Geraldine Weiss Dividend Investment Strategy: Undervalued Dividends

Women are better investors than men: Geraldine Weiss The Queen of Dividends. Many researchers have come to the same conclusion: women are better investors than men… One of the most famous female investor known is Geraldine Weiss.

Over fifty years ago Geraldine Weiss started publishing her selection criteria for her undervalued dividend strategy in her newsletter Investment Quality Trends. Geraldine Weiss even wrote books about her investing strategy Dividends don’t lie and the The dividend connection.

After studying Benjamin Graham, Warren Buffets investments teacher and the founder of fundamental analysis. Geraldine Weiss came to the conclusion that dividends are hard to manipulate, something which is much easier with earnings. Geraldine Weiss believed  that companies had an obligation to pay and keep on paying dividends to maintain investor’s trust, which makes dividends hard to manipulate. In her book she mentions:

So what determines value? Most people believe earnings, but they can be manipulated, which we are seeing with Enron. Dividends are real money. That’s the hallmark of a blue chip stock. If a company doesn’t pay a dividend, it’s a speculation.

Geraldine Weiss believed that companies which have a long dividend history with dividend increases must be high quality companies. Since companies which match these criteria are able to increase dividends throughout all types of economic cycles. This means that companies who have a long dividend history must be well managed and are able to generate and increase free cash flow and profits.

Based on her research and experience she believed that dividends provide the perfect company valuation. Geraldine Weiss also based her own dividend investing strategy on her research and knowledge. The first part of Geraldine Weiss strategy consists of the selection criteria or filters for the shares which she would consider to buy;

1. There are at least five million shares outstanding

2. The share has at least 80 institutional investors

3. The company has been paying dividend for at least the last   25 years,without any interruptions.

4. The divided has been raised a minimum of five times in the   last twelve years or in three of the last five years the divided has grown.

5. The company earnings have increased for at least 7 times in the last twelve years. Or the net earnings increased 7 times in the last ten years.

6. The S&P Financial rating of the company is A- or higher and / or the solvability ratio’s are acceptable (due to the latest commotion about S&P ratio’s). The debt equity ratio has to be lower than 60% and the debt ratio1 should be lower than 0.6  The dividend has been positive in the last 7 years.

7. The compounded growth of the dividend has been higher than 10% in the last 10 years.

8. The dividend payout ratio is lower than 56%

9. The price / earnings ratio is below 20.

10. The price to book ratio is lower than 2.

The second part of Geraldine Weiss strategy consists of two simple rules:

1. Buy shares when shares trade within the 10% of their    highest historical dividend yield or the highest dividend  yield for the last five years.2

2. Sell shares when they trade within the 10 % of their lowest dividend yield for the last five years.

Geraldine Weiss mentions the following about the second part of the strategy:

After a great deal of research, I noticed that these high and low levels of yield were repetitive. Some stocks would be undervalued when the yield would be 4% or 5% or 6%, and some would be undervalued when the yield hit 2% or 3%. But it was the repetition of the high yield that would indicate an undervalued area (time to buy) and the repetition of a low yield that would indicate an overvalued area (time to sell).

That’s it, a very simple strategy or so called Keep It Simple Strategy (K.I.S.S).

1 Total liabilities / Total assets.

2  Research the company to see if there is a fundamental and not a temporarily reason why the dividend yield is at a historical high level.