June 16th, 2009
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.
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.
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.
