Context

The pandemic is not over. New variants of the COVID have proven to be much more contagious, which means that hospitalizations and deaths might remain high with labor shifts disruptions in several sectors which exacerbates supply-chain bottlenecks. In addition, derived uncertainty and risk aversion will derive in (still) suppressed demand.

Together with excess savings, pent-up demand, and loose monetary and fiscal policies, those bottlenecks have fueled inflation, first believed as transitory, now convincing of its persistence. As a result, Central Banks may act increasing interest rates, decelerating the economy to contain inflationary menaces.

Also geopolitical tension and climate change menaces will prevail during the year adding uncertainty at scale and scope, also uncertain.

For investors seeking yield, the landscape is as barren as ever. Bond yields now have to overcome inflation with risk of default reducing its attractiveness for the whole asset class. Stock Prices remain high and price opportunities are hard to find. With the S&P and DJI 42% and 24% above pre-covid levels respectively, and tech companies facing difficulties to convince investors about the new massive trends in consumption, to pick the next growth stocks has become a serious challenge.

Given prevailing rate trends, investors are increasingly reliant on equities for return and income.

2022 Focused on Value Stocks (Stability and Divididend Income)

With the above context, markets may not be able to digest higher borrowing costs.Fixed Income Markets does not any longer seem to be an alternative to rest upon. On the other side, Equities although expensive and under uncertainty, may produce yield throughout the dividend delivery channel.

Even though equity dividend yields are close to their lowest levels in many years (the S&P 500 dividend yield is just 1.3%), around two-thirds of the income in 60:40 portfolios are now derived from equities. Note that dividend measures for equities do not incorporate gross buybacks, which in the US and Europe can contribute meaningfully to returns.

Since 1929, dividends have contributed 38% of total returns in the US. Since 1986,dividends contributed 33% of total returns. While implied dividend yields might seem low compared to history, we believe that dividend yields will exceed nominal and real yields on US gov’t bonds. That has been the case since the Global Financial Crisis, a trend we expect to continue. Payout ratios appear sustainable, and companies have plenty of cash on their balance sheets.

Therefore, at this point, for the months to come, we believe the only opportunities for yield rely on Value Stocks either looking for dividend yield or by active trading strategies.

The Cherry Picking

Dividend stocks distribute a portion of the company’s earnings to investors on a regular basis. Most American dividend stocks pay investors a set amount each quarter, and the top ones increase their payouts over time, so investors can build an annuity-like cash stream. Companies that pay dividends tend to be well-established, so dividend stocks may also add some stability to your portfolio. That’s one reason they’re included on our list of low-risk investments.

There are two main ways to invest in dividend stocks: Through mutual funds — such as index-funds or exchange-traded funds — that hold dividend stocks, or by purchasing individual dividend stocks.

Dividend ETFs or index funds offer investors access to a selection of dividend stocks within a single investment — that means with just one transaction, you can own a portfolio of dividend stocks. The fund will then pay out dividends to you on a regular basis, which you can take as income or reinvest. Dividend funds offer the benefit of instant diversification — if one stock held by the fund cuts or suspends its dividend, you can still rely on income from the others.

Below is a list of 15 U.S.-headquartered high-dividend stocks, ordered by dividend yield. The dividend shown below is the amount paid annually. To compile this list, we take into account the dividend growth rate over the last five years and the dividend payout percentage, in addition to the dividend yield and amount.

Appraisal

Once we know dividend yield is “attractive” we then take a look at its pricing features. We compare assets using the following features (see Heatmap below)

Trading Volume as indicative of liquidity of the asset. Liquidity is rewarded by investors, since higher liquidity means prompt exit when required.

Risk as indicative of volatility in the price of the asset. Low volatility is rewarded by investors since uncertainty may mean potential (uncomfortable) losses which requires compensation.

Return measured as the price return in the last year.

Change from 52 week high as an indicative of how “cheap” the price looks against its last-year high.

