One theme we have explored in the past is the search for stocks that have a good combination of dividend yield and earnings growth, the so called GARY stocks (Growth And Reasonable Yield). We think that continues to be a sensible strategy and have screened the ASX 100 universe for stocks that combine growth and yield, taking into account franking credits.
We present the results in the chart below. The vertical axis shows the 12-month forward grossed-up dividend yield. The horizontal axis shows the EPS 3-year compound annual growth rate (CAGR) based on consensus forecasts. We set a minimum requirement of a 4% grossed-up dividend yield and a positive 3-year EPS CAGR.
As you might expect, the highest yielding stocks exhibit the least amount of prospective earning growth. The banks and Telstra fall into this category. At the high-growth end of the spectrum are the infrastructure stocks such as Transurban (TCL), APA Group (APA), Duet Group (DUE) and Sydney Airport (SYD). Despite having little or no franking credits attached to their dividends the yields on those stocks are still reasonable.
Somewhere in between is a group of industrial stocks that have EPS CAGRs around the 10% level and a good combination of yield and franking credits. Such stocks include Wesfarmers (WES), AGL Energy (AGL), Blackmores (BKL), JB Hi-Fi (JBH), Carsales.com (CAR) and Boral (BLD).
Harvey Norman (HVN) and Tabcorp (TAH) have slighly lower EPS CAGRs of around 7-8% but have correspondingly higher yields. High-yielding stocks with EPS CAGRs closer to 5% include Suncorp (SUN), Qantas (QAN), Perpetual (PPT), Stockland (SGP), Primary Health Care (PRY), Coca-Cola Amatil (CCL) and Tatts Group (TTS).
Whilst some of these stocks could be vulnerable in the event of a bond market sell-off, we suspect any rise in bond yields and inflation is likely to be quite modest. The market's quest for income-producing assets is likely to be an ongoing theme for quite some time. The best protection against market volatility is to focus on high quality companies that can produce reliable EPS growth. Subject to that caveat, GARY stocks should continue to glitter.