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From TMFHighYield's CAPS Blog. I've added the links explicitly and my comment below.


8 Years of HYP Data
JANUARY 18, 2009

Greetings dividend Fools,

Just wanted to provide an update on the original Fool UK high-yield portfolio, created by Stephen Bland in 2000.

Through 2007, the portfolio was up 68% in terms of capital return (though that point is less relevant for HYP investors) and dividend income grew 29%, ahead of inflation. Stephen has since moved on, but his disciples at Fool UK have been kind enough to keep track of the portfolio performance, so here it is:

HYP1 performance 11/2000 through 11/2008:

Capital return: 6.6% vs. FTSE 100, down 33.5% -- very nice capital preservation, but that's only a secondary goal

Income return: 51% (still ahead of inflation)

This is encouraging, since the HYP1 seems to have withstood two stock market bursts, first with the dotcom fallout and the financial meltdown this year.

As I've previously noted, 2008 (particularly 4Q 2008) was the worst period for dividend cuts in fifty years or so. Even this portfolio, which started in August, has had to sell three stocks -- BAC, PLD, and CCL -- whose dividends were cut or suspended (by the way, a special thanks to DemonDoug for smacking some sense into me regarding BAC). Selling stocks in HYP, as you may recall, is only "permitted" when a stock cuts or suspends a dividend, and the strategy eschews rapid trading. It's inteded to be a passive, income-generating strategy above all else.

As bad as 2008 was, I consider 2009 the best year to start buying dividend stocks in nearly twenty years -- as NYU professor Aswath Damodaran recently showed, the S&P 500 dividend yield is the highest it's been since 1991!

Of course, this doesn't excuse us from picking up just any high-yielding dividend stock. As always, don't chase a high trailing twelve month dividend yield -- instead continue to look for companies with debt-to-equity ratios below 50%, a history of raising dividends, and enough free cash flow (generally calculated as "cash from operations - capital expenditures" -- see cash flow statement) to make the dividend payments.You'd much rather take a secure 4% yield than chase after a less-secure 10% one.

With that sentiment in mind, I've put International Paper in the proverbial penalty box. The company declared its regular dividend to be paid on March 16 to shareholders of record on Feb. 16 and it's currently yielding over 9%, but I have concerns about its sustainability with a high debt load and much lower future earnings estimates. It releases earnings on Jan. 29, so stay tuned.

Foolish best,


Important take-aways for this strategy:

1. Sell stocks whose dividends are cut or suspended.
2. Track income return (growth in dividends YOY)
3. Look for debt-to-equity rations below 50%
4. Look for history of raising dividends (how long?)
5. Look for free cash flow (cash from operations minus capital expenditures) greater than the dividend. Much greater, probably.
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