Filtered Equity Income Stock Prospects

By: Richard Shaw | Wed, Jun 17, 2009
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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.

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Average attributes of the list are:

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.



Richard Shaw

Author: Richard Shaw

Richard Shaw

Richard Shaw

Disclaimer: Opinions expressed in this material and our disclosed positions are as of July 5, 2010. Our opinions and positions may change as subsequent conditions vary. 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. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. 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. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.

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