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Earnings Yield is a simple yet effective ratio for investors who dabble in stocks or bonds. It is the inverse of the price-to-earnings (P/E) ratio, which is often used to handpick undervalued stocks. It gains an upper hand compared to the P/E ratio when we need to compare stocks with fixed income securities or the market.
Earnings Yield is calculated as (Annual Earnings per Share/Market Price) x 100. It can be used to compare a stock with other stocks as well as with fixed income securities. While comparing similar stocks, the one with the higher earnings yield should provide better returns.
Earnings Yield can also be used to compare the performance of a market index with the 10-year Treasury yield. When the yield of the market index is more than the 10-year Treasury yield, stocks can be considered as undervalued in comparison to bonds. In this scenario, investing in the stock market is a better option for a value investor.
However, you need to keep in mind that T-bills are risk free, while investing in stocks always comes with a caveat. Hence, it would be a good idea to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the overall market.
The Winning Strategy
We have set Earnings Yield greater than 10% as our primary screening criterion, but it alone cannot be used for picking stocks that have the potential to generate solid returns. So, we have added the following parameters to the screen:
Estimated EPS growth for the next 12 months greater than or equal to the S&P 500: This metric compares the 12-month forward EPS estimate with the 12-month actual EPS.
Average Daily Volume (20 Day) greater than or equal to 100,000: High trading volume implies that a stock has adequate liquidity.
Current Price greater than or equal to $5.
Buy-Rated Stocks: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have been known to outperform peers in any type of market environment.
Here are four of the 11 stocks that made it through the screen:
Deutsche Bank AG (DB - Free Report) is the largest bank in Germany and one of the largest financial institutions in Europe and the world, as measured by total assets. This Zacks Rank #1 stock has an expected EPS growth rate of 43.9% for the next 3–5 years.
Teck Resources Limited (TECK - Free Report) is a diversified resource company committed to responsible mining and mineral development with major business units focused on copper, metallurgical coal, zinc, gold and energy.The company sports a Zacks Rank #1 and its expected EPS growth rate for the next 3–5 years is 10.7%.You can see the complete list of today’s Zacks #1 Rank stocks here.
Cosan Limited was established as the controlling shareholder of Cosan S.A., a Brazilian company, after the corporate restructuring of the Cosan Group in Brazil. Cosan Limited currently holds roughly 62.3% of the controlling shares of Cosan S.A., which is engaged in the cultivation, harvesting and processing of sugarcane.This Zacks Rank #2 company has an expected EPS growth rate of 16.3% for the next 3–5 years.
Pacific Ethanol, Inc. is currently in the business of marketing ethanol in the Western United States through Kinergy Marketing, a wholly owned subsidiary.This Zacks Rank #2 stock has an expected EPS growth rate of 20% for the next 3–5 years.
You can get the rest of the stocks on this list by signing up now for a 2-week free trial to the Research Wizard stock picking and backtesting software. You can also create your own strategies and test them first before making investments.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector.Download it free »
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Buy These 4 Stocks with High Earnings Yield
Earnings Yield is a simple yet effective ratio for investors who dabble in stocks or bonds. It is the inverse of the price-to-earnings (P/E) ratio, which is often used to handpick undervalued stocks. It gains an upper hand compared to the P/E ratio when we need to compare stocks with fixed income securities or the market.
Earnings Yield is calculated as (Annual Earnings per Share/Market Price) x 100. It can be used to compare a stock with other stocks as well as with fixed income securities. While comparing similar stocks, the one with the higher earnings yield should provide better returns.
Earnings Yield can also be used to compare the performance of a market index with the 10-year Treasury yield. When the yield of the market index is more than the 10-year Treasury yield, stocks can be considered as undervalued in comparison to bonds. In this scenario, investing in the stock market is a better option for a value investor.
However, you need to keep in mind that T-bills are risk free, while investing in stocks always comes with a caveat. Hence, it would be a good idea to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the overall market.
The Winning Strategy
We have set Earnings Yield greater than 10% as our primary screening criterion, but it alone cannot be used for picking stocks that have the potential to generate solid returns. So, we have added the following parameters to the screen:
Estimated EPS growth for the next 12 months greater than or equal to the S&P 500: This metric compares the 12-month forward EPS estimate with the 12-month actual EPS.
Average Daily Volume (20 Day) greater than or equal to 100,000: High trading volume implies that a stock has adequate liquidity.
Current Price greater than or equal to $5.
Buy-Rated Stocks: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have been known to outperform peers in any type of market environment.
Here are four of the 11 stocks that made it through the screen:
Deutsche Bank AG (DB - Free Report) is the largest bank in Germany and one of the largest financial institutions in Europe and the world, as measured by total assets. This Zacks Rank #1 stock has an expected EPS growth rate of 43.9% for the next 3–5 years.
Teck Resources Limited (TECK - Free Report) is a diversified resource company committed to responsible mining and mineral development with major business units focused on copper, metallurgical coal, zinc, gold and energy.The company sports a Zacks Rank #1 and its expected EPS growth rate for the next 3–5 years is 10.7%.You can see the complete list of today’s Zacks #1 Rank stocks here.
Cosan Limited was established as the controlling shareholder of Cosan S.A., a Brazilian company, after the corporate restructuring of the Cosan Group in Brazil. Cosan Limited currently holds roughly 62.3% of the controlling shares of Cosan S.A., which is engaged in the cultivation, harvesting and processing of sugarcane.This Zacks Rank #2 company has an expected EPS growth rate of 16.3% for the next 3–5 years.
Pacific Ethanol, Inc. is currently in the business of marketing ethanol in the Western United States through Kinergy Marketing, a wholly owned subsidiary.This Zacks Rank #2 stock has an expected EPS growth rate of 20% for the next 3–5 years.
You can get the rest of the stocks on this list by signing up now for a 2-week free trial to the Research Wizard stock picking and backtesting software. You can also create your own strategies and test them first before making investments.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector.Download it free »