For the first time in the past four years, my high-yield, low-risk stock screen has failed to keep pace with the market. But the cumulative total return from the screen still stands at an impressive 122 per cent over four years (or 109 per cent when a 1.5 per cent charge is factored in for dealing costs) compared with 42.8 per cent from the FTSE All-Share, which suggests this screening approach still has longer-term merits.
| Year | Low-risk, high-yield | FTSE All-Share |
|---|---|---|
| 2011 | 20% | 0.5% |
| 2012 | 20% | 17% |
| 2013 | 44% | 8.5% |
| 2014 | 7.1% | 12% |
Source: Thomson Datastream
Part of the issue with last year's rather disappointing performance - a total return of 7.1 per cent compared with 12.3 per cent from the market - was that relatively few stocks were picked up by the screen in 2014. Just four shares passed all the tests last year, which meant the portfolio was more concentrated and therefore more risky. Indeed, if we take into account the performance of the eight extra stocks that I highlighted in last year's article, which passed all but one of the last year's screens test and were included in my write-up of the screen, the total return improves to 10.7 per cent - increased diversity muted the underperformance.
| Name | TIDM | Total return (16 Apr 2014 - 28 Apr 2015) |
|---|---|---|
| Devro | DVO | 28% |
| National Grid | NG. | 14% |
| XP Power | XPP | -4.8% |
| Majestic Wine | MJW | -9.2% |
| United Utilities | UU. | 34% |
| Severn Trent | SVT | 26% |
| William Hill | WMH | 19% |
| Tarsus | TRS | 14% |
| Chesnara | CSN | 6.8% |
| GlaxoSmithKline | GSK | 4.9% |
| Kier | KIE | 1.7% |
| ITE | ITE | -6.2% |
| FTSE All Share | - | 12% |
| Top 4 | - | 7.1% |
| Average | - | 11% |
Source: Thomson Datastream
This year's selection of high-yield low-risk stocks is once again extremely limited - just three shares from the FTSE All-Share passed all the screen's tests. Generating a decent list of stocks that pass all my tests is becoming increasingly difficult for many of my screens. This may be because valuations are now looking fairly high after several years of strong market performance. That doesn't mean calamity is around the corner, but it does mean it's harder to find clear bargains and there is more chance that the screens will alight on shares that are cheap for a reason. For the high-yield, low-risk screen the job is particularly hard because rather than looking for value relative to the wider market, it assesses value in absolute terms - a dividend yield of 3.5 per cent or more.
The screen also uses beta as a key measure of risk. A beta of over 1 suggests a stock is more responsive to the wider movements in the market, which is a trait often associated with shares in cyclical companies or those with other fragilities hard-baked into their business models. The other criteria mainly test for companies with solid track records. The current ratio tests for companies that are well placed to pay upcoming bills. The screen does not set any criteria for debt levels, though, as many companies with strong defensive business models can safely take on relatively large amounts of debt thanks to the reliability of their cash flows (and well-managed, high gearing levels boost shareholder returns). The full screening criteria are:
■ A dividend yield of 3.5 per cent or more; ■ A one-year beta of 0.75 or less; ■ 10 years of unbroken dividend payments; ■ 10 years of positive underlying earnings; ■ Underlying EPS higher than five years ago; ■ Underlying dividend higher than five years ago; ■ A return on equity of 12.5 per cent or more; ■ A current ratio of one or more; ■ Market capitalisation of more than £100m; ■ Dividend payments covered 1.5 times or more by earnings |
The three stocks that passed all the screen's tests are given write ups below from the highest to lowest yielding shares. Two of the shares are only yielding over 3.5 per cent due to special dividend payments, but as both companies return capital as a matter of course, in my opinion they are valid results. I’ve also included a table of ten shares that passed the key 3.5 per cent yield test but failed one other test.
THREE HIGH-YIELD, LOW-RISK STOCKS
