Jim O’Shaughnessy on Picking Stocks for a Rising Income Stream

By on August 21, 2012

James O'ShaughnessyInvestors can assemble a portfolio of dividend stocks providing nicely rising income according to Jim O’Shaughnessy, author of What Works on Wall Street, Fourth Edition: The Classic Guide to the Best-Performing Investment Strategies of All Time.

O’Shaughnessy and Thomas Lee of JPMorgan were interviewed by CNBC’s Becky Quick regarding their outlook for the markets. Quick pointed out the S&P 500 has been up 12 percent over the past six weeks. Lee said there is lots of skepticism regarding the rally which gives it the potential to move a lot higher. Lee has revised his outlook for the S&P 500 and expects it to hit 1,475 by early November. He points to an increase in construction data and a slippage in institutional money manager performance (the worst relative to the market since 1995) as catalysts to drive the market higher.

O’Shaughnessy agreed with Lee regarding the lack of enthusiasm for stocks citing recent comments from Bill Gross and comparing them to the Business Week “Death of Equities” magazine cover from 30 years ago.

O’Shaughnessy said his firm conducted a study showing there is a 95% correlation between the 10-year Treasury yield and what investors receive from the current dividend yield from stocks over the following 10 years. He explained that with the 10-year yielding 1.8% and inflation running at 3% investors are locking in a loss.

O’Shaughnessy identified a strategy of providing rising income from a stock portfolio instead of a bond portfolio. O’Shaughnessy has 45 percent of their assets under management in European companies where they find “financially strong, market leading companies that are paying very high dividend yields.”

O’Shaughnessy said the portfolio they are featuring today is referred to as enhanced dividend and it’s a global portfolio seeking out high dividend paying stocks that have the financial strength to continue paying those dividends. He said it’s important to separate the sovereign problems of Europe from the companies. They’ve found the important metrics regarding future performance are related to value, financial strength, etcetera.

There are tremendous bargains in Europe and they’re paying very high dividends, O’Shaughnessy said. The yield on the enhanced dividend portfolio is 5.3%, he added. Contrasting that with what investors can earn from the bond market we see that it’s not even close, according to O’Shaughnessy.

O’Shaughnessy discussed some of his favorite stocks which include Lilly (LLY) yielding 5.49%, Verizon (VZ) paying 5.54%, Vodaphone (VOD) giving investors 5.7%, and Total (TOT) with a dividend yield of 5.37%.

O’Shaughnessy mentioned an experiment in which they looked at using the stock portfolio simply for income going back to 1962. Looking at the “worst decade for stocks” during the years 2000 through 2009 an investor would have increased their income by more than 12 percent per year, a cumulative gain in income of 183 percent, while the overall portfolio was still up 83 percent. O’Shaughnessy pointed out that 2008, the second worst calender year since 1931, actually showed the portfolio increasing its income for that year. It’s a great way to get rising income stream, he concluded.

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