Screening for Equity Income, November 2010

Includes: DPL, DUK, ED, EPD, KMB, T, TEF, WPZ
by: Richard Shaw

Like many investors, you may be searching for portfolio income outside of the realm of bonds. Equity income is a reasonable place to look.

Cash provides negligible income and is losing money in real terms after inflation, modest though it may be.

Bonds have begun to turn negative and the prospects of bonds rising in price dims further each day.

Very possibly, one good place to find income now is in higher yielding stocks that might serve as bond substitutes for part of your portfolio.

We've been accumulating high yield dividend stocks for months now as we see a necessary rotation and allocation away from bonds.

Dividends have the general probability of rising over time, whereas traditional bond coupons don't. Dividends can and do decline or get suspended altogether in some circumstances, so it is important to look for long and consistent patterns of dividend payment, and to diversify among industries.

Banks are a special case of dividends shrinking. Before the 2008 crash, they were the largest component of S&P 500 yield, but those dividends were crushed by the credit crisis.

Putting the bank dividends outcome on the side as very unusual, it's best to look among companies that are inclined to stabilize and grow payments to owners as a higher priority than stabilizing net cash to the company -- companies that will dig deep if necessary on a temporary basis to keep the money flowing to their owners.

Clearly, those are not generally not super growth stories -- no $50 billion cash stockpile at 0.75% yield as in the case of Apple today, or something similar by Microsoft in its prime. Those represent different kinds of investment opportunities that are just fine when they are suitable. However, a growing portion of the investing population is at the stage where they have completed their savings years, and are now in need of some harvesting. That means income, because trying to live entirely from sale of appreciating securities, only works out well when the securities are appreciating. Living off of investment income from securities selected for dividend persistency is a lower risk proposition.

Treasury Benchmark: The 30-year Treasury is at 4.3+% yield, and the 10-year is at 2.9+%. The 2006-2007 highs for those Treasuries was in the 5% to 5.5% range, which we may see again. As a consequence, we would tend to want to find stocks with a 4% minimum yield when thinking of bond alternatives.

Here is one screen (one of many different possible screens) for dividend stocks based on closing prices on Friday November 12, 2010. Those of you searching for yield might want to put the stocks that pass this filter into your research list. We are not recommending them, but objectively showing you what comes out the filter meat grinder. It's up to you to determine if any of these make any sense to you for your purposes.

It's always a bit surprising how few companies pass what might seem like not so terribly rigorous screens. These are no exception.


  • Price > $5
  • Yield >= 4%
  • Av Dollar Trading Volume Per Minute >= $25,000
  • 3-Yr Sales Growth >= 3%
  • 3-Yr Earnings Growth >= 3%
  • 3-Yr Dividend Growth >= 3%
  • 12-Mo Sales Growth >= 3%
  • 12-Mo Earnings Growth >= 3%
  • 12-Mo Dividend Growth >= 3%
  • Two companies pass this screen: DPL (NYSE:DPL) and Enterprise Products Partners (NYSE:EPD)


  • Same as #1, except:
  • 12-Mo Sales Growth >= 0%
  • 12-Mo Earnings Growth >= 0%
  • One additional company passes: Kimberly-Clark (NYSE:KMB)


  • Same as #2, except:
  • 12-Mo Dividend Growth >= 0%
  • Two additional companies pass: AT&T (NYSE:T) and Williams Partners (NYSE:WPZ)


  • Same as #3, except:
  • 3-Yr Sales Growth >= 0%
  • 3-Yr Earnings Growth >= 0%
  • One additional company passes: Telefonica SA (NYSE:TEF)


  • Same as #4, except:
  • 3-Yr Dividend Growth >= 0%
  • Two more companies pass: Consolidated Edison (NYSE:ED) and Progress Energy (PGN)

The eight symbols that pass the screens are: T, ED, DPL, EPD, KMB, PGN, TEF and WPZ.

There are certainly other ways to slice and dice the stock universe for income stocks, and you should use several. It's most gratifying when some stocks pass through multiple independent sets of criteria.

Disclosure: Holdings Disclosure: As of November 12, 2010 we hold positions in the following securities mentioned in this article: T, ED, EPD, PGN in some but not all managed accounts.

Disclaimer: Opinions expressed in this material and our disclosed positions are as of November 12, 2010. Our opinions and positions may change as subsequent conditions vary. All of our published materials are for informational purposes only. More factors than considered in our published materials should be evaluated before taking any investment action. Perform your own investment research before making any investment decision. Consider seeking professional personal investment advice before implementing your portfolio ideas. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.