Peter BrimelowHappy with high-yield investing
6/14/12 12:01 AM ET (MarketWatch)
NEW YORK (MarketWatch) -- In a roller-coaster year (make that decade), high-yield strategies continue to work.
Three of the top-10 performers over the last 12 months through May, as measured by the Hulbert Financial Digest, are high-yield letters. One, Morningstar DividendInvestor is No. 2, up 9.9% vs. negative 1.75% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.
(And the top performer, Medical Technology Stock Letter, up 12.9%, is in a notoriously volatile sector. See April 26 column.)
DividendInvestor has quietly assembled a strong record. (See Jan. 12 column.) Over the past three years, DividendInvestor is up 20.23% annualized vs. 15.29% annualized for the total return Wilshire 5000. Over the past five years, the letter is up a healthy annualized 5.08% vs. negative 0.66% annualized for the total return Wilshire.
Editor Josh Peters exudes reassuring calm. He wrote recently: "Rapid day-to-day changes in stock prices are something I try my best to ignore, at least in the absence of any hard, fundamental developments to explain them. … A big part of successful investing is knowing what you can and can't do, and I can't think of any reliable way to outguess the hot money when it comes to the latest rumors out of Spain, China, or Washington, D.C."
He concludes: "Far better to operate with some basic observations about the long-term landscape -- principally an expectation of slow growth and exacerbated volatility -- and try to select individual companies that can thrive regardless"
An illustration of the DividendInvestor method: Peters simply shrugs off recent falling energy prices.
He writes: "Only a small part the value of a
And, Peters points out, these particular stocks are so cheap on a price-earnings basis that there is a "margin of safety" even if energy doesn't rebound: "Right now Chevron yields 3.6%, while Shell pays a handsome 5.2%, and both trade well below my Dividend Buy prices."
The "Dividend Buy price" is Peters' refinement of the fair value that Morningstar's fleet of analysts estimate for all of the stocks they follow. Normally, Morningstar discounts this by varying amounts, depending on the risk, to arrive at a "Consider Buying Price."
But Peters explains: "I'm willing to pay more than the Morningstar Consider Buying price when buying a new stock or adding to an existing holding. My Dividend Buy prices add an explicit premium for large dividends (those in excess of the market average yield of 2%) -- that help reduce the amount of capital at risk over time."
One example of this system in action: Peters writes that "
(Philip Morris closed Wednesday night at $85.01)
This is a fairly harsh discipline. A couple of weeks ago, Peters acknowledged that "as this month's issue goes to press, only 10 of our 34 stocks [in his model portfolios] are trading below their Dividend Buy prices."
But he added: "If you plan to cherry-pick a handful of stocks … I believe insisting on our Dividend Buy prices provide better protection from loss."
The rest of DividendInvestor's list of "Stocks to Consider Buying":
AmeriGas Partners L.P. (APU)
American Electric Power Co. Inc. (AEP) P
Energy Transfer Equity L.P. (ETE)
NuSTAR Energy L.P. (NS)
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