Geraldine Weiss-Lite Screen: Three dividend darlings for scrupulous investors

Dividend paying stocks can be a hugely attractive option for investors seeking to cushion their portfolios from market volatility – yet selecting income-generating shares comes with risks. While companies with frothy current yields may prove an immediate temptation, applying some additional metrics to limit downside risk can help investors taking the plunge to sleep at night.

For more than 50 years Geraldine Weiss has been widely regarded as one of the investment community’s most astute dividend hunters. The now retired editor of the US dividend newsletter Investment Quality Trends (http://www.iqtrends.com), Weiss developed a formula for identifying companies with strong dividend track records that are attractively valued in the market.

Weiss, of course, is not alone in formulating methods to select dividend stocks. Last week we considered another strategy known as Dogs of the FTSE 100 - a technique that calls on investors to pick out the 10 highest dividend yielding stocks in the index, invest in each one and then tuck the portfolio away for one year. In the same way, Weiss’s strategy looks for high yielding stocks that are apparently mis-priced – but her approach is much more demanding, requiring ongoing review and additional criteria. You can read more about it here.

At its heart, the technique looks for quality and value. It uses the dividend yield of a stock (derived by dividing the dividend per share by the stock price) as the critical measure of its valuation. If the yield is high it may signal a buying opportunity, if it the yield is low or drifting lower then that could be an indication to sell. Each company also needs to have a good quality track record and pass an additional set of robust criteria to prove it.

Weiss given the PRO treatment

Using Stockopedia PRO we have designed a Geraldine Weiss screen to get as close as possible to her criteria given the limitations of our UK based data set. Weiss liked her companies to have a 25 year dividend history, known in the US as “Dividend Aristocrats” but unfortunately, in the UK, these companies are as rare as hen’s teeth and the equivalent UK index covers just five years (known as Dividend Achievers), so we’ve relaxed this criterion and one or two others that are more US market specific.

As a result, our Geraldine Weiss Lite screen uses the following metrics:

• First, the company’s dividend must have increased in five of the last 12 years
• The dividend per share must have increased at least three times in six years – and it can’t have fallen more than once in that time
• Earnings per share must have been increased at least three times in six years
• The dividend per share yield over five years must average at least 0.9% (another way of reading that is to say that the current dividend yield must be within 10% of the stock’s historically high dividend yield)
• The company must have at least 5m shares in issue
• The payout ratio – the measure of earnings paid out in dividends – must be less than 50% (the inverse of this metric is known as dividend cover, which tends to be more popular in the UK)
• The long term debt-to-assets ratio – a measure of the financial leverage of the company – must be less than 50%
• Finally, the current ratio – which measures whether or not a firm has enough liquid resources to pay its debts over the next 12 months – must be greater then 2

Three's a crowd

There are only three companies meeting these criteria on London markets, including one stock each from the FTSE 100, FTSE 250 and AIM indices.

The blue chip is the £5bn market cap medical devices giant Smith & Nephew (LON:SN.), which has seen its share price fall from 730p to 578p since February. There was relentless speculation earlier this year that the company could be acquired by one of its larger rivals – with Johnson & Johnson touted as a possible buyer. Analysts have said that any acquirer is likely to have to pay a hefty premium for the business as well as clear tough competition rules. Nevertheless, rumours of a potential deal still circulate. Last year S&N raised its interim dividend by 10% to 6.0 US cents (3.81 pence) and it final dividend also by 10% to 9.82 US cents (5.975 pence), taking the yield to 1.69%. The cash-rich business easily clears the remaining Weiss criteria and its impressive dividend history also earns it a place on the Mergent-inspired Dividend Achievers screen.

Meanwhile, shares in Internet and catalogue home shopping company N Brown (LON:BWNG) have traded between 296p and 231p during 2011, with the shares currently changing hands at the lower end of that range. Despite its exposure to consumer spending – with a broad range of brands selling clothing, footwear, household and electrical goods – N Brown has consistently grown revenues and profits over our five-year data range. Dividend increases have followed and last year’s 15% rise to 12.41p represented a yield of 5.24%. With a market cap of £600m, FTSE 250-quoted N Brown doesn’t ooze all of the blue chip characteristics required by Weiss. However, its presence as the only London listed stock to make it on to legendary investor Ben Graham’s Defensive Investor screen is a point of interest. Stocks meeting Graham’s demanding criteria are required to have long histories of profitable operations and strong financial condition – which means a presence here is an interesting additional perspective for a Weiss stock.

Finally, as an AIM listed company, the presence of Albemarle & Bond (LON:ABM) on our Weiss Lite screen might cause the lady herself to break a sweat. With a market cap of £184 million, the pawnbroking, financial services and jewellery business has been a revelation for investors that got in early – but its growth ambitions remain strong. In 2000, with a 43-strong chain of stores, Albemarle posted pre-tax profits of £2.0 million and paid a total dividend of 1.25p. In 2010, the chain had grown to 202 stores, profits were up to £21.0 million and the dividend had risen to 12.5p (up 6.4% on the year) – representing a yield of 3.54%. Shares in the company leapt from 300p to 400p in the first six months of this year but currently trade at 350p.

Challenging criteria

It should be stressed that our Geraldine Weiss Lite screen does vary from the stipulations set out in the original formula and, either way, a screen like this is just the starting point for further research. This approach takes the simple technique of searching for high dividend yields in a basket of stocks – and puts it on steroids. Not only are the criteria challenging to meet on a stock-by-stock basis but as market caps move then companies will fall off the Weiss Lite radar – and that means investors need to actively manage the portfolio. In return, they get a formula that builds in extra safety features of dividend cover and financial history which could add some comfort when it comes to selecting attractively priced, dividend paying stocks. We will be tracking the screen’s performance on Stockopedia PRO!