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NEW YORK (Scott's Investments) -- Once per month I run a high-yield dividend stock momentum screen and use the results to manage a hypothetical stock portfolio on Scott's Investments. The strategy did relatively well in 2010 and is one I continue to track because of its promise. In recent months I have also done a variation of this strategy with the Dividend Champions list in which I only search stocks that have had a history of raising dividends for 25-plus years.


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    The screen looks for high-yielding, high-momentum stocks, and last month's list is here. I screen the S&P 500 for stocks yielding greater than 4% and then rank them by six-month returns. There were six results on July 10 (as opposed to 47 last month) and per a previous article (see below for explanation), the highest-momentum, high-yield stocks have historically been the best performin,g so I have listed the top 10 stocks below.

    The article in reference was a study done by Charles Schwab that examined the 1,500 largest stocks by market capitalization from 1990 to 2009 and divided yielding stocks into four quadrants. It ranked the highest yielding stocks by six-month price momentum, divided them into five segments, and found that highest yield stocks with the highest six month price momentum outperformed a) all other momentum segments (in other words, those high yield stocks with lower price momentum) and b) the annual return of the other yield quadrants.

    As I have previously mentioned, the screen is more of a trading strategy and less of an income strategy, although the dividends do play an essential component in the overall returns. Thus, turnover could be high and the strategy is not for everyone but I have added a modification to the strategy to minimize turnover (see below).

    For Monday, July 11th, the strategy is selling Pfizer (PFE) and Spectra Energy (SE) and using the proceeds to purchase Bristol-Myers Squibb (BMY) and Health Care REIT (HCN).

    In an attempt to limit turnover in the portfolio, stocks with yields that have fallen below 4% due to share price appreciation will remain in the portfolio. Stocks will only be sold when yield falls below 4% due to dividend cuts or when the six month performance would otherwise lag the top 10-11 stocks in the screen. Philip Morris (PM) remains in the portfolio despite having a yield below 4% because its 6 month return is over 24%.
    This strategy is one of several I track with real-time results on the right hand column of Scott's Investments. Year to date the portfolio is up 3.09% (returns exclude commissions, taxes and slippage).

    Below are the top 10 high-yield momentum stocks as of July 11.

    Data source: Finviz.

    At the time of writing, author had no positions in stocks mentioned.

    Scott's Investments focuses on consolidating and tracking free online investment resources for the public with an emphasis on ETFs, portfolio/trading strategies and macroeconomics. Follow Scott's Investments on Stocktwits and Twitter.