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.
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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.