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What are we looking for?

High-income-generating Canadian-listed securities that can help smooth out the bumps in a rough market.

More about today's screen

Craig McGee, senior consult at CPMS Morningstar, created a screen for high-yield stocks that also have strong cash flow and reasonable payout ratios. We want to avoid stocks or trusts that are going to be at risk for cutting dividends or distributions if the economy gets worse.

The screen was as follows:

- market cap greater than $1-billion;

- expected yield greater than 2.5 per cent (next four quarters of distributions divided by latest price);

- flat or positive three-month revision of the median 2012 cash flow estimate;

- positive five-year annualized cash flow growth rate;

- expected payout ratio of less than 75 per cent (next four quarters of distributions divided by 2012 expected cash flow).

More about CPMS

CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 700 of the largest and more liquid Canadian stocks, plus more than 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?

This group of stocks is has returned 16 per cent this year, which is a huge outperformance versus the S&P/TSX composite total return index, which is down almost 13 per cent. The average yield on the group is 4.7 per cent, while the average expected payout ratio is 48 per cent.

"Searching for higher yielding stocks can add an income stream to help smooth realized returns," says Mr. McGee. "It's also important to look for strong levels cash flow to get the best chance that payouts can continue."

TransAlta Corp. and Groupe Aeroplan Inc. both have a higher-than-average yield and lower-than-average expected payout ratio, and therefore may be a good place to start for more research.