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Finding Truly Great Dividend Values
07/29/2013 11:00 am EST
In his IQ Trends newsletter, value investor Kelley Wright focuses on high-quality, blue chip companies with 25 years of dividend increases.
Steven Halpern: We're here today with Kelley Wright, editor of Investment Quality Trends, a newsletter that has been continually published since 1966. How are you doing, Kelley?
Kelley Wright: I'm well, Steven. Good to talk to you.
Steven Halpern: Good. Could you tell us a little about the background of the newsletter?
Kelley Wright: Well, as you said, we were first published in April of 1966, and the letter was started by our founder, and my predecessor, Mrs. Geraldine Weiss.
The letter was originally designed for the professional financial community, to provide value identification for high-quality dividend paying stocks, and the process and the format has pretty much stayed the same since 1966.
We have a two-part process of identifying what is a high-quality company, and then establishing what its parameters of value are, so that we know where to buy, hold, and sell the stocks that meet our criteria.
Steven Halpern: Your strategy is buying dividend paying stocks when their yields are historically high, and then you sell when the yields, when the dividends, decline to a historic low. Could you explain what you mean by historically high or low yields?
Kelley Wright: Certainly. One of the shared characteristics of the stocks that meet our criteria have is, that they tend to trade between two repetitive areas of dividend yield, so when you take, for example, one of our stocks, and you plot it on a graph of, say 25 to 30 years, and you look at all the major points of support and resistance, meaning where a stock stops declining or where a stock stops advancing.
There tends to be some repetitive symmetry with those dividend yields at those support and resistance levels, so even though a stock will grow in price over time, because of the consistency of their dividend increases, those dividend yields at those support and resistance areas, tend to remain in place, and so that's what we call the high and low dividend yield areas.
Steven Halpern: Now you focus only on the highest quality dividend paying stocks. In fact, you require that a company has at least 25 years of uninterrupted dividends. Could you explain why that is so important in your analysis?
Kelley Wright: The average business cycle is about four to five years, and over the course of three or four business cycles, you're typically going to see a period of inflation, maybe a period of contraction, and you'll typically get at least one bull and bear market in there.
If you expand that to 25 years, you're going to get many different periods of expansion, and contraction, and many different bull and bear cycles.
What we have found is that those companies that have the ability to weather all of those cycles, and to remain relevant with their products and/or services, and have the ability to attract, and train, and retain the next generation of management that continues the policies that allowed them to become a great company in the first place.We've found that that period of time of uninterrupted dividends, really separates the truly great performers from those that are maybe just intermittently good performers, and that's the entire reasoning behind the 25 years.
Steven Halpern: Each month you feature a list that you call your Timely 10. Could you explain this list and perhaps share a few of the names of the stocks that are currently on that list?
Kelley Wright: The genesis of The Timely 10 is that in the year 2000, we started a feature called The Lucky 13, which was 13 stocks that we picked at the beginning of the year, that we thought would outperform the market for the coming 12 months.
Well, subscribers are kind of like children to an extent that when you give them one thing, then they want something else, and they said “okay, we know what it could do at the beginning of the year, but what do we do the rest of the year”?
We decided to start The Timely 10 feature, which encompasses the process that we go through at our investment management company in identifying stocks to put into the portfolios that we manage.
The Timely 10 is the ten best ideas out of our undervalued category as of each publication, and these ten stocks are our view of what's available to us at the present, that should perform best over the coming five.
So in our most recent Timely 10 list we have, say, Chevron Corp. (CVX), a major oil company. It has a tremendous dividend of $4 a share, and has a tremendous amount of upside based on the current dividend, all the way up to $200. In another industrial sector, we have Coca-Cola (KO), which is one of the great iconic companies.
We also have Wal-Mart Stores (WMT) in there, perhaps the largest retailer on the planet, that does everything from groceries to prescriptions.
So, what we try to do in this Timely 10 is to get the best ten stocks that we have at the time, and hopefully they're diversified among industrial sectors so that you have a lot to choose from, and you don't get your portfolio overloaded in any one particular sector.
Steven Halpern: Well, we appreciate you taking the time today. Thank you for sharing your ideas with us.
Kelley Wright: Thanks for having me, Steven.