Stock Screener Settings

This post contains affiliate links. Purchases made through these links may earn The Stoic Trader commission, but they do not affect your purchase price. Thanks for supporting the blog!

A key aspect of any investment strategy is how you choose what securities to invest in. Thankfully, the days of manually calculating P/E ratios are behind us, but we still need to evaluate our stock picks. With that in mind, I thought I would share the settings I use when using a stock screener. This post will not outline the exact end to end process I use, but it will outline the first step in my stock evaluation process.

What is a Stock Screener?

A stock screener allows a user to filter stocks based on certain criteria. Imagine having to manually look at each stock in the S&P 500 to see if it had a high enough dividend yield, or if its price to earnings (P/E) was trading below a certain number. A stock screener eliminates the manual work. Generally speaking, the user is free to set the parameters for the screener, but this may vary by the screener. Not all screeners are created equal, some are free, some work on a subscription basis and some offer both.

I use FinViz as my stock screener. The functionality of the free screener is all I need at the moment, although as I progress I may look at upgrading to the paid version for access to the export feature and more detailed filters. One of my favourite features is the preset feature. Once you decide what criteria you would like to screen for, you can save this as a preset and avoid having to manually select the criteria each time. The FinViz filters are grouped into three different categories; descriptive, fundamental, and technical. As my strategy for this portfolio is to buy and hold dividend-paying companies, I don’t tend to use the technical tab. Nevertheless, it is nice to know I have the option to filter based on technical indicators as well as fundamental and descriptive data.

My Stock Screener Settings

The goal of this portfolio is to provide me with income through dividends. As a result, I am looking for companies that currently pay a dividend and are likely to do so in the future. These settings aim to screen out companies that are not financially solid or do not pay a dividend. I have also included a valuation filter to try and capture some upside by choosing potentially undervalued securities.

In total, I use seven criteria to filter my stocks. It is worth mentioning that there are additional criteria I look for before investing in a company, but these will be outlined in a further post. For the time being, we are concentrating on cutting down the number of stocks we need to research. I use one descriptive filter and six fundamental filters to get my initial stock list.

Dividend Yield (Descriptive): As this is an income portfolio, the main goal is to provide a steady flow of cash. As a result, the dividend yield is a highly important criterion that I look for. The minimum dividend yield I am willing to accept is 3%. In layman’s terms, if I buy a stock for $100 with a 3% yield, I will receive $3 per year in dividends. As you can see, the yield is tied to the stock price so it fluctuates as the stock price does. Companies also frequently increase their dividends which also has an impact on yield.

P/E (Fundamental): The Price to Earnings or P/E ratio is the next filter I apply. This ratio measures the price relative to the earnings per share (EPS). It is a common ratio used to compare companies across industries and sectors. Rather than selecting a specific P/E ratio to use regardless of market conditions, I look for companies trading at a lower P/E ratio than the market. At the moment, the P/E ratio for the entire S&P 500 is just above 31. As a result, I would screen for companies with a P/E ratio of Under 30. As the P/E of the screened stocks is below the overall market, it is potentially undervalued.

EPS Growth Past 5 Years (Fundamental): As with the P/E ratio, the Earnings Per Share (EPS) is an integral part of this approach. EPS growth is a good sign for a company, it means it has become more profitable in the last five years. For this screener, I filter for companies that have a positive EPS growth over the past 5 years. This is quite a low bar, but as it’s just a screener it is not the final metric.

Return on Assets (Fundamental): Return on assets, or ROA, offers an investor a guide as to how profitable the company is in relation to its assets. From this, we can discern how effective the management of the company is at using the assets at its disposal to generate earnings. As with EPS growth, I filter for companies that have a positive ROA.

Current Ratio (Fundamental): The current ratio measures the ability of a company to meet its short term obligations. It compares all current assets (cash and equivalents) and current liabilities (debts due in the next year or so). A current ratio of less than one indicates that a company has more liabilities than assets. For the income portfolio, I screen for companies with a current ratio of one or more. If a company cannot meet its short term liabilities, I’m not interested in having it in my portfolio.

Debt / Equity (Fundamental): Debt/equity is a ratio that measures the financial leverage of a business. It compares the total liabilities to the shareholder equity to indicate the amount of debt a company is using for its operations and whether or not the amount is covered by shareholders equity. The higher the ratio, the more highly leveraged a company is. I look for a D/E ratio of less than one. In my eyes, a D/E ratio of less than one indicates a more stable, sustainable business.

Payout Ratio (Fundamental): As this is an income-focused portfolio, dividends are an integral part of the returns. The payout ratio measures the amount of money a company pays out in dividends versus its earnings. A company with a low payout ratio may be reinvesting its earnings back into the business, while a company with a high payout ratio may struggle to keep paying at the same rate in the future. A payout ratio of over 100% is not sustainable in the long run, a company simply can’t continue to pay out money it doesn’t have (unless it has big cash reserves). I look for companies with a payout ratio of less than 70%. Sustainable payments are important in an income portfolio, without a dividend payment there is no income.

A Starting Point

The above criteria are what I use as a starting point. In a future post, I will go into detail on the next steps I take when evaluating my stock picks. Typically, I will run the screen at the end of each month when I know how much extra money I have to invest. Hopefully, as time goes on, I will run this process multiple times per month but for now, once will do. While some of the above filters don’t change much on a monthly basis, some do. This allows new stocks to enter the mix, while also displaying old picks that still meet the criteria.

This post isn’t meant to be a one-size-fits-all recommendation. I merely wanted to share my filters in the hope it gives you some ideas of your own. Investing is not a static process, so the above filters I use may change over time. If they do, I will update this post accordingly. It is also my aim to provide complete transparency with this portfolio. In the coming weeks, I plan on creating a page that displays the performance of the portfolio. It is a work in progress at the moment but stay tuned! It is also worth noting that I chose these particular criteria based on income as the end goal. These filters will not work if you are interested in growth investing and while there are some value aspects, it is not a value-focused approach either.

As with anything you read on this site, this is not investing advice. You must do your own research before investing in anything.

The Stoic Trader

Posted in Income Portfolio, Investing and tagged , , , , , .
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments