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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 55 results on Nov. 10 vs. 58 results on Oct. 10. 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 11 stocks below.

    The article in reference was a study done by Charles Schwab, which examined the 1,500 largest stocks by market capitalization from 1990-2009 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.

    The intermediate trend (six-month returns) can help identify stocks that have held up better during periods of turmoil. Last month we saw strength in utilities, and it is clear from this month's list that utility stocks continue to hold up well relative to the rest of the equity market.

    For nimble and patient investors, the recent market turmoil could present potential opportunities to purchase dividend stocks at a discount. However, if the U.S. enters a recession in the near future (see my ECRI recession article here), then we could see greater buying opportunities ahead.

    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). I have also listed the payout ratios of each stock for informational purposes only. The payout ratio plays no role in this specific strategy but is an important element in a dividend stock examination.

    For Nov. 10, the strategy is selling CenterPoint Energy (CNP), Reynolds American (RAI) and Lorillard (LO). The proceeds will be used to purchase Ameren (AEE), Duke Energy (DUK) and Xcel Energy (XEL). Keep in mind this is a hypothetical portfolio and for tracking purposes it is fully invested at all times and does not use stop losses. A real-world application may be better suited to hedge the overall portfolio when the market is below long-term moving averages or to use stop losses on individual positions.

    One potential strategy an income investor could employ would be to sell covered calls against some or all of the positions. For example, NiSource (NI), which is currently up over 8% in the portfolio (excluding dividends), has multiple covered call opportunities. Using Born to Sell, the December 22.5 call last bid for $.45 and the January 22.5 last bid for $.80.

    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.

    This strategy is one of several I track with real-time results on the right-hand column of Scott's Investments. The portfolio is up 5.49% (returns exclude commissions, taxes and slippage) since its inception on 1/11/11, including dividends.

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

    Data source: Finviz.

    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.