What are we looking for?
The best income-producing stocks.
More about today's screen
We'll ask for help today from Morningstar CPMS, a Toronto-based equity research shop. It has created an income portfolio that looks for the following characteristics:
- High dividend yield;
- Low beta versus the S&P/TSX composite index over the last five years. This implies that returns have a relatively low correlation with S&P/TSX composite returns ("A+" indicates lowest correlation);
- High quarterly earnings momentum;
- Positive earnings surprises last quarter;
- Rising earnings estimates over the past three months.
More about CPMS
CPMS is a Toronto-based equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus another 2,100 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?
The income model is CPMS's best-performing model this year. It is up 3.5 per cent year to date, versus 3 per cent for the benchmark, the S&P/TSX composite total return index.
Over the last 10 years, the income model is up 14.7 per cent, versus 9 per cent for the benchmark.
"In a nutshell, the model looks for high-yielding, low-beta stocks with strong earnings," said Jamie Hynes, a senior consultant with CPMS. "It is a much higher turnover model (about 90 per cent annually) versus the typical income model, but the increased activity has paid off over the long-term and the short-term over three years."
The model doesn't factor in payout ratios, but that data was included in the table. This is an important column because there are some of names in the portfolio that are carrying payout ratios that may be too high for more conservative investors. A few names on the list look like they are at risk for dividend cuts, so some investors will want to do more research on these names.