This week, we return to one of our oldest stock-picking methods, the High Yield, Low Risk screen.
That ‘high yield’ bit is somewhat subjective. Today, investors can get a ‘risk-free’ yield of about 4.2 per cent on two-year gilts. Crank up the risks a little, and various passive high yield global bond funds get you closer to 5.8 per cent. However, unless you hold fixed income for the long-haul, short-term price swings and inflation can quickly knock (or erase) those income benefits. As the past few years have reminded us, bonds’ fine print includes several nasty risks.
What about stocks? Currently, the median forward yield on the FTSE All-Share index is 3.9 per cent. Plenty of main market shares – 172 for which our data provider offers forecasts – meet or exceed that threshold. Yes, that’s not as good as gilts. But unlike fixed income, the upsides for capital and dividend growth are unlimited. So when we talk about stocks’ dividend yields, we need to put them in a different risk context.
Given all that, what then does ‘low risk’ mean? Few equity investors, I’d wager, would define it as a negative total return of more than 50 per cent. Nor would they likely accept losers outnumbering winners by three to one.
Unfortunately, that’s what the screen’s selections experienced in the past 12 months. Just one of its four picks (the now Carlsberg-acquired Britvic) posted a positive total return, while Burberry (BRBY) had at one point shed more than half of its value (see table). Worst of all, a recent run of bad news for the recruiters Robert Walters (RWA) and SThree (STEM) has resulted in both stocks finishing the period at their lowest ebb – down a quite horrible 33 and 39 per cent, respectively.
However, despite this showing, the screen’s overall volatility remained fairly limited during the period. Owing to the cancellation of the good news by the bad (and vice versa), its worst ever total negative return for the year was 7.9 per cent.
Does this point to some in-built risk-dampening properties within the methodology? Well, not quite. As Burberry crashed last spring and summer, Britvic surged on news of its takeover. Then, as the recruiters sank, shares in the luxury group started to rally. While this highlights the importance of even minimal portfolio diversification – not that the screen insists on this property – capital preservation was largely due to luck.
What’s more, the results paled against a strong 12 months for the screen’s benchmark, the FTSE All-Share, which not only produced a 16.5 per cent total return in the period, but never saw a material drawdown after we published our 2024 round up on 4 March.
2024 Performance
| Name | TIDM | Total Return* | Max | Min |
| Britvic | BVIC | 53.6 | 53.6 | -9.0 |
| Burberry | BRBY | -7.8 | 3.0 | -52.4 |
| Robert Walters | RWA | -33.4 | 6.0 | -33.4 |
| Sthree | STEM | -38.8 | 7.0 | -38.8 |
| FTSE All-Share | – | 16.5 | 18.0 | 0.0 |
| High-Yield Low-Risk | – | -6.6 | 7.2 | -7.9 |
| source: LSEG. *4 Mar 2024 – 20 Feb 2025. | ||||
Thanks to a very strong run in its early years, the screen’s long-term record is decent. Since inception, it has returned 371 per cent, based on a once-a-year re-weighting of picks and assuming dividends are reinvested. Although the screen should be seen as a source of ideas and not a model portfolio, that headline return drops to 281 per cent if we factor in a 1.5 per cent charge to reflect real-world dealing costs. Such is the effect of compounding even a small annual frictional cost.
Over the same period, the equivalent return of the All-Share has been 144 per cent.
Methodology
The High Yield Low Risk screen, which has been running for nigh on 14 years, is designed to find stocks which offer investors a nice income – in the shape of an above-average yield – with below-average share price risk, which we might describe as a proxy for capital preservation.
It consists of 10 separate tests, which together can be seen as a proxy for corporate stability across an economic cycle. The most important of these tests – and the only one which all qualifying stocks must pass – relates to the dividend yield. This year, I’ve reverted to its historic standard of at least 3.5 per cent, though I’ve stuck to my preference for analyst estimates over trailing yields, meaning the test is based on the next 12 month’s expected payouts.
