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Finding Quality and Yield

02/07/2012 12:34 pm EST


Kelley Wright

Managing Editor, Investment Quality Trends

The dividend yield theory helps Kelley Wright of Investment Quality Trends find value in the market. Here, he explains how it works.

Kelley, any specific areas you think are very hot right now in terms of your strategy of finding value with dividend yields?

You know, right now...sometimes we go through periods where we can’t find anything, but right now the world is kind of your oyster. It doesn’t really matter. Consumer discretionary, utilities, oil and gas, tobacco—you name it, we pretty much have value kind of across the board right now.

All right. Is there any sector that seems to have value consistently, like two or three, or four stocks that all the time are ending up on your list?

You know, since we had the big sell-off in 2007 and 2008, and even though we’ve had a really nice run off the bottom, there’s still some defensive plays that investors seem to still be attracted to.

Things like Abbott Labs (ABT) and Johnson & Johnson (JNJ) are consistently showing up in what we call our undervalued area, which means they offer good historic value, and you could consider buying them. Coke (KO) and Pepsi (PEP), in the beverage area. Usually Altria (MO), which is in the tobacco area.

Let me see. Exelon (EXC) is a nice utility. Molson Coors (TAP). I don’t know if that has anything to do with the NFL rising again, but yeah.

How about international? Do you ever look outside of the US into international markets or anything like that?

Actually, as long as it trades on the New York exchange, it’s open to our analysis. But what we have found is that in our universe, most of our companies are multinationals, so they’re getting that impact.

You know, Procter & Gamble (PG), for example, is earning over 60% of their revenues now from overseas. So we’re seeing a lot of that. You know IBM (IBM)’s really a global market right now.

And how about allocation of your entire portfolio? Do you recommend a certain percentage for each of these, or is it up to the investor to decide that?

That’s usually personal, but when someone asks us, I our fund for example, I would rarely hold more than 5% of the fund in any single issue, and I try to avoid more than 10% in any one sector. And if you can get between 25 and 30 names diversified amongst a broad set of sectors, you’re in pretty good shape.

I know you look for a range, and when something’s in a range because they have high dividend yield or a low dividend yield, that’s what you’re looking for. How about technicals on the chart at all? If you’re looking at a previous 52-week high or low, does that impact your decision whether or not you buy it or sell it?

No, and it’s interesting. We say that we have a fundamental approach to technical analysis in that we have six criteria, which is a qualitative filter that tells us what a quality company is. But then when we find those repetitive boundaries of dividend yield, that is technical analysis in and of itself; we’re looking for repetitive patterns of dividend yield on a high and low basis.

Other than that, everything else kind of fits into that. It’s sort of baked into the cake for us, and so we don’t really have to look at a lot of these disparate indicators. As long as we can follow the yield pattern, we’re in good shape.

All right, and then finally, the people. Does the CEO matter, does the board matter, does Meg Whitman going from eBay (EBAY) to HP (HPQ)...does it have any bearing on your decision on these companies?

You know, one of our criterions is 25 years of uninterrupted dividends. For a company that can do that, they’re going to have to go through a lot.

They’re going to go through business cycles, they’re going to go through troughs, and they’re going to go through recessions and expansions. But more importantly they’re going to have to attract, train, and retain the next generation of talent that’s going to run that company.

The companies that fall into our universe, that meet our qualitative guidelines, they seem to be competent in that area, and they show us that they have the ability to continue the policies and the processes that have made them a high-quality company in the first place.

So just because of our qualitative criteria—I don’t want to take you over the hills and through the woods to Grandma’s house—but no, that’s a short-term thing for traders. For us, it’s a competent company doing what they’ve always done.

Related Reading:

The 10 Must-Know Market Forces for 2012

The Case for Small Firms with Big Yields

Follow the Blue Chip Dividend Hikes

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