Many investors make the mistake of only looking at stocks that pay high dividends when building a portfolio of the best long term dividend stocks. This is because the dividend can be sky high but the share price plunging wiping out any gains from the dividend.
My favorite way to screen for the best income stocks is to use the CANSLIM methodology. Here’s how it works:
C = Current Earnings
Earnings must increase by a minimum of 18 to 20% over the same quarterly period year over year.
A= Annual Earnings Increases
Yearly earnings need to be increasing from year to year.
N= New Products, New Management, New Highs
These are the catalysts that push stocks higher. Changes in the company’s products and management often signal moves higher. Companies launching new products or switching management can be difficult for non insiders to know about as its happening. Therefore, screening for stocks making new highs can often serve as a proxy for the fundamental information.
S= Supply and Demand The fewer shares outstanding the faster the stock will move.
This is because firms with a smaller number of shares increase quicker than firms with large numbers of shares due to the law of supply and demand. L= Leader or Laggard This is a function of the relative strength of the stock compared to others in its sector. The rule is to invest in stocks with high relative strength rankings of 80 or 90%. By doing so, one is certain to only purchase the leading stocks in the group.
I = Institutional Ownership
Institutional ownership is crucial for CANSLIM. The stock needs to be owned by three institutions at a minimum to support its price. If there is not institutional ownership, avoid the stock.
M= Market Direction
Only purchase stocks when the overall market is rising. Be very cautious even with the best income stocks in a falling market.
Source: http://www.tradingtips.com/using-canslim-to-find-the-best-income-stocks/