Stock Selection Using Yield revised March 2007
For over two decades I have selected common¹ stocks using yield². Yield is one indicator of value³...a way of measuring how cheap or expensive a stock is relative to other stocks. Yield is a reliable indicator because it represents the dividend (actual cash payments) and the current price.
I never buy stocks which do not pay dividends or stocks which do not grow their dividends.

Common stocks fluctuate between recurring extremes of high and low dividend yields. You can see this from the yield charts below. Each stock has its own range and it's often quite narrow...less than 1% percent and often only 60 basis points or so. There is little variance in yield or price, usually.
It's better to purchase a common stock when it's yield is higher than its average, when it's in the higher end of it's yield range. Why? When the yield is up, the price is down. Beware of any investment where the yield is too high, however. The market could be sending a signal that something is seriously wrong.. "Risk is more often in the price you pay than in the stock itself." Christopher Browne The Little Book of Value Investing, 2007 page 64

Each week, by hand, I enter the yields of the stocks I follow into a spreadsheet from the weekend Report on Business. I want to know where the current yield is relative to the stock's own average yield. If the current yield is nicely above its own average yield (horizontal dashes on chart), I investigate further. If it's below, the stock is expensive. I do not buy common stocks which are expensive by yield, that are near low historic yield. The chart on the left below (sorry it's missing)shows a stock above its current yield (as of the last date on the chart). The graph on the right (also missing) shows a stock expensive by yield. "Safety and value", James Grant says, "are qualities conferred not by the nature of the asset, but by the price at which it is acquired". In a way, stock selection by yield is quite simple.
The stocks in my list are sorted in order of difference from their own average yield. The stocks near the top are more value priced in relation of historic yield. I investigate these. The stock at the very top, though, is seldom a best buy. And, common stocks near the bottom of the list are expensive. Realize too, that the list is not static: stocks move slowly up and down the list with the ebb and flow of investor sentiment and with dividend increase announcements.

Which stock is the best purchase? At a minimum, I consider these six factors from my table:
• Has there been a dividend increase, a healthy sign, in the last year or so?
• Does the company have a good dividend growth record?
• Is the current yield higher than its average over the past few years?
• Does the stock have a reasonable Graham value*?
• Has the price rise in the last few years been lower than the equivalent dividend growth?
• Is the payout ratio (the relationship between earnings and dividends) okay?

I do not buy a stock with a yield significantly below its average yield or overvalued by Graham. There's no margin of safety. Realize that excellent buying opportunities are rare.One must be patient.
¹ I never buy preferred stock: it's not. And there's no dividend growth and hence no capital growth to offset inflation.
² Yield is the dividend divided by the price (.84 / 50 = 1.68% for CNR).
³ Other valuation indicators are Graham's figure*, price earnings ratio P/E, price to book...
* Graham value is the square root of (average of three year trailing earnings * book value * 22.5). (The Intelligent Investor by Benjamin Graham/Grossbaum, Chapter 14)

Yield charts not here. Sorry. I don't remember how to post them on the net.