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Market Screening for Dividend Opportunities


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My previous article looked at potential screening opportunities the stocks that had underperformed the FTSE 100.

This article will also look at IGs market screening tool and attempt to come up with some ideas the stocks that could be bought on the basis of the dividend they offer.

It seems a good time to at least begin starting to look at stocks that pay a good dividends (begin creating a Watchlist maybe?)  but crucially stocks that also seem capable of continuing to pay that dividend.

The reason for this article is the markets have been a bit turbulent lately: there are various geopolitical events on the horizon (which could trigger panic in the market) but also because with stocks trading near all-time highs it may be more prudent to look for stocks that pay in income (dividend) rather than stocks for future the growth potential. And lastly the previous stock market crash was 10 years ago. That in itself is not a sign of doom, but history repeats, eventually. ?
 

The first thing we will do is open up IG's screening tool. We can access this from the website, IG analysis > market screener.

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The first thing I always do when playing with filters is hit the Reset button to remove any criteria that may have been remembered from earlier sessions. This gives a clean slate- so we will now start to build our filter.

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On this occasion let's look at some of the largest stocks on the London stock exchange. (Reason? these giants are partially shielded from UK economic fortunes , as they derive a lot of income from overseas, typically. but also they tend to be mature and stable, which in itself lends to steady earnings and hence dividends) The first thing we will do is refine selection to both the FTSE 100 companies and also include the mid caps - the FTSE 250.

 

Now take a moment to download and read this interesting document I found online https://www.schroders.com/pl/sysglobalassets/digital/insights/2017/pdf/seven-year-asset-class-forecast-returns-2017-update.pdf Using this, we can easily look into Schroders predictions on expected returns of various asset classes in the future. Useful reading for anyone in the markets.

As you see from the summary table on page 2, this shows why it is not wise to hold just cash, because although interest rates are expected to average 1.3% this gets eroded by inflation (the increase cost of living) which is (expected to) rise at a greater rate than interest rates, given Cash an expected return of -1%

Now let's look at equities, focusing in on the UK equity markets quoted GBP. Schroders expects over the next seven years stocks will return 5.4%. Subtract inflation (exactly the same as cash at 2.4% obviously) so this gives a net return of 3% expected over the next seven years on UK equity.

Why are we doing this? well we can use this information to give us a benchmark for what we want screening to return as we look to beat the overall markets… otherwise if we're happy with 3% we may as well simply put money into an ETF or index tracker.

 

Therefore our next criteria will be to filter the stocks in our selection based upon the expected dividend yield. Will set this at 4% as that will outshine the expected market return by 1% minimum. we will also add in another criteria that indicates financial strength by adding the Current Ratio. The current ratio exists to indicate if a company has sufficient liquidity to pay off any short-term liabilities For example if *notional company* has current assets(cash & equivalents) on its balance sheet of £100 and its current liabilities(short term monies owed) are £100 also the current ratio returns would be 1 = current assets (100) divided by current liabilities (100)

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We want to look for a current ratio of at least 1.5, that is to say current assets exceed current liabilities by 50% this serves to give us some comfort that the company is unlikely to experience issues in paying down its near-term liabilities. And conversely increased confidence the dividend can be paid.

 

Let's add two more criteria for the filter: the dividend per share in cash terms and the most recent earnings per share - we will use these to provide some kind of comparison.

Set the Earnings per share minimum to 0.1. This means a positive value is required so any companies with negative eps in the last reporting period will now be excluded.

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The filter returns 16 stocks, four in the FTSE 100 and 12 in the FTSE 250. This seems like a manageable amount to work with the further research. From here you can exclude companies in industries that you don't do not want to pursue if you wanted to narrow down the search further.

 

Perhaps first sort by Dividend yield column first by clicking on that column header.

 

The next thing I would do is look down the two right-hand most columns those being EPS and dividend per share and I would look to identify for the situations where reported earnings are significantly greater than the dividend. This provides some level of comfort that the profits of the company retains are sufficient to honour the dividend expected. You may want to go even further and look at the level of dividend cover feature of the shortlisted companies by doing some more research on their website or on the IG platform but we can quickly skim over our 18 results and see that some are more appealing than others in this respect four example Henderson group has a dividend and eps at parity so for me this is probably a sign to eliminate it, or at least do much more research.

 

As per the current ratio I would look for dividend cover about 1.5 to 2 times. EG EPS is approx. 50% more than the dividend payout.

 

This is a quick glimpse of looking into some companies that may be suitable to invest our money is if the markets starter gets a bit shaky. At least there will be some certainty of regular income informant dividend payments which as we have shown is far greater than holding cash.

 

This is not investment advice just an expression of ideas, let me know your thoughts. I recognise it is quite simple, but equally it is rules based so gives us a platform to make further choices and conduct more research. There is a lot more we could do, time permitting. It is probably worth running something like this monthly, as the results will change as reporting is released, and you can pick the best for more research or to go into a Watchlist.

