What are we looking for?
Last week, we tried to help separate stocks that are true bargains from those that are cheap for good reason. It's especially important to do this when it comes to finding good dividend stocks because, as everyone knows, a high yield is no good for anyone if the dividend is about to be cut.
The income seekers
Again, we turn to CPMS Computerized Portfolio Management Services. CPMS, which was recently acquired by Morningstar Research, has developed a stock screen to find the most reliable high-yielders - the Income Seekers Screen. Today, we look at the screen on U.S. stocks.
For this screen, CPMS limits its list of stocks to ones in the S&P 500. To make the cut, a stock must pass seven tests:
- Dividend yield: More than 2.5 per cent.
- Payout ratio: Dividends must not exceed 50 per cent of earnings per share.
- Relative payout ratio: The current ratio must be no more than 10 per cent above the historical median payout ratio.
- Dividend momentum: Must be flat or up in the past year. No cuts.
- Dividend growth: Must be flat or up over the past five years.
- Earnings growth: The five-year growth rate must exceed the median of the 2,200 U.S. companies CPMS tracks.
- Earnings growth volatility: Five-year volatility must be below the median. Must have growth but not the volatility.
What did we find...
There are 28 names in the S&P 500 that passed the screen with the highest yield at 5.5 per cent. Unlike the Canadian screen last week, none of the names are banks. The top yields are from companies in the pharmaceutical and manufacturing sectors.