Getting Creative In The Hunt For Yield

Interest rates remain near historically low levels. This is great for the economy and the financial markets. But it remains terrible for those who want or need investment income. As usual in situations like this, there’s temptation to reach for as much yield as can be obtained in today’s environment. And the challenge, as always, is to steer clear of “sucker yields,” yields that look high because of price declines that anticipate dividend cuts. With all income seekers looking for the same thing, we need creative ways to assess dividend risk. Here are sone ideas generated by Chaikin Analytics content.

© Can Stock Photo / venimo

The Approach

OK. We understand that we can’t simply sort equity-income candidates by yield and pick from the top. What we can do is look for ways to raise the self-imposed yield ceiling as high as possible consistent with an acceptable level of dividend-sustainability risk. And the better we are at assessing this risk, the better our ability to accept higher yields than would be palatable to many other dividend players.

I tackle this task by eschewing traditional approaches to risk assessment such as the payout ratio and relying instead on general fundamentals and even more, on chart reading and measures of market sentiment (or, put another way, by outsourcing dividend risk analysis to “Mr. Market,” who I’ve consistently seen, is remarkably skilled at assessing dividend risk. (Note to Ben Graham: In today’s information-rich era, it’s time to update the myth that postulated Mr. Market as a manic depressive loser.) 

Here’s an approach that uses the Chaikin Power Gauge rating and the firm’s approach to chart analysis as described here

Part One: Identify Attractive Equity Income ETFs

I started with the recently-introduced Chaikin ETF screener and identified U.S. Equity Income ETFs that had (i) bullish ETF Power Gauge ratings which are based on the ratings of the fund’s constituent holdings and technical analysis of the ETF price, (ii) yields of at least 3%, and (iii) Betas below 1.00.

The Chaikin database starts with 59 domestic equity income ETFs.

  • Most, 44 of them, have Betas below 1.00, but it’s still a good idea to eliminate the 15 more volatile funds.
  • Only 23 out of 59 have yields above 3%. When we also eliminate those with betas above 1.00, we’re at 21 candidates.
  • If this were a stock screen, we might start here. But nobody needs to own 21 ETFs, each of which is a diversified (within its chosen style) portfolio unto itself.
  • Limiting consideration to those with bullish Power Gauge ratings, we’re now down to 9 ETFs. That’s still more than many would want to own, but at least now, we’re down to the point where its feasible to look at them individually and hone in on those with higher yields (relative to the final 9) and favorable charts.
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