Generally, I’m not a big fan of stock screeners. I’ve found that it causes investors to be overly mechanical in their approach.
However, if investors use screeners as a first step in the investing process, then I think it can help them achieve their investment objectives.
With that in mind, I want to share with you what I call “the world’s easiest stock screener.”
You can use the basic screener at www.finviz.com, which is free. I call it the most effortless screen because it only has three steps.
Step #1: Screen for stocks with dividend yields above 3%.
Step #2: Screen for stocks with low levels or long-term debt.
Step #3: Sit by the pool.
Let me take a step back and explain some details. I use dividend yield because it’s a decent (though not perfect) measure of valuation. Of course, there are exceptions. You want to steer clear of stocks that are in a death spiral. They might have high yields because their share is down, and future dividends are in doubt.
Also, companies may list elevated dividend yields because they’re based on a one-time special dividend that can’t be counted on In the future. Think of the dividend yield as a way to avoid too much risk in an investment.
I also like dividends because it’s something tangible. The accounting department can endlessly manipulate earnings and cash flow. Companies also use “adjusted” earnings and share buybacks to make the corporate balance sheet appear the way they want it to. Dividends, by contrast, represent real money that goes to you.
The second screen is too much debt. There are lots of ways to measure this, but a good one is to look for companies whose long-term debt is less than 40% of their equity. Don’t worry about the exact dividing line, but that’s an excellent place to start.
The issue we want to avoid is companies that borrow too much and in effect, use their debt fund their dividends. That’s a big no-no. That’s why these two screens worth together. It’s an efficient way to find companies with organic growth. Too often, companies use their balance sheet to buy growth instead of earning it.
As a very general rule of thumb, a deteriorating balance sheet is often a sign of business trouble. Companies will try to use their finances to mask over difficulties that their products are having. You always have to look behind the numbers.
Their other screens you can use to fine-tune your results. For example, you may only want stocks in the S&P 500. Or stocks above $40 per share. Or stocks based in the United States. There are good arguments for all of these, but don’t lose sight of the basic idea.
Our screener is useful because it focuses on price and quality. As long as you do that, you’re investing correctly.
Now let’s look at three stocks that currently pass our screener:
At the top of the list is ExxonMobil (XOM), the largest energy company in the world. Declining energy prices have hurt the stock, but the current yield is 4.6%. That’s excellent protection. Long-term debt currently registers at 21% of equity. That’s not bad. Also, rising geopolitical tensions in the Persian Gulf could be a boost to oil. XOM will report earnings on August 2.
Our next candidate is Bristol-Myers Squibb (BMY). The pharmaceutical company currently yields 3.8%. BMY’s long-term debt is equal to 37% of its equity. The shares have been beaten down this year. BMY is down about 16% in 2019. I like that the shares are currently going for less than ten times next year’s earnings. This could be the time for a turnaround.
Lastly, we have the Cheesecake Factory (CAKE). The chain restaurant stock has a yield of 3% and their debt position is quite good. CAKE’s long-term debt is just 4% of its total equity. The next earnings report is due out on July 31. Wall Street expects 81 cents per share. Look for an earnings beat. High calories will never go out of business.
To clarify, our stock screener is just a first step in finding good stocks. You still want to make sure you own high-quality shares that are fundamentally sound. The three I’ve just given you fit the bill.
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