Join Kelley Wright LIVE at The MoneyShow Philadelphia !

Join Kelley Wright LIVE at The MoneyShow Philadelphia !

IQ Trends: Yield, Value and Patience

07/20/2015 10:00 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

Over more than 50 years, Investment Quality Trends has developed a proprietary strategy of identifying under- and overvalued levels for blue chip stocks based on their historic levels of yield; here, editor Kelley Wright explains how he is now applying that time-tested strategy to the development of a new model portfolio of core long-term holdings for conservative investors.

Steven Halpern:  Our guest today is Kelley Wright, a long standing expert on dividend and value investing and editor of the industry-leading Investment Quality Trends. How are you doing today, Kelley?

Kelley Wright:  Very well, thank you, and you?

Steven Halpern:  Very good.  We appreciate you joining us, today.  

Kelley Wright:  Absolutely.

Steven Halpern:  In assessing investment ideas, you track that historic yield parameters of individual stocks could determine if the shares are overvalued or undervalued.  Could you explain this process for our listeners?

Kelley Wright:  Sure, Steven. One of the characteristics of very high quality dividend paying blue chip stocks is that they tend to fluctuate between high and low dividend yield boundaries. What we do is we track these fluctuations and find repetitive areas where each of these stocks has a low price, high yield, and a high price, low yield.  

It makes it kind of simple then if a stock has a long-term history—and I mean like 25 or 30 years—that it stops declining when it reaches that high yield area. That’s a really safe place to buy.  

If you sell it once it reaches that low yield area, you pretty much rung all you can out of the stock. That’s a really good place to sell and protect all those gains and dividends you’ve collected over the years.

Steven Halpern:  Now, just to be clear, these parameters are based on the actual yields of the stock, not the price. If a company raises its dividend, it will concurrently lift the parameters that you’re looking at.

Kelley Wright:  Absolutely. You hit the nail right on the head.  It’s not price specific, it’s yield specific. I would say the explanation for that is that investors have determined with each individual stock that when it reaches a certain dividend yield area, that that represents good value.  

No matter what the price is, it’s when it offers this specific area of yield.  That seems to be what drives their buying and selling decision.

Steven Halpern:  Now, while yields are a critical part of this strategy, you also require stocks to be blue chips.  What are some of the criteria you look at to determine if a stock meets your high standards for quality?

Kelley Wright:  Sure. What we’re really looking for, Steven, is competency. What we’re looking for is both dividends' and earnings' improvement at least five to seven times over a 12-year period.  

We look at the S&P quality rankings. That has nothing to do with the credit quality, but it’s a look at the earnings and dividends persistency.  We want an S&P quality ranking in the A category.  We’re looking for institutional interest in the stock, at least 80 institutional investors.


We’re looking for liquidity.  We don’t really care if a stock is a large-cap, a mid-cap, or a small-cap.  What we’re looking for is a sufficient float so that we can get in and out of it if we need to.

Last, and the most important, is we’re looking for at least 25 years of uninterrupted dividends.  We take those six criterions and put them together and they form what we call our filter, the criteria for select blue chips.  If the company can pass that screen, then we’ll take a look at it to define its dividend yield parameters.

Steven Halpern:  Now, you’re currently in the process of applying your overall investment strategy to the development of a new portfolio that you’re designing for conservative long-term investors.  You call this the core portfolio.  Could you explain the concept behind this?

Kelley Wright:  Sure, Steven.  Here’s, kind of, the genesis of it.  You said, you know, for better or worse, the bogie that most people use to measure investment performance, is against that of the S&P 500. If you look at the S&P 500, it’s broken down into about ten or 11 individual sectors.  

The way that the S&P sectors are constructed is that—and these are all names that people should be familiar with—is like Consumer Discretionary, Consumer Staples, and Healthcare, Financials, Energy, etc.  

When you look at each of those individual sectors, they’re what we call capitalization-weighted, meaning that each sector will consist of a number of stocks and they’re ranked from the largest company to the smallest company. When the index is comprised, more money goes into the largest company, and then the next largest, and then the next largest, etc.  

While the S&P is not really representative of the blue chip quality that we’re really looking for, what we have found is that if, say, two or three or maybe four of those top stocks in each sector are what we call our select blue chips and we can buy them when they’re at their undervalued area, what we’re going to end up with is broad diversification against all the major S&P sectors and we’re going to be concentrated, though, in only those top three or four stocks in each sector.  

What our research has shown us is that you get a higher overall dividend yield, you get less volatility, you get the lion’s share of the capital appreciation of the S&P.  You can actually kind of outperform the S&P without having to own all 500 stocks. You can do so on a much better risk-adjusted basis.  That’s our concept for the core portfolio.

Steven Halpern:  I understand that you expect it will take some time to find the stocks that will meet your criteria to build this portfolio, but I was hoping perhaps you could walk our listeners through a few names of those core portfolio holdings that have already qualified.


Kelley Wright:  Sure.  Well, let’s just take a sector for example.  Let’s say it’s the Consumer Discretionary, for example.  Consumer Discretionary is products that people buy but they don’t necessarily have to have.  In that area, you’re looking at say a Walt Disney (DIS), Home Depot (HD), McDonald’s (MCD), and a Nike (NKE), for example.  

That just so happens to be that Disney, Home Depot, McDonald’s, and Nike are four of the six largest holdings in the consumer discretionary area.  We would like to own those four stocks when they represent good value.  Right now, that would be McDonald’s.  

If you want to get a Consumer Discretionary stock, we would recommend McDonald’s. If you want to take a look at Consumer Staples, staples are things that you pretty much have to have; Proctor & Gamble (PG), they make products for the kitchen, the bathroom, and personal hygiene.  

Coca Cola (KO), Phillip Morris International (PM), CVS Health Corp (CVS), Wal-Mart (WMT), you know, those kinds of companies.  What we would want to do is we would want to own, probably, Proctor & Gamble and Coke, CVS, Wal-Mart, and Phillip Morris International.  

That’s a really, really giant category—Consumer Staples—but if you just own those four or five stocks then you’re great.

Steven Halpern:  But do any of those happen to also meet your yield criteria for purchase?

Kelley Wright:  Absolutely.  For example, right now Coca Cola is undervalued. CVS is undervalued.  Phillip Morris International is undervalued.  Wal-Mart is undervalued. Those are all stocks in that Consumer Staple area that you could buy right now at the undervalued level.

Steven Halpern:  Now, finally, you note that your core portfolio will comprise long-term positions that, once you’ve bought, you're willing to hold through thick and thin until their whole values have been realized. In your view, how important is this long-term patience to an investor’s success?

Kelley Wright:  It’s critical, Steven, and here’s why:  When you’re talking about great blue chip companies, they will often take years to go from the undervalued area to the overvalued area.  

In the meantime, though, while you’re waiting for that full price appreciation, you’re getting very consistent and meaningful dividend increases along the way.  

You want to capture every dividend and every dividend increase you can while the stock offers good value, because once you get to overvalued, you’re going to sell it. 

In other words, you want to make as much hay as you can, but you’ve got to give time for the sun to shine and the hay to grow before you get to harvest all of it.  

Steven Halpern:  Again, our guest is dividend expert Kelley Wright of Investment Quality Trends.  Thanks for your time; I really appreciate your insights.  

Kelley Wright:  Thanks for having me, Steven.

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