Stock Screening : Dow Jones 30

In general, stock screening is associated with fundamental and ratio analysis. Literally, you filter stocks with predefined key fields that suit your trading styles; growth, valued, conservative or aggressive. Personally, I always use fundamental data such as dividend yield, Beta, operating margin, Return on Capital Employed (ROCE), ratios derived from Balance Sheet and Profit/Loss Account as the first stage of my stock research.

With that information, you can set up screening strategies using specific fundamental criteria to extract suitable stocks to trade. Many practitioners have developed predefined and back tested screening strategies. Some of them may be complex to general public and some of them are as simple as ABC.

I think you may hear about screening the big market cap stocks, hold and sell them after a year. Perhaps, I could put extra details on this method. You may want to apply to all stock exchanges though. However, I believe this method is useful for medium-term investors who do not want to spend too much time on research.

Big Cap list

Get a list of big market cap of Dow Jones which is usually known as Dow Jones 30. Or get a similar list from S&P, FTSE, CAC40, DAX, Nikkei, Hong Kong or even Johannesburg Stock Exchange. Big market cap stocks usually are prominent blue chip stocks with strong fundamental business and financial models.

Dividend Yield

A simple calculation of dividend yield would mark an ability of a company to pay out dividend each year. It may pay on quarterly or annually basis. However, the bottom line is it represents the return on investment for owning a stock. So hence, you should be interested to look for stocks that have high dividend yield. 

Roughly, it could be in the range from 2% to 7%. If it’s more than 7%, re-compute the yield; dividing dividend per share by the current share price. The yield may be distorted by the current share price. Otherwise, you may get yourself will-be a jackpot. Insofar, you need to select ten big market cap stocks with the highest dividend yield.

Lowest Stock Price

The golden rule in trading is buy low and sell high. So, apply that rule and select five stocks with the lowest price. Please don’t make any preferences on the stock selection. You must eliminate any emotional attachment. You should not be saying’ ‘I feel these stocks would go further up’ although you know the prices are among the highest. 

Finally, you would have five big market cap stocks with a good dividend payout record at a bargain price. If you are thinking of diversifying your portfolio, apply this screening method on other markets as well. 

At the beginning of the year, buy equal amount of each of these five stocks. Hold them for a year. Then, sell them before Christmas or perhaps before the correction periods of stock exchanges (usually during last quarter of the year). Simple, isn’t it? How long does it take you to come out with five bargain big market cap stocks? Is your portfolio in the positive territory?

In conclusion, the timeframe for this method should be about a year. In essence, it tries to capture a year cycle of stock market. Having said that, the pre-requisite for this discipline does not implied that investors should hold for a full year. It is just a guideline not a rule.