What are we looking for?
The best large-cap U.S. stocks for income.
More about today's screen
We want to find the best U.S. stocks for yield, but we want that yield to be as safe as possible. We'll turn to Morningstar CPMS for help in this exercise.
CPMS has created a screen that looks for:
- stocks in the S&P 500 with a dividend yield higher than the median yield of the index, which is currently 1.9 per cent.
- a payout ratio less than 100 per cent of estimated forward earnings.
- positive earnings growth in the last four quarter over the previous four quarters.
Furthermore, it looks for the 20 best income stocks by ranking them according to:
- 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 taking the median current year earnings estimate divided by book value).
- positive earnings estimates revision over the past three months.
- size, the larger the company the better.
More about CPMS
CPMS is an 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?
Jamie Hynes, senior consultant at CPMS, created a model portfolio for this strategy and found it has returned 10.5 per cent annualized since 1993, versus 8.4 per cent for the S&P 500 total return index benchmark. In the last five years, it has returned 8 per cent annualized versus 3 per cent for the benchmark.
Furthermore, he found that the portfolio has low volatility and a low turnover of just five buys and five sells a year.
The one drawback is that the portfolio tends to lag when the market is rising. It beats the benchmark in just five of 13 years when the benchmark is rising, but surpasses the benchmark in four of four years when it is falling.