Saturday, January 29, 2022

Stop Chasing Yield

I use a homemade excel screener to select Dividend Growth stocks for the DT portfolio. Taking the time to put the screener together has yielded some valuable insights!

As I've studied Dividend Growth Investing, one mistake I saw newer investors making was chasing yield. Finance Hippy's comment below struck a nerve. 

 

Let's investigate! Take a look at the chart below. Sure, AT&T raises their dividend each year, but adjusted for dividends the 5 year trend is negative.

StockRover - Dividend Adjusted Price

Let's just run a scenario below. Say I bought 100 shares in 2017 at ~$40 and the price goes down linearly each quarter down to the current $25.20. Dividends are reinvested and I'm counting the meager dividend increase each year. At the end of January, your $4,000 has turned into $3,514.  Finance Hippy is right, you'd be better off keeping 7% of cash in savings.


What if we apply this thought process to our selection process? Of my selection of 1,706 stocks, I'll filter any that have a current yield of between 6% - 15%.  That selection narrows the field to 153 stocks. The average return of this selection over 5 years is 46.4%. This is annualized rate of return of 7.9%.

Dividend Town Screener - Stocks with 6% - 15% yield

Let's see where some qualitative filtering gets us. Let's take that same selection of 1,706 and choose all everything yield 4% and below. Now I'll also select higher quality stocks by filtering anything with a DT quality score of  >18. These are going to be higher quality stocks that have higher growth, quality, economic moats, etc.  

With this selection, I have 293 stocks to choose from, with an average 5-year return of 143.5%. Right off the bat, chasing quality gives a better chance of netting higher stock appreciation than chasing yield. 

Dividend Town Screener - Stocks with <=4% yield, DT grade 18-25 and >4 years of consecutive dividend increases 

To do a quick comparison below, the left side is a stock at $40, at a constant 7% yield and price appreciation of 46.4%. Growing linearly and reinvesting dividends, $4K investment turns to $8.4K. On the right side we have 2% constant yield and price appreciation of 143.5%. Same situation, but the $4K investment turns into $10.8K.


Obviously your portfolio needs to be structured properly for number of years to retirement, risk profile, and other factors. After adjusting for those factors, with longer-term horizons you're better off searching for higher quality dividend stocks than higher yielding stocks.

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