Geraldine Weiss | High-quality Out of favour Blue Chip Stocks

Geraldine Weiss has been called "the Grande Dame of Dividends". She is the celebrated erstwhile editor of Investment Quality Trends - one of the most long-lived of all investment newsletters, Investment Quality Trends has been making money for its subscribers since 1966. 

The newsletter is dedicated to the wonderfully old-fashioned idea that one should purchase the top dividend paying stocks when the dividend yield is historically high, sell when the dividend yield declines to historic lows and completely avoid stocks which pay no dividend at all.  

"Investment Quality Trends was the number one performing investment newsletter (in the U.S.) on a risk-adjusted basis over the last 15 years, earning 12.4% annualized. It was placed third for the last ten years and third for the past five years", as per a 2002 report by the The Hulbert Financial Digest (now part of Marketwatch). 

Check out ValuePickr's Geraldine Weiss Stock Screener selections for the Indian Stock Market, here.

Geraldine Weiss Investment Approach

Dividends don't Lie and The Dividend Connection are two books authored by Weiss that details her investment approach. These books are the primary source and inspiration for this article, and the stock screen.

Stock Picking strategy: Dividend Yield as a guide to value

Geraldine Weiss is a conservative blue chip value investor. She likes to buy quality stocks at a good value.

Stocks with a long uninterrupted dividend record is a sign of high-quality stocks. Why? simply because to be able to pay stable dividends over the long term a company must be earning sufficiently to cover all expenses and debt payments; paying increasing cash dividends year after year would imply consistently increasing earnings and point towards being efficiently run, well-managed companies. These type of stocks would have stood the test of time, having survived through all types of economic cycles.

Dividends are tangible evidence of a firm's profitability and proof that the firm's earnings are real. The consistent dividend payments become a reliable source of steady and increasing income. Its natural that these type of stocks are also well-regarded by the market. They are usually stable and the last to fall in a declining market.

Weiss believes Dividend Yield - dividends per share divided by price per share - is the most important measure of investment value. There is a significant impact on prices if dividends change. If dividends increase, the stock becomes more valued, and if dividends decrease the stock loses value.

On the other hand, stock prices can fluctuate between extremes in the short term. Lower share prices cause dividend yields to go high (indicating stock may be under-valued) and higher share prices lead to lower dividend yields (indicating stock may be over-valued). She found that thus a company's dividend yield fluctuates in a range that is unique to each company. Historical dividend yield ranges provide important clues to over & under-valuedness of a stock. She suggests stocks could be bought or sold when they reach the extremes of their historical dividend yield range.

Sustainability of dividends and increasing dividend payments are at the core of the Weiss approach. She therefore suggests starting on the selection process by narrowing down the list to blue-chip, high quality stocks. Companies that are run by good management, selling well-known products and services, with good marketing and R&D skills, and unwilling to cut dividends even in cyclical downturns!

Once this list of high-quality stocks is devloped, Weiss suggests buying these stocks using historical dividend yields as a guide. She tracks a company's dividend yield and share prices for over 10 years looking for historical high and low dividend yield turning points -where stock prices change direction. Her observation is that most stocks change price direction at about the same dividend yields.

When such a shortlisted stock's dividend yield comes within 10% of their historical high dividend yields, she suggests buying. However she suggests first examining the reasons for the price fall - specifically possibilities for a decrease in dividends - which would cause the stock's removal from the list.

Similarly she advocates selling the stock when its dividend yield comes within 10% of the historically low dividend yields. Although in such markets the stockprice may contiunue to rise, she believes the upside potential is overshadowed by the downside risk.

Geraldine Weiss Stock Screen Design

Objective

Primary Criteria

Criteria to locate stocks that match our screening objective

1. Dividend increases in 5 of last 12 years - Weiss's most reliable measure of good management

2. Improved earnings in atleast 7 of last 12 years

3. Must have paid dividends with no interruptions

4. Current Dividend yield within 10% of their historically high dividend Yield

Secondary Criteria

Criteria that ensure that the companies passing the primary screen do not meet our objectives just by coincidence, but because they are deserving candidates and truly meet our objective. Usually these are useful to eliminate the duds from creeping in.

1. A minimum of 5 million shares outstanding - An assurance of liquidity

2. Shares must be held by atleast 80 instituitions

3. Stock must carry a S&P quality ranking of atleast A- or above