Using The Best Dividends Screen To Find Income Opportunities

17th Sep by Roland Head

9 comments 2033 reads

I recently used two of Stockopedia’s Guru screens to find growth stocks at reasonable prices. Today I’m switching focus and looking for good quality dividend stocks with reasonable valuations.

Stockopedia’s Guru Screens are preconfigured screens based on the methods of successful investors. You can find them using the browse tab on the left of the screen – the Income Investing screens are here.

The top-performing income screen is the Best Dividends Screen. At the time of writing it’s delivered a cumulative gain of 315% since inception:

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This is equivalent to an annualised return of around 12% since inception, comfortably above the long-term average of c.7% from the UK market.

This chart shows the performance of the screen relative to the FTSE All-Share Index:

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One point worth noting is that this figure excludes dividend income. At the time of writing the stocks in qualifying for the Best Dividend screen have an average yield of 4%.

Assuming the screen has provided a similar rate of income since its inception, would take the total return over 12 years to around 365%, equivalent to 13% annualised.

While that’s less than some growth-focused screens have delivered since 2012, it’s a very creditable result that most investors would rightly be happy with.

In this piece I’m going to look at the rules behind the Best Dividends screen and consider a selection of the stocks highlighted by this approach.

I am also a fan of some of the other Guru income screens, so I may consider some of these in a future piece.

Screen: Best Dividends

The Best Dividends Screen is based on research by the American Association of Individual Investors.

Essentially, it’s a value investing approach that looks for stocks with dividend yields above their historic norm, and sustainable payouts.

The logic behind the screen is that by buying good quality dividend stocks at attractive valuations, investors can benefit from attractive income and capital gains as valuations revert to more typical levels.

The rules

The rules for this screen are relatively simple. Let’s take a quick look.

Div Streak >4 & Div Growth Streak >2: these rules look for companies with a track record of consistent and rising…

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Don`t let the tail wag the dog

17th Sep

I personally find a screen like this a little restrictive. I think the Payout Ratio and DPS CAGR options are sensible, but I dont see why the yield has to be greater than the 5 year average. That would have excluded you from Games Workshop for the last several years whereas it has continually paid a good yield and grown it apart from briefly during the Covid period. I personally prefer screens with less wide ranging criteria. Would a screen with just dividend yield, basic payout ratio cover and basic dividend growth sorted by Stock Ranks perform better. Especially as you have the ability to do a more detailed analysis of the top shares in the screen, and weigh up these other factors without excluding anyone.

LumpedOn

Roland - great article again with interesting ideas for income. However, perhaps we need to see post-October budget whether high income generating assets are still interesting tax-wise - and whether ISAs etc still prove to be tax shields.

I'm not in full agreement with your assessment of Computacenter (LON:CCC) and its long term growth though, my thoughts for critique & comment being:

It was a long term, large core position for me since buying at below £10 in 2017 but the growth was only there up to mid-2021 (during which time the dividend more than doubled) . Since then it has effectively flatlined (with peaks and troughs) being now at the same price level as end of 2020/2021. I traded out at £29 in 2021 but was tempted back in (on similar thinking to that within your article)and held again until this July when I sold out again at £29. This may seem like a good result overall, but in truth a modest divi return and no capital growth over 3 years did not justify it as a core holding for me any longer. Actually I also sold out of Celebrus Technologies (LON:CLBS) (same sector and same "buy" timeframe) as personally I don't see the sustained growth in this sector over the coming years. Not sure if it's a post-Covid bubble thing, or something I'm missing, but I just don't see the growth getting back to the pre-2021 kind of ramp.

You may well be correct in your view, but I have built up core holdings of PayPoint (LON:PAY) which is yielding me 8.25% and TP Icap (LON:TCAP) yielding 7.2%. And these 2 have significantly outperformed Computacenter (LON:CCC) in SP growth over the last 12 months. Both of these fail this screen, but I guess partly that is to do with timing - I simply take my capital allocated divided by income received to generate my %age. As always. we each have to make our own decisions ! Thanks for the thought provoking article .

bohenie

Hi Roland - Like your analysis of chesnara - as you say - it's not been a brilliant investment over the last ten years - but could well be in the coming years. The business model works - far less complex than Phoenix and who knows may be bought out at some time.

MetalMaid

A very interesting and informative read.

ken mitchell

I also think that screen is far too restrictive and it included shares that aren’t even high yielders. This is the best time in my investment life for searching out quality big dividend paying shares and Investment Trusts and some I hold have yields in excess of 10%. The following are a few of my high yielders that are just examples and not recommendation to buy now.

Aviva (LON:AV.) 7.5% dividend and Increasing the interim and final dividends by mid single figures %.

Legal & General (LON:LGEN) 9% dividend. Target annual dividend increase now reduced to 2% and with buybacks starting instead.

Phoenix group (LON:PHNX) 10% dividend . Tiny annual dividend increases.

M&G (LON:MNG) 10% dividend. Small annual increases.

Abrdn (LON:ABDN) 10% Dividend flat. Sitting duck for a bid or break up after years of bad Management now looking fully priced in.

Chesnara (LON:CSN) 9% diviidendand also on Roland’s screen,and he’s coveted it too. Chesnara been a lousy performer except for the big dividend for years now. I hold in case it tempts a bidder.

Henderson Far East Income (LON:HFEL) 10% For too long the dividend has been at expense of capital gains, but new Manager and changed investment tactics might see improved performance.

Ithaca Energy (LON:ITH) 18% dividend if held.

Serica Energy (LON:SQZ) 17% dividend. Latest one held but no comment on the final.

Amedeo Air Four Plus (LON:AA4) 14% dividend (8p a year paid quarterly until 2016 at least) and it was 20% until recent share price gain on the back of Boeing’s problems. Any further share price upside for now looks frothy, Dividend is near to 25% at my 34p buy price.

Also is Dividend Streak >4 sensible as it excludes all the stocks that had to cancel their dividend due to Covid, or is that a deliberate ploy.

Roland Head

18th Sep

That's a good point - it may exclude some good companies whose dividend records were disrupted by Covid (even if they later made up the payments).

This kind of thing is an inevitable feature of screening. In my personal investing I tend to ignore any disruption to payments in 2020/21 as long as the company's dividend paying capacity remains largely unchanged post-pandemic and it has resumed payouts at a similar level.

But it's a personal choice...

Roland

Hi LumpedOn, thanks for your comments.

Re. Computacenter (LON:CCC) (I hold) - you may well be right. For what it's worth, my view is that the peak profits from 2021-23 were not entirely sustainable due to one-off factors like pandemic spending and the initial AI boom.

But I think the long-term structural growth story remains intact, albeit perhaps at a slower rate than in the past, given the company's larger size.

Computacenter's run-rate profits are now double what they were in 2018, but the group's expansion into North America is still at a fairly early stage, I think. In addition, I believe it's a very well-run business with some strong quality characteristics.

Time will tell, though. I could be too late to the party!

Agree re. TP Icap (LON:TCAP) - I hold this in the SIF folio (and personally) and things do seem to be moving in the right direction at the moment.

raggedtp

And look at Volta Finance (LON:VTA) , with continued growth in NAV, with 8% div on NAV translating to 10.5% @ the current 25% discount to NAV. V low defaults under new-style CLO construction, plus the mark-to-market valuation means NAV should increase further as central interest rates decline. Would buy more if we weren't fully loaded on our diversification model on no more than 4% in any position. Hmm... (And do currently hold 5 of your recommendations, Ken).

Using the Best Dividends screen to find income opportunities

Screen: Best Dividends

The rules

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Roland Head

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