What are we looking for?
A portfolio that would appeal to a conservative investor looking for income along with a bit of growth. More specifically, we went hunting for U.S. stocks with stable earnings and dividend prospects.
More on today's screen
Craig McGee, senior consultant at CPMS, a division of Morningstar Canada, constructed the screen. To pass, stocks must have had a market cap of at least $1-billion (U.S.) and a dividend yield of at least 2 per cent.
Each stock also had to meet several additional criteria:
-the dividend payout ratio must not have exceeded 80 per cent of the 12-month earnings estimate;
-dividend growth must have been positive over the previous year;
-total annualized dividend growth could not have been negative over the past five years;
-the five-year earnings growth rate must have exceeded the median of the 2,289 U.S. companies that CPMS tracks;
-the expected price return on the stocks must have been higher than 5 per cent based on the median of analyst price targets.
The 20-stock list is sorted by expected yield.
More about CPMS
CPMS provides quantitative North American equity research and portfolio analysis to primarily institutional clients. It covers more than 700 Canadian and 2,200 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.
What did we find out?
We ran this screen a year ago. The portfolio we picked at that time provided a total return over the year of about 23 per cent.
There are, of course, no guarantees that this year's crop will come close to that figure. But it does demonstrate that focusing on firms with a solid record of earnings and dividend growth, with payouts that are well supported by earnings, gives an investor a good chance of enjoying both a steady stream of income as well as gains in share price.