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Growth-income combo: The best of both worlds

What are we looking for?

A solid portfolio of growth and income stocks.

More about today's screen

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This concludes a series of Tuesday screens we've done with CPMS Morningstar over the last couple of weeks. First, we looked for stable income stocks in the S&P 500; last week we screened for strong growth stocks in the index.

Today we look for the top 10 income and growth stocks in the index and combine them into one portfolio.

CPMS found the growth stocks by screening for:

· A re-investment rate higher than the median of S&P 500 constituents. Re-investment rate is defined as the return on equity after payment of dividends, or (earnings per share minus dividends per share) divided by book value;

· Positive earnings growth (trailing four quarters versus previous four quarters);

· Positive earnings surprises (earnings that have beat expectations last quarter).

CPMS then ranked the growth stocks based on the best combination of:

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· Reinvestment rate;

· The ratio of estimates that have been raised versus estimates that have been cut as a percentage of the total number of forward estimates;

· earnings growth;

· earnings surprises;

· price change over last three and six months.

CPMS searched for the best income stocks by looking for:

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· a payout ratio less than 100 per cent of estimated forward earnings;

· dividend yield higher than the median yield of the index;

· a payout ratio less than 100 per cent of estimated forward earnings;

· positive earnings growth in the last four quarters over the previous four quarters;

It then ranked the income stocks by:

· the best dividend yields relative to their sector;

• positive trends in return on equity and return on total assets (expected return on equity is calculated by dividing the median current year earnings estimate by book value);

· positive earnings estimate revisions over the past three months;

· size - the larger the company the better.

What did we find out?

An equal-weighted portfolio of the top 10 growth and income stocks in the S&P 500 has returned 16 per cent this year, versus 8 per cent for the S&P 500 total return index benchmark. Since 1993, the portfolio has returned 12.4 per cent annually, versus 8.4 per cent for the benchmark.

"[This portfolio]offers downside protection in bearish markets and upside participation in bullish markets," said Jamie Hynes, senior consultant at CPMS. "Despite just half of the pooled portfolio being geared toward dividend yielding names, the equally weighted portfolio of 20 stocks still offers a dividend yield higher than the S&P 500 [2.0 per cent compared with 1.9 per cent]"

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