Value Can Be Found Everywhere

01/19/2012 10:15 am EST

Focus: STOCKS

Kelley Wright

Managing Editor, Investment Quality Trends

That is the view of Kelley Wright from Investment Quality Trends during a mid-October interview, where he shares why that’s true even though he sees less quality than he used to.

There are a lot of ways to find value in the markets. One of those ways is using dividend yield. Our guest is here to talk about that, Kelley Wright, to define what that is for us. So, Kelley, first of all, how do you define value with dividend yield?

Well, the Holy Grail for all stock investors is, “I want to buy low, and I want to sell high.”

Well, that can be very subjective. What’s low to you may not be low to the next guy. So, we need some type of a mechanism, if you will, a metric.

What we have found is that really high-quality dividend-paying stocks tend to trade between two dividend-yield boundaries. If you look at them over long periods of time—15, 20, 25 years—you can find where you have a repetitive pattern of a high yield at a low price, and a repetitive pattern of a low yield at a high price.

So, we’re just smart enough to figure out that high yield, it’s a good area for value to buy, and that low yield, it’s a good time to sell and get out of it.

Alright, in the past ten years, has it been more difficult to find stocks that have these high yields with the economy and maybe companies cutting back on dividends?

You know what? It hasn’t been a problem finding the yields. What has been a real challenge for us is finding the quality.

We have six qualitative criterions that we use to define what’s a quality company. For years and years and years, we followed 350 or 400 stocks. Today, that number is down to 250. So it’s not so much that the yield isn’t there, but the quality of the market isn’t there anymore.

How much in and out of stocks am I doing when I find…how often do they bounce between these ranges where I need to buy and sell?

What our research says is right now, if you do the bell curve, that our average hold from buying one when its price is low and its yield is high and holding it…it’s about 1,400 to 1,500 days. So, four years, right in there.

Okay, is there a seasonal play in this at all? Are there more of these available at the end of the year, maybe during a Santa Claus rally or something like that? Or is it pretty steady across the year?

You know, it’s interesting. There are some that you could almost set your clock by.

McDonalds (MCD) is a fourth-quarter stock. We know at the end of the third and beginning of the fourth quarter, if you look at McDonalds, for whatever reason. I don’t know. It’s probably because they declare their dividend, and they pay the increased dividend. Other than that, not really. No really, but McDonalds is an interesting one.

So, with this strategy you’re getting the benefit of maybe rising stock plus some dividend at the same time.

Well, that’s the thing. A dividend tells us an awful lot about a company. No. 1, that it’s making money. A rising dividend trend tells us that their earnings are going up. OK.

We know that the only reason why a company declares a dividend is because their board knows they’re going to hit their numbers, and they’re going to be able to pay it. So, that shows us management’s confidence in the company.

But the last thing about a dividend is that we have found it to be a fairly good predictor of price increases. If you think about it, it’s pretty logical. It’s pretty rational.

If a company consistently raises its dividend, then the value to the investor is consistently going up because of the return that they’re getting. In a rational, logical world the market has to increase the stock price to reflect that increased value of the stock to the investor.

Alright. Finally, is there anything outside of this dividend that you look at, whether it be the Fed or any of the fundamental information that would affect the market or would affect that stock that you take into consideration and put that on the list?

Not so much the macro, because these dividend, these repetitive dividend yields are really established by the market, which is that great body of investors.

Over 15, 20, and 25 years, the market has determined that this high yield is a great entry point for stock ABC, and when the yield declines to whatever on stock ABC, it doesn’t offer value anymore. So, the market has kind of made that judgment for us.

So, we don’t really have to look at those macro things. We just follow these repetitive areas of dividend yield, and it all works out good.

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