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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; 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 68 results on Aug. 10, and per a previous article (see below for explanation), the highest-momentum, high-yield stocks have historically been the best-performing, so I have listed the top 10 stocks below.

    The article in reference was a study done by Charles Schwab which 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.

    I was especially eager to look at this month's results. The result market sell-off has increased the dividend yield on most stocks as share prices drop. Thus, we have more total stocks on this month's preliminary list then we have seen in previous months. Also, the intermediate trend (6 month returns) can help identify stocks that have held up better during periods of turmoil. The market selloff could continue, so investors should be patient and ease into any long position. Hedging or timing entries into long positions is also an option as I have detailed on numerous occasions, including this week.

    For nimble and patient investors, the recent sell-off presents potential opportunities to purchase dividend stocks at a discount. This strategy is but one approach for identifying these potential stocks. 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 Aug. 10, the strategy is selling R.R. Donnelly & Sons (RRD) and Health Care REIT (HCN) and using the proceeds to purchase Consolidated Edison (ED) and PPL (PPL). Keep in mind this is a hypothetical and for tracking purposes it is fully invested at all times and does not use stop losses. I frequently detail additional timing and hedging strategies at Scott's Investments.

    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 to 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 12%.

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    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 down 7.25% (returns exclude commissions, taxes and slippage).

    Below are the top 10 high-yield momentum stocks.

    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 Twitter.