Filtered Equity Income Stock Prospects

We are increasingly asked about low risk individual stocks that may be suitable for an equity income allocation within a portfolio. This is a general response to that question.

Before offering a prospect list in which you might find attractive ideas, we want to make it clear that diversification of sectors and individual securities is important; and that individual stocks involve more work to create and maintain in a portfolio than holding funds. Generally, individual stock portfolios have higher risk due to concentration among a limited number of issues. That higher risk could enable out-performance, but could also result lower performance than a diversified fund or index.

There are diversified equity income ETFs and mutual funds which should also be considered as alternatives to a portfolio of individual stocks.

We developed a filtered list of equity income prospects in two stages: (1) selection by Standard & Poor’s or Value Line for financial strength by their proprietary process (producing 595 stocks), then (2) subjection to the following criteria focusing on minimum yield and a history of dividend increases, sales growth and other criteria (resulting in a reduced list of 26 stocks):

The first stage filter by independent research firms reduces risk of insolvency, but says nothing about price volatility risk. The second filter by QVM assures that the selections have a higher yield than the S&P 500 index, and focuses on past behavior suggesting a good chance that the dividend yield will grow over time.

This table shows the 26 filter survivors along with certain information about them: sector, industry, yield, payout ratio, position within its 52-week price range, P/E ratio, 3-year sales and dividend growth, EV/EBITDA, and website address.

click image to enlarge (large: 1228 pix X 542 pix)

Average attributes of the list are:

• Yield 3.85%
• Payout Ratio: 48%
• 3-Yr Sales Growth 10.70%
• 3-Yr Dividend Growth 14.82%
• P/E Ratio 13.98
• EV/EBITDA 9.39
• Price in 52-Week Range 0.39

These are not recommendations for purchase, but are recommendations for further research if equity income through individual stocks is what you seek.

Disclosure: We own some of the stocks in this list in some managed portfolios. Individual symbols are: IFF, WTR, GIS, K, AVP, FPL, NSC, AFL, PEP, VLO, ABT, ADP, CLS, JNJ, NJR, CVX, EMR, ENB, SYY, VFC, PAYX, HCBK, PPG, VVC, SO, SCG.

Comments

[granger:]

Great shopping list. Thanks for the ideas. Solid article as always, I enjoy them.

Jun 17 06:46 AM

[KFC007:]

All these wud be good buys if they drop another 15%, not at current levels

Jun 17 09:51 AM

[tipalia:]

WONDERFUL ! what a nice tooland I agree with granger - solid article as always. Every time I see your name I have to read and ,before deleting it , I save it. Also I do not put any money at work before I reread all your articles that I preciously kept. Thanks a lot for your help Richard . One stock , that you mention few times , that I keep hesitating before I pull the trigger is PAYX . I kind of like it, have been watching for some time now but I need more convincing . But I do own some of the stocks you have on your list here. Also AFL looks temting but I am so afraid of that sector. Could you elaborate a little more on those 2 stocks? Many thanks again...
Mike

Jun 17 12:31 PM

[BigOlDave:]

Excellent article!

Jun 17 03:26 PM