As a keen dividend growth and value investor part of my investing activities each month include running some basic screens on various stock exchanges to gauge the relative value of the market and pick out interesting stocks that might qualify for more than a simple glance. The difficulty for many novice investors is deciding what criteria to include in their screen to maximize the chances of finding those elusive bargain stocks.
Stock screens aren’t difficult to use, but for many investors their search through a stock screener often finds them far too many or too few results to make it worth their while. No investor wants to sift through 1,200 results on the NYSE or feels defeated when their criteria turn up only 5 results of companies they don’t like or understand.
Part of the difficulty for any investor is deciding what information is important to include in a stock screener and what information doesn’t really need to be there. As fun as it is to include multiple factors you might be limiting yourself to some really good stocks that don’t fit one or two of your criteria and not including enough factors will leave you with a search result not specific enough for what you’re looking for.
The factors I like to screen for are some of the easiest to determine from both a dividend and value investing approach and leave you with enough quality results to filter out 10-15 quality stocks for your consideration.
In almost all situations I avoid stocks that trade under $5.00 because for a few important reasons. Often their market cap will be too low for inclusion in my portfolio because from experience I know this will impact the growth rate of their dividends. While every value investor likes undervalued companies, but when looking for dividends an investor should realize that many companies who are experiencing difficulties will be the first to cut their dividend. I also don’t place a ceiling on this item because dollar value doesn’t always mean a company is over-valued when you consider the relation to the number of outstanding shares of a company.
Market cap is a little tricky and on that each investor has to decide for themselves. Smaller market capitalized companies may have significantly higher growth rates and dividend growth but may also shovel back cashflow into operations much faster than a dividend oriented investor may prefer. Generally speaking I like to have a minimum of $500 million as the baseline for my screens.
This is an important item to screen with but investors should be realistic in what numbers they choose as both a minimum and maximum yield. Often I find many investors avoid screening below 3% because they feel the current yield isn’t high enough or a company may be overpriced, but often companies with a yield under 3% and a strong history of dividend growth grow those dividends at double digit rates each year. Likewise searching for only high yield stocks may predispose an investor to looking at companies whose dividend is at risk or not sustainable. Generally I like to screen stocks between 2% & 6.5% for a modest number of stocks that I can tackle filtering through and provide me with enough breadth that the screen is useful although for this screen I only set a maximum yield at 10% because of the sector.
I’m an investor who’s often m0re focused on forward P/E than trailing P/E simply because a trailing P/E is an indication of what a company has done in the past and not what they’re going to be doing in the future. Screening for forward P/E is often difficult depending on the screening tool you’re using so if you’re forced to use trailing earnings the range I like to screen for is between 5 & 15. As a value investor I want to be buying at some discount to the true value I’ve determined for a stock. A P/E over 20 often leads me to determine that the company is overvalued and the range of 5-15 gives me a good enough range to include not too many but also not too few results.
I admit that deep down I’m still a cold-blooded value investor; I don’t invest with emotion and finding a dividend growth stock at a discount to its peers, its net asset value (NAV) or its intrinsic value makes my week! When screening with P/B and investor needs to be conscious that some industries/sectors will have a variance in their P/B than other industries/sectors and comparing apples to oranges doesn’t always work. This tool is included in my screen because I’m a value oriented investor but in today’s post I didn’t use my usual range of 0.5-2.0 because of the sector I wanted to examine.
So what was I looking at out of curiosity when I did my most recent screen? Telecom….
Now not all (or any) of these five companies would be considered for inclusion in my dividend growth portfolio, but one specifically is already in my portfolio and another has been on a watchlist of mine for some time. When I weeded through the best of the bunch for consideration in this screen here is what I got:
France Telecom (FTE)
• Dividend of 7.3%
• Down 16% YTD
• Forward P/E of 9.8
• Dividend of 6.9%
• Up only 10% YTD
• Forward P/E of 9.6
• Dividend of 6.0%
• Up 0.5% YTD
• Forward P/E of 11.2
• Dividend of 6.2%
• Down 4.4% YTD
• Forward P/E of 13.7
• Dividend of 7.0%
• Down 15.5% YTD
• Forward P/E of 10.5
Nice screen. I like TEF too. I met with the Morgan Stanley analyst regarding TEF a couple of weeks ago. The dividend should be E1.70 by 2012.
One risk: a depreciation of the latin american currencies versus the euro.
Just a comment on VOD. The dividend is closer to 5% than 6.9%. I think the confusion comes when financial sites simply double the most recent dividend to arrive at an annual number. But most UK companies pay dividends twice a year unevenly, a lower interim and a larger final. At roughly $1.30 per ADR, VOD would yield 5.2% at a price of $25.
In a stock screen, I replace P/B with total debt/equity or LT debt/equity, and if possible I include some sort of growth metric, but it depends on what I'm looking for.
SC: Currency risk will be present in almost any multi-national but the key for a long-term investor is overlooking short-term trends that shouldn't affect your response to the stock if you're in for the long run. But yes, certainly a risk to be aware of.
Jonny: Good to hear from you! I used the yahoo screener so yes my guess would be that the dividend wasn't as accurate as it should be for VOD.
Dividend Monk: Growth I usually target when I'm looking at a company more closely (ROE + BV growth are my two favourite metrics).