..and the end of another dull week in the markets which have been dominated by the on going will they won't they Grexit debate which will now stretch on over the weekend. So apart from Tesco's update today (which will no doubt be extensively reported elsewhere) and Stanley Gibbons (SGI) unexpectedly cutting their final and full year dividend in their results today, there is not a lot to write about.
However, as I always try and being you value and hopefully things of interest I thought I would share a few things I have been reading and watching this week. So on the investment front I read a couple of what I thought were interesting things about identifying yield stocks, although that may just be confirmation bias as they seem to reinforce what I do with my Scores.
The first one was by Jack Vogel who works with Wesley Grey the co author of Quantitative Value and was posted on their useful Alpha Architect site. This looked at taking the top 20% yield stocks from a large cap universe ($1.8bn+) in the US from 1964. They then split this into two portfolio based on the value metric EBIT/EV to form a high value and low value equally weighted portfolio. This appeals to me as these are the two metrics I use in the value score for the Compound Income Scores.
These two portfolio were then equally weighted and compared to an equally weighted portfolio of the yield stocks and the whole universe they were selecting from. The results can be seen in the table below which is from the original article and their conclusions were:
In this article Jack also referenced another article which their post was a response to. This was another article from -
- Research Associates called The Market for “Lemons”:A Lesson for Dividend Investors. In this they looked at identifying Quality high yield stocks and improving returns by screening for profitability (ROA) and distress for which they use debt coverage ratio. Again this appeals to me as these are also things that I include in the Compound Income Scores.
They also looked at accounting red flags for which they use increase in Net operating assets (NOA) and accruals and they found that both higher levels of accruals and NOA suggest lower future equity returns regardless of causation. This is something I would perhaps like to include in the CIS but I have not found an easy way to do it - so spotting that type of thing remains part of the due diligence process & gut feel when researching stocks flagged by the Scores.
They then took the top 200 yield stocks from their universe and tested these added screens and found that they all added value over the 1000 Large cap universe and the higher quality 100 yield stocks outperformed the 100 lower quality yield stocks. They also found that by combining all these measures together into a Composite gave higher average total return, lower volatility and higher subsequent 5 year dividend growth. If you want to read the Research Affiliates document which is authored by Chris Brightman, CFA, Vitali Kalesnik, Ph.D., and Engin Kose, Ph.D. then see the link above.
So quite a compelling case for backing quality and secure stocks based on profitability and balance sheet measures which is part of what I do in the Compound Income Scores. Of course I also look at dividend cover, growth and estimate revisions for a more complete picture, but of course sometimes simpler may be better, but I find it works for me and hopefully some of my subscribers.
Any way that's all on the investment front for now. Otherwise TFI it's Friday as they say or it's FF Friday as I said in the title because it is Glastonbury this weekend which was supposed to feature the Foo Fighters (FF) - that's a band and not a stock in case you are not into music!
If like me you were disappointed that they will not now be headlining because Dave Grohl broke his leg then don't despair - I have a treat for you. See the video below for a great set they did in Germany recently before he broke his leg, but be warned it does include some swearing from Mr Grohl and also quite a few tweets, many of which are in German and therefore may also be rude for all I know as mein Deutch ist nicht das gut! Auf wiedersehen, have a great weekend - I've got to rock on - see you next week.