently includes 2,206 U.S. companies) as well as have:
- Positive quarterly earnings momentum (measured as the growth in most recent trailing four quarters’ earnings relative to the same metric lagged by one quarter);
- Positive quarterly earnings surprise (a CPMS proprietary measure of the difference between actual and expected quarterly earnings);
- Dividend yield in the top two-thirds of peers (that value today is above 2.1 per cent);
- One-year price change greater than minus 5 per cent (in order to avoid stocks that appear to have excellent dividend yields because of an extreme drop in price – recall dividend yield is calculated as the annual dividend divided by the current stock price).
More about Morningstar
Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
I used Morningstar CPMS to back test this strategy from December, 1993, to October, 2017. During this process, a maximum of 25 stocks were purchased. Stocks were sold if their rank fell below the top 50 per cent of the CPMS universe; if their quarterly earnings momentum or quarterly earnings surprise fell below minus 8 per cent; or if their one-year price change fell below minus 20 per cent. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 14.3 per cent, while the S&P 500 total return index returned 9.6 per cent across the same period. Downside deviation (measured as the variability of negative returns) was 6.6 per cent compared with the S&P 500 total return index, which had a downside deviation of 9.7 per cent. Lastly, the portfolio's current dividend yield is 6.1 per cent, while the S&P 500 is yielding 1.9 per cent. The top 15 stocks that qualify for purchase into the strategy today are listed in the accompanying table.
As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Emily Halverson-Duncan is an account manager for CPMS at Morningstar Research Inc.