Investing in dividend paying stocks offers a few benefits such as a hedging against inflation, dividend payers also provide a steady cash stream in bear market periods and serve as a way to add some cash to a portfolio without moving in and out of positions. During tough market environments we recommend buying safe, well managed, attractively-priced dividend stocks as opposed to fleeing the equity markets to the “safety” of the realm of fixed-income. This strategy serves as a way to “stay in the game” if the market does experience a run-up, while at the same time protecting your portfolio from a long-term bear market.
Utilizing The Applied Finance Group’s backtest system, we ran a strategy of investing only in companies with a market capitalization of greater than US$ 1 Billion and a dividend yield above 3%. The strategy has worked fairly well with the annualized returns over the last 12 years beating the overall universe. While the dividend paying strategy worked well, a strategy based on AFG’s valuation metric performed better.
The best results were achieved by utilizing both variables. When we limited our universe to companies that had a dividend yield greater than 3% and had an attractive AFG valuation score, the returns were even better than the standalone variables.
The companies that we have provided in our list of attractive dividend-payers include the following criteria…
To meet the screen criteria companies must:
a) Have above $1 billion market cap
b) Pay a dividend yield of 3.15% or larger
c) Rank above the 70th percentile of companies within its sector in valuation attractiveness