With well over a thousand companies listed on the London Stock Exchange, we can’t hope to analyse them all, so how do we narrow down our search. One way is to pick a specific strategy and only look at companies that match.
I recently took a look at screening for growth candidates, and today I’m selecting a few income stocks — which I think is especially relevant as I believe we’re in one of the best periods for dividends for years. But where do we start?
The FTSE 100 seems like a good place, as it’s full of cash cows offering tempting yields. If we screen out all those with dividend yields below 3.5% (which is around the long-term index average), we’re still left with half the Footsie constituents. It’s a start, but we can do better.
Yields aren’t enough
Now, big yields alone aren’t sufficient, as many who bought finance shares before the banking crash will attest — it’s no good buying a big yielder today if it’s facing a financial squeeze and will have to cut its dividend later. Checking on how well dividends are covered by earnings can offer some safety, as good cover suggests a company can keep on paying.
We will miss out on some low-cover stocks that still have records of reliability, especially utility companies which have low capital costs and very good earnings visibility, but for now I’ll stick to companies whose dividends are covered at least 1.5 times by earnings. That narrows the search down to around 30 companies. Getting better, but can we refine further?
I hate to see companies building up big debts, especially when they’re paying dividends. So I’ll omit all companies with net gearing of more than 60%. That leaves me with fewer than 20 companies, but which are they?
The best dividends?
We have housebuilders, which also came through my growth screening. And if a sector does well at two different screens, that says something good about it to me. Taylor Wimpey, for example, is offering dividend yields of around 8%, with decent cover and no debt problems.
Royal Dutch Shell and BP are there too, and I like the look of both of them now that oil is picking up. Big miners like Rio Tinto and BHP Billiton are in the mix, and they’re surely worth a look.
But as a note of caution, Marks & Spencer also makes the cut, even though high-street retail businesses are struggling. House of Fraser is set to close around half its stores, for example, and I’d never buy on a stock screen alone.
If I apply the same screening to the FTSE 250, I see that big index narrowed down to fewer than 40 companies, and some catch my eye. Housebuilders show up again — even more support for the sector as being good value right now?
Asset Manager Man Group is there, with its forecast yields of around 4.5% to 5%, and that’s a company I’ve liked for quite some time. Saga gets a nod too, with dividend yields of around 7%, and a quick further check shows forward P/E multiples of under 10. And there’s Royal Mail Group with its 5% offerings.
You need to investigate these stocks individually, but I hope you agree that narrowing it down this way is a helpful start.