Attentive readers may recall from the start of the article that the median yield is higher, at 3.9 per cent. My reason for lowering the bar is twofold. First, it increases our list of stocks, which in turn increases diversification. And second, if we learned anything from the 2024 cohort, it is that high yields can sometimes point to building risks. That was true of both Burberry and Robert Walters, the latter of which is unlikely to see its earnings cover its payout ratio for 2024 or 2025, according to analyst forecasts.
The other change I’ve made is to lower the minimum market capitalisation from £100mn to £75mn, to reflect the shrinking pool of companies listed in London. Doing so adds just one company, as the results indicate. The full criteria are as follows:
■ A forecast dividend yield for the next 12 months above 3.5 per cent (the ‘high yield’ test).
■ A one-year beta of 0.75 or less (the ‘low risk’ test).
■ Ten years of unbroken dividend payments.
■ Ten years of positive underlying earnings.
■ Underlying EPS higher than five years ago.
■ Underlying dividend higher than five years ago.
■ A return on equity of 12.5 per cent or more.
■ A current ratio (current assets divided by current liabilities) of one or more.
■ Market capitalisation of more than £75mn.
■ Dividend payments covered 1.5 times or more by earnings.
This year, just two stocks – packaging group Macfarlane (MACF) and the struggling discount chain B&M European Value Retail (BME) – passed every test, though as in previous years, those which scored nine out of 10 have been allowed to pass.
The resulting selection has a distinctly value flavour. All bar Macfarlane have seen their share prices fall in the past three months, even as the FTSE All-Share has climbed. And except for construction outfit Morgan Sindall (MGNS), all have seen a contraction in forward earnings estimates. My worry is that the long-term dividend and profits tests are failing to pick up more recent dips in the companies’ outlooks.
Then again, the above criteria haven’t changed much for a screen that has beaten its benchmark almost two years out of every three since 2011. Details of the tests that failed are given in the table of 2025 stocks below. A downloadable version of the table, with more details on stock fundamentals, can be found here.
2025 High Yield Low Risk stocks
| TEST FAILED | Name | TIDM | Mkt Cap | Net Cash / Debt(-)* | Price | Fwd PE (+12mths) | Fwd DY (+12mths) | FCF yld (+12mths) | 12mth Chg Net Debt | Op Cash/ Ebitda | EBIT Margin | ROCE | Fwd EPS grth FY+1 | Fwd EPS grth FY+2 | 3-mth Mom | 3-mth Fwd EPS change% |
| – | Macfarlane | MACF | £171mn | -£43mn | 107p | 9 | 3.6% | 10.7% | 8% | 89% | 8.2% | 14.5% | 26% | 3% | 0.5% | -1.0% |
| – | B&M European Value | BME | £2,917mn | -£2,158mn | 291p | 8 | 6.2% | 14.1% | 8% | 79% | 10.4% | 20.8% | -3% | 7% | -16.0% | -3.0% |
| Beta | Diageo | DGE | £47,029mn | -£15,749mn | 2,114p | 16 | 3.9% | 4.7% | 4% | 91% | 28.7% | 19.0% | -9% | 6% | -10.6% | -5.3% |
| Beta | RS | RS1 | £3,029mn | -£437mn | 639p | 15 | 3.7% | 5.8% | -13% | 69% | 8.9% | 14.7% | -12% | 11% | -12.0% | -6.2% |
| EPS trk rcd | Morgan Sindall | MGNS | £1,738mn | £285mn | 3,620p | 13 | 3.6% | 6.3% | -36% | 133% | 3.5% | 19.8% | 9% | 0% | -6.1% | 0.5% |
| Beta | SThree | STEM | £339mn | £30mn | 255p | 14 | 5.5% | 12.0% | 45% | 53% | 4.5% | 24.7% | -52% | 20% | -26.3% | -46.3% |
| DiviCov | FDM | FDM | £251mn | £18mn | 229p | 14 | 7.3% | 8.9% | 38% | 99% | 14.7% | 57.4% | -35% | -24% | -29.5% | -16.7% |
| DPS trk rcd | Ultimate Products | ULTP | £75mn | -£15mn | 86p | 8 | 6.4% | 9.5% | -26% | 97% | 10.2% | 22.7% | -23% | 29% | -30.1% | -27.7% |
| Source: FactSet. * FX converted to £ | ||||||||||||||||