Estimate of Price over Earnings Per-share as an indicative of how current price looks against Market’s Earnings expectations.

Change from 52 week Low as an indicative of how “expensive” the price looks against its last-year low.

Price to Earnings Ratio as indicative of how Price compares against its earnings, reflecting how market is rewarding (or penalizing) future vs current financial performance.

Price to Book-Value Ratio as indicative of how Price compares against its balance sheet, reflecting how market is rewarding (or penalizing) future vs current financial performance.

As shown in the above Heatmap, red-like indicator warns about undesirable outcomes in comparative terms, i.e.: lower liquidity, Higher Risk, Lower Return, closer (farther) from its last-year high (low), lower earning expectations, Higher Price (against its earnings performance or Current Balance Sheet).

The above Heatmap provides a hint on how to prefer (or avoid) form the selected assets cording to several criteria in single graph. For example, knowing its potential for Dividend yield, IBM CAT, NEE and TXN (with rows in yellow) should be preferred over the assets with reds or dark orange on its indicator’s row.

Portfolio Construction

We then design three different portfolios:

1.Weighting by opportunity prices. First portfolio is constructed preferring relatively cheap assets (farther from its last-year high) weighing heavily those which are cheaper.

2.Weighting by dividend yield. Second portfolio is constructed preferring relative better yield performance, weighting heavily those assets which have delivered comparatively higher dividend yield.

3.Weighting by risk/return features (Efficient Frontier). Third portfolio is constructed y the traditional Efficient Frontier Theory.

500K Portfolio, Asset Allocation Alternatives
52WH DivBias EF
AAPL 17617 5463 15000
ALB 79085 7728 10000
CAT 59786 23947 15000
CVX 2497 42213 30000
ESS 27626 27361 10000
EXPD 62205 22624 20000
HPQ 15794 28461 10000
IBM 18750 51186 55000
NEE 57753 21682 85000
O 18358 15505 65000
OKE 17795 63640 10000
PM 8375 51653 135000
PSX 17810 44328 10000
TXN 46579 28717 10000
UVV 49970 65493 20000

Backtesting

Considering the above constructed portfolio, we run a backtesting simulation assuming we invested 400K in each portfolio.

The following graph ilustrate each portfolio’s behavior over past 365 days.

Appendix

ONEOK, Inc. (OKE)

Engages in gathering, processing, fractionating, transporting, storing and marketing of natural gas. It operates through the following segments: Natural Gas Gathering and Processing, Natural Gas Liquids and Natural Gas Pipelines. The Natural Gas Gathering and Processing segment offers midstream services to producers in North Dakota, Montana, Wyoming, Kansas and Oklahoma. The Natural Gas Liquids segment owns and operates facilities that gather, fractionate, treat and distribute NGLs and store NGL products, in Oklahoma, Kansas, Texas, New Mexico and the Rocky Mountain region, which includes the Williston, Powder River and DJ Basins, where it provides midstream services to producers of NGLs and deliver those products to the two market centers, one in the Mid-Continent in Conway, Kansas and the other in the Gulf Coast in Mont Belvieu, Texas. The Natural Gas Pipelines segment provides transportation and storage services to end users. The company was founded in 1906 and is headquartered in Tulsa, OK.

Universal Corp (UVV)

Engages as a business-to-business agro-products supplier to consumer product manufacturers that sources and processes leaf tobacco and plant-based ingredients. It operates its business through the following segments: Tobacco Operations and Ingredients Operations. The Tobacco Operations segment activities involves in selecting, procuring, processing, packing, storing, shipping, and financing leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products throughout the world. The Ingredients Operations segment provides its customers with a variety of plant-based ingredients for both human and pet consumption. The company was founded in 1918 and is headquartered in Richmond, VA.

Philip Morris International, Inc (PM)

Is a holding company. It engages in manufacturing and sale of cigarettes, tobacco and nicotine-containing products. It operates through the following geographical segments: European Union, Eastern Europe, Middles East & Africa, South & Southeast Asia, East Asia & Australia and Latin America & Canada. The company was founded by Philip Morris in 1847 and is headquartered in New York, NY.

