Screening for resilient US dividend stocks

The Globe and Mail, Number Cruncher

By Peter Ashton

Friday, January 22nd 2017

In The Globe and Mail, Peter Ashton uses Trading Central Strategy Builder to find dividend stocks that may provide a cushion in the case of a market pullback. 

What are we looking for?

U.S. dividend stocks that may provide a cushion in the case of a market pullback.

With both the U.S. Federal Reserve and the Bank of Canada forecast to raise rates three times in 2018, the prices of dividend stocks in a number of sectors have been pushed down from their highs. As bond yields rise, dividend stocks become less attractive for investors seeking regular income. However, numerous academic studies have shown that, over the long term, dividend-paying stocks tend to outperform their non-dividend paying counterparts. With momentum stocks now trading at very high multiples, dividend-paying stocks may now offer better value, as well as a cushion, in the event of a market correction in the coming months.

The Screen

We will be using  Strategy Builder to search for U.S. stocks with attractive dividend characteristics.

We begin by setting a minimum market-capitalization threshold of $10-billion (U.S.); companies with very large caps typically have higher-quality revenue streams than their smaller counterparts and also have a track record of performance.

Next, we will look for companies with a dividend yield of at least 2.5 per cent and a five-year dividend growth rate of 15 per cent or more. In addition, in the context of rising interest rates, we also wish to avoid companies with large debt burdens. To accomplish this, we will screen for debt-to-equity ratios of 1.0 or less.

Finally, we wish to focus on companies expected to increase their business in the coming year, we will also screen for companies with analyst ratings of either buy or strong buy (or equivalent) from a consensus of analysts covering the stock.

What did we find?

Topping our list is MPLX, a mid-stream energy firm spun out of Marathon Petroleum in 2012. MPLX operates oil and gas pipelines in the U.S. Midwest and Gulf Coast regions. It has the highest dividend yield on our list at 5.8 per cent and an impressive dividend growth rate of 25.4 per cent over the past five years.

The largest company on our list is computer networking firm Cisco Systems Inc., with a market cap in excess of $200-billion. Cisco also has the highest five-year dividend growth rate at 36.6 per cent. Cisco is an uncommon example of a technology stock with strong growth prospects, as well as excellent dividend-growth characteristics. Cisco shareholders enjoyed a good run in 2017 as the stock advanced just over 37 per cent.

Insurance giant MetLife Inc. also makes our list with a dividend yield of 3.1 per cent and a five-year dividend growth rate of 17.2 per cent. Like many financial stocks, MetLife was clobbered during the financial crisis and traded at close to $10. However, the stock has demonstrated its resiliency since, now trading at over $52. MetLife is also poised to benefit in the rising interest-rate environment ahead.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.