“I think this report is very important to your subscriber base for what it says about dividend revisions being the driver of performance, not the high yielding dividend. We all too often get in the trap of reading from left to right, eying the juicy dividend over all else. My experience over the last year has been exactly as this report relates. I was very lucky to get stopped out of Telefonica, have nothing but the dividend on VOD (although that's plenty) and have a very large gain in MBT. It goes straight back to what I'll call "not quite Aristocrats". I'm proposing a new category of "Goldilocks Stocks" (It even rhymes and has gold). I don't want 1.5% or 2% (too cold), or 9.5% or 12% (too hot)....I'll take the 4.5% this year and 5% next (just right).”

Eoin Treacy's view Thank you for this informative report and your additional valued comments which I'm sure will be appreciated by the Collective. Here is a section from the report:

On our work, what is critical in any dividend strategy is whether dividend estimates are rising or falling. High yielding stocks have been performing poorly because they have mostly seen cuts to their dividend forecasts.

A better performing style, which we outlined last year, has been to isolate companies where dividends looked too low and where there was scope for them to rise. During 2011 dividend pay outs generally looked too low. Even stock screens focused on seemingly ‘sustainable' dividend yields have struggled without the helping hand from dividend momentum.

Telecom is a great example of this. We have been underweight the sector (and still are) on the basis of the outlook for dividends and we have seen a substantial deterioration in the momentum in dividend estimates this year. But within the sector the few positive dividend revisions (Telenor and the UK segment) have outperformed the negative dividend revisions by 21% since the end of November.

Therefore a recovery in telecom will depend on how reassured we can become on their dividends. The telecom sector is burdened by a range of issues such as the quite onerous outlook for capex, regulatory and governmental interference and increasing competition in mobile. The cyclical nature of revenues is often overlooked and this is the key to dividends. If we can become more comfortable with revenues then we can become more comfortable with dividends and a mere absence of downgrades can trigger a recovery in the dividend revisions ratio from these very negative levels which should drive outperformance.

We agree that remarkably high yields or those completely out of character with a company's sector require closer inspection. One of the reasons we have shown such favour for the Dividend Aristocrats is that they have solid records of increasing dividends. Companies in that sector whose yields are also competitive with the wider market have tended to outperform lower yielding constituents.

The European Telecoms sector is now at an interesting juncture. As the above report indicates the UK portion has outperformed by a wide margin. Vodafone is a European Dividend Aristocrat and currently yields 5.85%. The share has been largely rangebound for more than a year and a sustained move above 180p would be required to reassert the medium-term demand dominated environment. BT Group (3.92%) is unwinding a short-term overbought condition relative to the 200-day MA and the medium-term upside can continue to be given the benefit of the doubt provided it finds support in the region of 200p. Norway's Telenor found support last week in the region of NOK100 and a sustained move below NOK96 would be required to question medium-term potential for additional upside.

Swisscom and TeliaSonera share a similar pattern and have been largely rangebound for the last 9 months. They both bounced impressively from their lower sides last week and a sustained move below SEK40 and CHF330 respectively would be required to check potential for some additional higher to lateral ranging. Telecom Italia found support in the region of the 2009 lows in September and has held a progression of higher reaction lows since. A sustained move below 80¢ would be required to check potential for additional higher to lateral ranging.

Telekom Austria and Deutsche Telecom has been largely rangebound albeit with a downward bias and will need to break progressions of lower rally highs to signal returns to demand dominance.

Portugal Telecom accelerated lower last year but has lost momentum somewhat this year. A sustained move above €4.25 would break the progression of lower rally highs and could potentially unleash short covering.

Hellenic Telecom has also lost momentum somewhat but retains a downward bias. Belgacom fell abruptly this week to test its lows. France Telecom remains in a consistent downtrend. KPN and Telefonica are accelerating lower, becoming increasingly oversold relative to the MA and potential for short covering rallies is increasing.