In the continued debate around the valuation of equities, one dividend model, as developed by Investment Quality Trends, indicates that stocks are still moderately undervalued, writes Mark Hulbert for Barrons.
Investment Quality Trends dividend strategy looks for companies that are likely to be able to sustain their dividend, as a result of their strong financial charateristics, and secondly, the model compares a stock’s yield to its historical yield (not the overall market). “When a stock’s yield approaches the high end of its range, for example, a stock is considered undervalued—and overvalued when at the low end of the range,” explains Hulbert.
Investment Quality Trends tracks hundreds of dividend paying stocks, grouping them in “Undervalued” and “Overvalued” categories and within each of those categories stocks are split between undervalued/rising trend or overvalued/declining trend. According to Hulbert, the statistics are useful in assessing the market’s overall valuation because future returns have ” tended to be higher when the Undervalued and Rising Trend categories have been larger, and lower when most stocks are in the other two categories.” The chart below shows the current percentages compared to the averages over the last 50 year. The figures indicate a fairly valued to slightly undervalued environment for dividend paying stocks.
Investment Quality Trends’ insight is worthwhile listening to as its model portfolio ranks #1 over the last 25 years based on risk-adjusted performance by the Hulbert Financial Digest. The article concludes with 10 top scoring dividend paying stocks, which are highlighted in the table to the right below.