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What are we looking for?

U.S.-listed large-cap stocks that can weather a potential storm ahead.

Looking at financial media this past week, it’s not hard to find an analyst or financial commentator who is concerned about a possible “top” in North American equity markets. It’s easy to call a market top when the S&P 500 index is up more than 20 per cent year to date and a historically dismal fall season looms.

Looking back at the S&P 500 over just the past 10 years, the performance of the index in the fall has actually been a coin toss, closing positive only 50 per cent of the time in September and 56 per cent in October, with an average return of 0.1 per cent and 0.6 per cent‚ respectively.

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This week, we look for new long opportunities in top-quality large-cap stocks that have some defensive traits.

The screen

We will start by using Strategy Builder to screen for U.S.-listed stocks with a market capitalization of at least US$10-billion. This will limit our search to the largest and most stable companies in the market with correspondingly higher-quality revenue and earning streams.

Next, we looked for stocks with price-to-earnings ratios that are at least 10 per cent below the average P/E of the entire S&P 500 in order to find stocks with a discounted value relative to the index. The current P/E of the S&P 500 is 27, so we want stocks with a multiple of 24.3 or less.

In order to add a few layers of defence in case of a market correction, we scanned for stocks that are indicating a dividend yield of at least 2 per cent and have shown a dividend growth rate of at least 10 per this year compared with last year so investors can get paid to ride out the storm as many did during the market meltdown early last year.

Regarding price performance, our minimum requirement is positive returns for the year-to-date and 52-week time horizons.

Finally, we will scan for top-ranked stocks using Trading Central’s new Quantamental rating method. This proprietary methodology ranks stocks on a scale of one to 10, with 10 being the most bullish and one being the most bearish. TC Quantamental uses a combination of valuation, growth, quality, price momentum and income as key metrics when ranking a company.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Trading Central’s product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities. Strategy Builder is available through leading retail brokers in Canada and around the globe.

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What we found

10 large cap dividend stocks

RankCompanyTickerMkt. Cap. (US$ Bil.) P/EDiv. Yld. (%)1Y Div. Grth. Rate (%)TC Quant. RatingYTD Perf. (%)1Y Perf. (%)Recent Price (US$)
1Cdn. Natural ResourcesCNQ-N39.912.34.513.38.1040.182.733.69
2Prudential Financial Inc.PRU-N40.45.84.410.07.4934.053.3104.64
3Ally Financial Inc.ALLY-N18.06.62.011.87.6639.8106.749.84
4Citizens Financial GroupCFG-N18.29.53.714.77.2119.257.242.64
5EOG Resources Inc.EOG-N39.220.82.539.27.8334.760.567.18
6Manulife Financial Corp.MFC-N37.86.74.612.07.208.831.019.39
7Dow Inc.DOW-N45.311.14.633.38.219.423.360.69
8Snap-On Inc.SNA-N12.115.62.213.77.6730.548.4223.31
9Tyson Foods Inc.TSN-N27.811.52.312.07.5418.224.476.17
10Best Buy Co. Inc.BBY-N27.311.32.510.07.3911.22.0110.99

Source: Trading Central

Two of the companies are Canadian, listed on the New York Stock Exchange and the Toronto Stock Exchange. Canadian Natural Resources Ltd. tops our ranking, while Manulife Financial Corp. holds sixth spot.

Calgary-based Canadian Natural has the highest year-to-date performance on our list at 40.1 per cent. The current dividend yield is one of the highest on our list at 4.5 per cent with a current dividend growth rate of 13.3 per cent over last year. Looking at the TC Quantamental Rating, the company scored an impressive 8.1 out of 10.

Chemical producer Dow Inc. has the highest TC Quantamental Rating on our list at 8.21 and ties with Toronto-based Manulife for the highest dividend yield on our list, at 4.6 per cent. Dow’s dividend growth rate is the second-highest on our list at 33.3 per cent.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Gary Christie is head of North American research at Trading Central in Ottawa.

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