Investing

For bull market doubters, this relatively safe dividend strategy has provided big returns

Key Points
  • The market could turn choppy again as macroeconomic risks have not gone away.
  • Investors can turn to high dividend-yielding stocks that provide steady income when volatility returns.
  • Quantamize, a quantitative investment research firm, used cloud and quantum computing to identify factors that lead to stable and growing dividend yield.
  • Its 20-stock dividend portfolio has returned nearly 20% in the last 12 months.
A trader works ahead of the closing bell on the floor of the New York Stock Exchange (NYSE) on April 12, 2019 in New York City.
Johannes Eisele | AFP | Getty Images

It still seems too good to be true. The stock market staged one of the swiftest rebounds in history amid an earnings slowdown and global economic deterioration, putting December's pain completely in the rear-view mirror.

However, one could argue the rally might have just been the decadelong bull run's last hurrah as some macroeconomic risks like a slowing Chinese economy are not going away.

Here's one way to play it safe if the market gets choppy again.

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We all know high dividend-yielding stocks often provide steady income in a turbulent market, but simply buying the highest-yielding names could go in vain as sometimes those stocks are value traps. The key is to find real dividend growers. Quantamize, a quantitative investment research firm, uses cloud and quantum computing to identify factors that identify reliable dividend payers.

Those factors include return on invested capital, cash flow, quality and capital efficiency ratios, according to Quantamize's chief investment officer, Stephen Mathai-Davis. He then applied the factors to the top third of the highest-yielding stocks in the Russell 1000, to winnow the pool down to just 20 stocks.

Quantamize also used artificial intelligence to create different weightings for the stocks than traditional exchange-traded funds. That's led them to recommend smaller and more under-the-radar dividend payers more heavily for this portfolio, including shares like Mid-America Apartment Communities, New York Community Bancorp and First Hawaiian. More traditional dividend plays like an AT&T don't make the top holdings.

The back-test return for this dividend yield portfolio is 19.4% for the 12-month period ending March 31. The annualized dividend yield for the basket is about 4%.

"The S&P [500] has run so heavily over the last three, four months and the implied volatility is so muted," said Mathai-Davis. "I think the reality is after this run up driven by consumer discretionary and tech, it really does start to make sense for people to begin lower beta exposure."

reclaimed its September old highs this week and an earnings recession seems to be off the table now. However, the market is missing some of the euphoria that often accompanies record levels. And it's still not out of the woods with some of the biggest risks including the ongoing trade battles and the Federal Reserve's policy uncertainty.

To be sure, Wall Street overall still holds a slightly bullish view on the market with an average year-end target for the S&P 500 of 2,950, according to a CNBC analysis. Additionally, the economic picture in the U.S. seems to be improving as first-quarter GDP expanded by 3.2%, exceeding expectations.