Chevron Corp (CVX)

Engages in the provision of administrative, financial management, and technology support for energy and chemical operations. It operates through the Upstream and Downstream segments. The Upstream segment consists of exploration, development, and production of crude oil and natural gas; liquefaction, transportation, and regasification associated with liquefied natural gas; transporting crude oil by major international oil export pipelines; processing, transporting, storage, and marketing of natural gas; and a gas-to-liquids plant. The Downstream segment comprises refining of crude oil into petroleum products; marketing of crude oil and refined products; transporting of crude oil and refined products by pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses, and fuel and lubricant additives. The company was founded in 1906 and is headquartered in San Ramon, CA.

International Business Machines Corp. (IBM)

Is an information technology company, which provides integrated solutions that leverage information technology and knowledge of business processes. It operates through the following segments: Cloud and Cognitive Software, Global Business Services, Global Technology Services, Systems, and Global Financing. The Cloud and Cognitive Software segment provides integrated and secure cloud, data, and solutions to the clients. The Global Business Services segment provides clients with consulting, application management, and business process outsourcing services. The Global Technology Services segment provides comprehensive IT infrastructure and platform services that create business value for clients. The Systems segment provides clients with innovative infrastructure platforms to help meet the requirements of hybrid cloud and enterprise AI workload. The Global Financing segment provides client financing, commercial financing, and participates in the remanufacturing and remarketing of used equipment. The company was founded by Charles Ranlett Flint and Thomas J. Watson Sr. on June 16, 1911 and is headquartered in Armonk, NY

Phillips 66 (PSX)

Engages in the processing, transportation, storage, and marketing of fuels and other related products. The company operates through the following segments: Midstream, Chemicals, Refining and Marketing & Specialties. The Midstream segment provides crude oil and refined products transportation, terminaling and processing services, as well as natural gas, natural gas liquids and liquefied petroleum gas transportation, storage, processing and marketing services. The Chemicals segment produces and markets petrochemicals and plastics on a worldwide basis. The Refining segment Refines crude oil and other feedstocks into petroleum products such as gasoline, distillates and aviation fuels. The Marketing and Specialties segment purchases for resale and markets refined petroleum products such as base oils and lubricants, as well as power generation operations. The company was founded on April 30, 2012 and is headquartered in Houston, TX.

HP, Inc. (HPQ)

Engages in the provision of personal computing and other access devices, imaging and printing products, and related technologies, solutions, and services. It operates through the following business segments: Personal Systems, Printing, and Corporate Investments. The Personal Systems segment offers commercial and consumer desktop and notebook personal computers, workstations, thin clients, commercial tablets and mobility devices, retail point-of-sale systems, displays and other related accessories, software, support, and services for the commercial and consumer markets. The Printing segment provides consumer and commercial printer hardware, supplies, solutions and services, and scanning devices. The Corporate Investments segment includes HP Labs and certain business incubation projects. The company was founded by William R. Hewlett and David Packard in 1939 and is headquartered in Palo Alto, CA.

Texas Instruments Incorporated (TXN).

Engages in the design, manufacture, test, and sell analog and embedded semiconductors, which include industrial, automotive, personal electronics, communications equipment, and enterprise systems. It operates through the following segments: Analog and Embedded Processing. The Analog segment semiconductors change real-world signals, such as sound, temperature, pressure or images, by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as embedded processors. The Embedded Processing segment designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. The company was founded by Cecil H. Green, Patrick Eugene Haggerty, John Erik Jonsson, and Eugene McDermott in 1930 and is headquartered in Dallas, TX.

Essex Property Trust, Inc. (ESS)

Operates as a real estate investment trust. It engages in the ownership, operation, management, acquisition, development, and redevelopment of predominantly apartment communities. The company was founded by George M. Marcus in 1971 and is headquartered in San Mateo, CA.

