How To Find Decent Equity Yields In A Zero-Rate World

For those who supply capital, the interest-rate nightmare continues and shows little sign of abating any time soon. These are great times if you’re borrowing, but it you want or need seeking investment/saving income, may be as bad as it gets. The only thing worse would be dividend reductions: Oh wait, given continuing uncertainties on the economic front (covid-19, an aging business cycle, brass-knuckle politics), that, too, is an ongoing concern. Investing smarts can’t cancel this, but there’s a lot you can do to make the best of it.h2 1. Manage Expectations/h2

As one who started in security analysis when the bank prime rate was around 20% and even rates in that range weren’t good enough to induce savers to buy CDs (banks also gave free gifts such as toasters or even color TVs), I never thought I’d see the day when I’d have to say, as I do now, that if you can get a dividend yield north of 2%, that’s pretty good and above 3% is excellent. Sure there are stocks yielding around 10%, or more, but that’s only on paper and based on historic payments. The stocks are priced low (which causes the yields to look high) because the market expects those companies to reduce or eliminate dividends, and in this area, Mr. Market turns out to be right very often.

You absolutely can find higher yields in fixed income. Some of it is in high yield (junk) where credit risk is a problem. But even for good quality choices, fixed income is, well, fixed. That means that if interest rates rise in the future, or even if investors start to anticipate future rate increases (maybe not tomorrow but with benchmark rates now around zero, this source of risk cannot be ignored), you’ll be stuck with the deteriorating principal. At least with equities, you can expect companies to raise dividends.

While risk of dividend cuts can never be eliminated, it can be mitigated through strategic choices to favor good stocks and strong companies.

I screened on On Chaikin Analytics using the following criteria:

• Start with a broad universe consisting of Russell 3000 stocks.
• The overall Chaikin 20-factor fundamental-technical Power Gauge rating should be Neutral or better: Usually, we focus on stocks with Bullish or Very Bullish ranks, but income investors should be willing to be flexible here, since they’re often willing to move lower on the reward-risk scale than are most other equity investors. But even for income seekers, we do want bullish ratings for some categories within the model
• Category ranks for the “Earnings Growth” and “Expert Opinions” must be Bullish: These tests are designed to steer us toward companies doing well earnings-wise well (and less likely to cut dividends) and tap into judgments of important stock market constituencies (that’s important — historic numbers alone aren’t enough in a world where past performance does not assure future outcomes).
• The factor rank for Return on Equity (ROE) must be bullish: This is the penultimate measure of corporate quality, an important thing if we care about dividend security. (We need not always emphasize it when we’re willing to take on more risk it’s ok to move down the quality scale, but this is a good time to be thinking about it).
• Yield must be above 2%

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A surprisingly good number of stocks, 92 of them, passed the screen. To narrow further, I added some technical criteria (stocks should be technically “oversold” and above a rising long-term trend line). Steps like these can be important. It’s always easier to fly with a tailwind than against a headwind, whether literally (airplanes) or metaphorically (the stock market).

Based on a final review of the Chaikin Analytics price charts using the bottom-up process we recommend, I chose three interesting dividend-stock ideas.