Easy income

All but one of five portfolios selected by the screens over the past half decade have outperformed the market in the 12 months following the original screen. And while I chiefly monitor this screen on the basis of a 12-month holding period before a complete portfolio reshuffle, it is worth noting that on a buy-and-hold basis all five portfolios produced by the screen have outperformed the FTSE All-Share index from which the stocks are picked. The performance details can be seen in the tables and chart below.

*Alt values are based on portfolios based on a relaxed screening criteria used in 2014 and 2015 due to a low number of fully qualifying stocks - more details below.

However, in terms of performance, perhaps the screen's real boast at its five-year birthday (a time period that the finance industry often attaches great significance to) is just how much better its picks have been to funds managed by the pros. On a cumulative basis - based on switching from one set of screen results to the next on day of publication - the screen has delivered a total return of 125 per cent over five years, or 109 per cent if annual costs of 1.5 per cent are factored in. That compares with a median performance from 36 IA UK Equity Income funds with records of that length of 54 per cent, and is significantly ahead of the sector's top performing funds, according to Morningstar data. The table below shows the screen's cumulative return from its inception date just over five years ago compared with the top five IA UK Equity Income funds over the same period.

Source: Thomson Datastream and Morningstar (total returns are based on income reinvested)

*Alt values are based on portfolios based on the relaxed screening criteria used in 2014 and 2015 due to a low number of fully qualifying stocks - more details below.

True, some people may regard such comparisons as questionable given the concentration of the portfolios selected by the screen. Even looking at the relaxed version of the screen I've run over the past two years (which actually produces better performance of 137 per cent over five years or 120 per cent after notional costs), the average number of stocks held each year has been just 12.4, with the largest portfolio standing at 17 and the smallest standing at seven. Still, given the performance achieved by the screen I think if it were the work of a fund manager, while she or he would certainly be regarded as a maverick, she or he would also have plenty of plaudits at the moment.

The amazing thing about this outperformance is that it has been achieved by focusing on quite basic measures of income sustainability and risk. For risk, the screen chiefly looks at one-year beta, which measures how sensitive a stock price has been to wider market movements. This is generally considered a useful proxy for how defensive a stock is, but it's not an incredibly sophisticated guide. On the income side, the screen chiefly looks for signs of a decent yield supported by historic dividend and earnings growth along with forecast earnings growth and decent earnings cover. There are also a couple of light balance sheet tests, but overall the whole package offered by the screen is neither very demanding nor imaginative. The full list of criteria is:

But maybe the success of such a relatively simplistic screen should not come as too much of a surprise as it chimes neatly with the finding of psychologists that helped provide the intellectual grounding for significant aspects of behavioural finance. A frontrunner among these thinkers was Paul Meehl, whose 1954 paper 'Clinical versus statistical prediction: A theoretical analysis and a review of the evidence' found a large amount of evidence supporting the idea that the use of very simple formulas could often have superior predictive powers than experts with the same data and much more beside.

But drawing on the work of great academics puts me at risk of over-egging the significance of the past five years; after all, five years is not such a long time when it comes to investing. We'll have to see what's to be said for this strategy come 2021.

In the meantime, the results from 2016's screen provides some encouragement. Not only has the screen produced a decent number of results (10) following two rather fallow years, but the three stocks I've taken a closer look at from the screen's picks (see below) all appear to hold some promise. So far, in the years that the screen has returned fewer results it has produced less impressive returns, which means it is encouraging that 2016 has produced a decent batch of fully qualifying shares. That said, there is perhaps less encouragement to be taken from the difficult market conditions that have depressed share prices and pushed out yields, which in turn has made the screen more productive.

Over the past two years, while the high-yield low-risk screen has struggled to find many stocks that meet all its criteria (only three last year), I have run two portfolios made up of fully qualifying shares and a larger portfolio that also includes stocks that have passed the screen's key tests but have failed to meet one of its lesser requirements. In the 12 months since my 2015 screen, both the fully fledged portfolio and the larger and looser version beat the index. The larger portfolio actually did rather better than the three stocks that passed all of the screen's tests, which suffered due to the travails of retailer Next. In the 2015 performance table below, the three stocks that passed all the screen tests are listed first, with the also-rans listed below.

2015 performance

Source: Thomson Datastream

This year's screen results and fundamental data relating to the shares can be found in the table below. The shares are ordered from highest to lowest yield. I have provided a write-up of three stocks from the top, middle and bottom ends of the list.

2016 high-yield low-risk shares

Source: S&P CapitalIQ