Caterpillar, Inc. (CAT)

Engages in the manufacture of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It operates through the following segments: Construction Industries, Resource Industries, Energy and Transportation, Financial Products, and All Other. The Construction Industries segment supports customers using machinery in infrastructure and building construction applications. The Resource Industries segment is responsible for supporting customers using machinery in mining and quarrying applications and it includes business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The Energy and Transportation segment supports customers in oil and gas, power generation, marine, rail, and industrial applications. The Financial Products segment offers a range of financing alternatives to customers and dealers for caterpillar machinery and engines, solar gas turbines, as well as other equipment and marine vessels. The All Other segment include activities such as the business strategy, product management and development, and manufacturing of filters and fluids, undercarriage, tires and rims, engaging tools, and fluid transfers. The company was founded on April 15, 1925 and is headquartered in Deerfield, IL.

Expeditors International of Washington, Inc.(EXPD)

Engages in the provision of global logistics services. The firm offers airfreight, ocean freight and ocean and customs brokerage and other services. It also provides customer solutions such as order management, time-definite transportation, warehousing and distribution, temperature-controlled transit, cargo insurance and customized logistics solutions. The company was founded by John M. Kaiser, Peter Rose, Wang Li Kou, Kevin Walsh, Hank Wong, George Ho, Robert Chiarito, and Glenn Alger in May 1979 and is headquartered in Seattle, WA

NextEra Energy, Inc.(NEE)

Is an electric power and energy infrastructure company. It operates through the following segments: FPL & NEER. The FPL segment engages primarily in the generation, transmission, distribution and sale of electric energy in Florida. The NEER segment produces electricity from clean and renewable sources, including wind and solar. It provides full energy and capacity requirements services; engages in power and gas marketing and trading activities; participates in natural gas production and pipeline infrastructure development; and owns a retail electricity provider. The company was founded in 1984 and is headquartered in Juno Beach, FL.

Albemarle Corp. (ALB)

Engages in developing, manufacturing, and marketing of chemicals for consumer electronics, petroleum refining, utilities, packaging, construction, transportation, pharmaceuticals, crop production, food-safety, and custom chemistry services. It operates through the following segments: Lithium, Bromine Specialties, and Catalysts. The Lithium segment engages in developing and manufacture of basic lithium compounds, including lithium carbonate, lithium hydroxide, lithium chloride, and value-added lithium specialties and reagents. The Bromine Specialties segment consists of bromine and bromine-based business includes products used in fire safety solutions and other specialty chemicals applications. The Catalysts segment contain two product lines: clean fuels technologies, which is primarily composed of hydro processing catalysts, and heavy oil upgrading that comprises of fluidized catalytic cracking catalysts and additives. The company was founded in 1993 and is headquartered in Charlotte, NC.

Realty Income Corp.(O)

Is a real estate company, which engages in generating dependable monthly cash dividends from a consistent and predictable level of cash flow from operations. The company was founded by William E. Clark, Jr. and Evelyn Joan Clark in 1969 and is headquartered in San Diego, CA.

Apple, Inc.(AAPL)

Engages in the design, manufacture, and sale of smartphones, personal computers, tablets, wearables and accessories, and other variety of related services. It operates through the following geographical segments: Americas, Europe, Greater China, Japan, and Rest of Asia Pacific. The Americas segment includes North and South America. The Europe segment consists of European countries, as well as India, the Middle East, and Africa. The Greater China segment comprises of China, Hong Kong, and Taiwan. The Rest of Asia Pacific segment includes Australia and Asian countries. Its products and services include iPhone, Mac, iPad, AirPods, Apple TV, Apple Watch, Beats products, Apple Care, iCloud, digital content stores, streaming, and licensing services. The company was founded by Steven Paul Jobs, Ronald Gerald Wayne, and Stephen G. Wozniak in April 1976 and is headquartered in Cupertino, CA