Devised by US fund manager Michael O’Higgins, this strategy exploits the tendency for stockmarkets to overreact to bad news, which throws up cheap shares.
Fans of the theory say that bargains can be spotted by looking for high dividend yields – the annual dividend as a proportion of the current share price. Buy these and you not only get a big income, but the likelihood of capital gains too when share prices recover.
Between 2003 and 2007, for example, Peter Temple regularly picked the five companies with the lowest share prices from the top ten yielding stocks. His annual gains ranged from 30% to 117%. Over the last year, however, high-yield strategies have struggled. That’s because a big dividend may simply be a result of the share price falling because the company’s outlook is poor.
The risk is that the dividend is then cut, resulting in further steep share price falls.
• See Tim Bennett’s video tutorial: How to pick income winners: What are dividends?