What are we looking for?
U.S. dividend growth stocks.
The screen
As the S&P 500 continues its bull run, cautious investors may begin to wonder whether the U.S. equity market is starting to look overvalued. For investors with this belief, a low-volatility, income-paying strategy may prove to be a reasonable way to stay invested in the market while mitigating some of the risk associated with higher-torque strategies.
This week, I revisit the CPMS U.S. Dividend Growth strategy that ranks stocks on the following factors:
- dividend yield;
- five-year beta (which measures the sensitivity of a stock’s price to the S&P 500 index; when markets are trending, lower-beta stocks move less than the market, and in this case the lower, the better);
- five-year dividend growth;
- five-year earnings growth;
- three-month estimate revisions (i.e., current consensus estimate versus three months ago);
- cash flow-to-debt ratio (higher ratios are better).
Qualifying stocks have a market cap greater than $500-million (U.S.) and a dividend-payout ratio of less than 80 per cent on earnings. Companies with a limited-partnership structure were excluded in this strategy.
More about Morningstar
Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
I used CPMS to back-test the strategy from December, 1993, to June, 2015. During this process, 20 stocks were purchased and equally weighted. Stocks would be sold if they fell outside the top 25 per cent of the ranked universe, if three-month estimate revisions drop more than 15 per cent, or if the payout ratio exceeds 80 per cent. Over this period the strategy produced an annualized total return of 13.3 per cent, while the S&P 500 total return index produced 9.3 per cent. The top 20 stocks that qualify today are listed in the table.
As always, investors are advised to conduct their own independent research before purchasing stocks shown.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.