The Geraldine Weiss Dividend Strategy

I had a request from a reader to talk about one of the more prominent proponents of a dividend based investment strategy – Geraldine Weiss. Weiss is the editor of the dividend newsletter called Investment Quality Trends that focuses on buying blue-chip stocks whose dividend yields are near the high of their historical ranges and selling them when they drift lower.

Although I have never been a subscriber to her newsletter, I have read her book, The Dividend Connection: How Dividends Create Value in the Stock Market. In a nutshell, her approach is simple – she looks at a stock’s historical dividend yield and determines if a stock is overvalued or undervalued based on where it sits in comparison to this historical yield. As presented in a Forbes article from a few years ago:

So what determines value? Most people believe earnings, but they can be manipulated, which we are seeing with Enron. Dividends are real money. That’s the hallmark of a blue chip stock. If a company doesn’t pay a dividend, it’s a speculation. So, hanging my hat on that theory, I studied a number of stocks, went back in the history of these stocks. And I realized that each of these stocks has its own individual profile of value, its own criteria for high and low dividend yield. Obviously when the yield was high, it would be time to buy the stock, and when the yield was low, it was time to consider selling. After a great deal of research, I noticed that these high and low levels of yield were repetitive. Some stocks would be undervalued when the yield would be 4% or 5% or 6%, and some would be undervalued when the yield hit 2% or 3%. But it was the repetition of the high yield that would indicate an undervalued area (time to buy) and the repetition of a low yield that would indicate an overvalued area (time to sell).

Of course this approach is of interest to me – looking to buy high dividend stocks that are mis-priced by the market. As most investors know though, is that it is often not enough to just base a buy decision on what the yield of the stock is. The underlying fundamentals of the company needs to be strong in addition to the high dividend yield to make it worth buying. The investment newsletter also has six other criteria above and beyond dividend yield:

1. Dividend increases five times in the last twelve years
2. S&P Quality ranking in the “A” category
3. At least 5,000,000 shares outstanding
4. At least 80 institutional investors
5. At least 25 years of uninterrupted dividends
6. Earnings improved in at least seven of the last 12 years

Pretty simple yet powerful approach – for a company to meet all 6 of these criteria would mean that you are looking at a very strong, and very stable company. If these are met, and the yield indicates that shares are trading at the low end of their historical range, then there is some safety in buying the stock with the high dividend yield. I am going to give some thought to subscribing to their quarterly plan (4 issues per year) as that makes the most sense given that I am not buying stock on a monthly basis. I don’t think my own personal approach differs from this very much, but it is good to get alternative sources of investment ideas and opinions before making a decision.

P.S. I was not compensated for this post in any way.