 

Cheers, rimmy2000

 

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Just in summary then, what we have done here is:

  • Restricted our market/pool of stocks to large and mid caps (UKX, MIDD)
  • Looked for stocks that yield above the expected market return (4% above)
  • Seen how cash is probably not attractive due to inflationary erosion in the coming years.
  • Added in a simple test of financial health by restricting to shares with a strong current asset:liability ratio
  • Restricted further for positive EPS value in most recent reporting period.
  • Sorted our data by Yield
  • Looked for stocks that produce an EPS in excess of the dividend payout.
  • Reduced our list to a manageable number for further research.
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14 hours ago, rimmy2000 said:

Schroders expects over the next seven years stocks will return 5.4%. Subtract inflation (exactly the same as cash at 2.4% obviously) so this gives a net return of 3% expected over the next seven years on UK equity.

Why are we doing this? well we can use this information to give us a benchmark for what we want screening to return as we look to beat the overall markets… otherwise if we're happy with 3% we may as well simply put money into an ETF or index tracker.

This is a great article and guide but I am interested why given all the independent searching and research you have done that you are only going off one source for the expected dividend return? Is it because this is easy to calculate as most are published in advance and you can look at the variance over the last x numbers of years and take a pretty educated guess?

NB: I haven't read the full schroders yet but will print off at work and read on the train.

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Hello @cryptotrader, Well This source is probably as good as any: Schroders are in the industry, manage funds and are an asset manager. So their take is reasonable to use, imo. Happy for you or anyone else to look for other estimates, and we can adjust accordingly, but all this is doing is giving us a benchmark from where to set the dividend threshold, we are not allowing this assumption to underpin the entirety of the research.

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Guest PandaFace

Great post. Now although you say this is simple stuff for yourself, I’m sure it’s something a lot of people wouldn’t even really know where to start with (myself included). 

There are certainly many aspects which have helped and I know like yourself that I’m begging to think ‘the end is neigh’ for equity markets with the geopolitical risks, Brexit, winding down of bond buybacks by the ECB (kicking off September right?), an over extended market anyway and someprofit taking, and the trump tariffs possibly coming into effect. Also inflation increases ... even gradual you’ll see a drop in discretionary consumer spending, companies far less liquid...

i think we have a little way to go before any cause for concern but as with all investment it’s good to get a finger on the pulse early and start tracking the companies. 

THANK YOU

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14 hours ago, PandaFace said:

i think we have a little way to go before any cause for concern but as with all investment it’s good to get a finger on the pulse early and start tracking the companies. 

THANK YOU

Thank you @PandaFace, Your post summarises the attitude that should be taken: being on the front foot, perhaps with some good quality income stocks, keeping *some* cash aside for opportunities and generally acting with trepidation over the coming months.

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Guest name on a forum

interesting so what I have to say is these are very large div stocks! what I don't get is how these are not getting bought up a lot and people pushing the price up. An 8% div seems a lot. Does the EPS and current ratio give some assurance that there is a good company we are looking at? it gives liquid assets for the potential turbulence, but I guess you have to look into each stock and see whats going on fundamentally? this is a starting point basically as I read it? These are the top 5 some of which I have never heard of. time to do some digging I think then

https://www.ig.com/uk/marketanalysis/ig-shares/polar-capital-holdings-plc-POLR-UK

https://www.ig.com/uk/marketanalysis/ig-shares/rio-tinto-plc-RIO-UK

https://www.ig.com/uk/marketanalysis/ig-shares/renewables-infrastructure-group-ltdthe

https://www.ig.com/uk/marketanalysis/ig-shares/pearson-plc-PSON-UK

https://www.ig.com/uk/marketanalysis/ig-shares/evraz-plc-EVR-UK

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1 hour ago, Guest name on a forum said:

 but I guess you have to look into each stock and see whats going on fundamentally? this is a starting point basically as I read it? These are the top 5 some of which I have never heard of. time to do some digging I think then

absolutely, these are not recommendations to go out and buy. Not a chance I would do that. I am trying to construct an argument for looking ahead and considering how income stocks may form part of a portfolio, as a way of assuring decent levels of return if the markets soured.

It raises another point, that a dividend yield too high is something to be suspicious of, also. For example Carillion actually raised dividends but went bust earlier this year, as per this article.

The main point I am trying to get across is there are some rules that can be used to help our stock selection, and improve chances of success. As I put at the end of my article, it...

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...gives us a platform to make further choices and conduct more research

As for the other point "what I don't get is how these are not getting bought up a lot and people pushing the price up" remember these are large cap stocks, and all will have many millions of shares in issue, a lot will also be held by institutions, for example, RIO TINTO (RIO) has one-billion-three-hundred-and-twenty-one-million (1,321,300,000) ordinary shares in issue, so it will make very very little difference if retail investors buy for future income..

 

Hope that provides some clarity. Good questions.

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