What are we looking for?
The best income-producing stocks in the S&P/TSX 60.
More about today's screen
This is a similar to a screen that we did last week with Morningstar CPMS, a Toronto-based equity research shop. This time we'll limit the names to the S&P/TSX 60 whereas last week we screened the full group of more than 600 names that CPMS tracks.
The stocks for today's screen must have:
- Dividend yield of greater than 1 per cent;
- Low beta versus the S&P/TSX composite index over the last five years. This implies that returns have a relatively low correlation with S&P/TSX composite returns ("A+" indicates lowest correlation);
- High quarterly earnings growth momentum;
- Positive earnings surprises last quarter;
- Rising earnings estimates over the past three months.
More about CPMS
CPMS is a Toronto-based equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus another 2,100 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?
CPMS created a portfolio of 30 names for income in the S&P/TSX 60. Stocks were sold when they fell into the bottom half of the index for all the income ranking or if their payout ratio rose above 100 per cent.
Since inception at the end of 1998, the portfolio has returned 12.4 per cent annualized, versus 8.9 per cent for the S&P/TSX total return index benchmark. But in the last five years, this income strategy has matched the benchmark with a 6.8-per-cent return.
"This model is also grossly underweight materials stocks," said Jamie Hynes, a senior consultant with CPMS. "Only one materials name (Teck Resources) has a dividend yield of at least 1 per cent and qualifies for inclusion in this model. Materials have been sorely missed over the last five years as the materials total return index is up [17.9 per cent annualized over the past five years.]rdquo;
Disclosure: I own shares in Fortis Inc.