What are we looking for?
Slow-moving stocks yielding higher than the sector median in U.S. markets.
The screen
In Thursday's Number Cruncher, I created a strategy for conservative investors who would rather receive income over price appreciation of the stock value for the Canadian market. Today's strategy is similar in nature, but for the U.S. market. The strategy ranks stocks based on the following factors:
- Three-year and five-year historical price beta (recall that beta measures the sensitivity of a company to the movement of the benchmark – here, we use the S&P/TSX composite total return index. In trending markets, a stock with beta less than one has historically moved less than the benchmark index – in today’s strategy, we prefer low beta).
- Dividend yield relative to the industry median.
To ensure that our dividend paying companies maintain their yield, I require their payout ratio on earnings be less than 80 per cent. Companies with a market cap of less than $1.1-billion (U.S.) were excluded in this analysis (this figure represents the bottom third of stocks by market cap in the CPMS U.S. Database, which today consists of 2,214 companies). Limited partnerships and foreign companies traded in the United States were also excluded in the analysis.
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 Morningstar CPMS to back-test this strategy from April, 2004, to April, 2017. During this process, a maximum of 20 stocks were purchased with a maximum of five per economic sector to ensure reasonable diversification. Stocks are sold if their rank falls below the top 25 per cent of the universe, if the company's payout ratio exceeds 80 per cent on earnings, or if the company missed earnings expectations by more than 5 per cent. When sold, the positions were replaced with the highest ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 11 per cent while the S&P 500 total return index gained 8.3 per cent. Stocks that qualify for purchase into the strategy today are listed in the accompanying table.
As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.