Saturday, 28 November 2009

The concept and purpose of using Screen and Standards in Stocks Selection

As you begin the process of culling your universe of stocks down to a useful list, think about the qualities you find in your candidates in terms of screens and standards.


A screen is any element of a security that would eliminate it from further consideration, for example, the absence of a dividend.

The purpose of a screen is to limit your universe of stocks to a manageable list of candidates. 

The concept of using a screen to narrow our choices is a familiar part of daily life.  For example:
  • people with food allergies can't eat certain dishes, no matter how delicious they are.
  • we only read books written in languages we understand, and
  • when we shop for clothing we start by looking for clothes that will fit.  After all, it doesn't matter how nice an item is if it's not the right size.
Screens help us discard all the possibilities that, no matter what else they may have to offer, just don't meet our needs.  Any stocks that fails to meet one of your screens simply won't be on your list of candidates.



Standards are those criteria by which you will compare one security to another when both of them pass your screening process in order to select your perferred choice. 

The purpose of standards is to help you decide which stocks on your list of candidates to invest in. 

Returning to our shopping example, once we narrow our choices to those items that are the right size we can try them on to see which ones fit the best.  There are other clothing standards in addition to fit such as color, style, quality, and price that we can use to compare our finalists when deciding which ones to buy.

The stocks that pass through your screens will be ranked according to a variety of investment standards to help you find those candidates on your list that appear to offer the most promising fit for your dividend portfolio.

Sometimes a measurement you use as a screen to shorten your list will also be used as a standard to rank your choices. 

The most obvious screen you'll be running your universe through is the size of the dividend yield.  If you've set your minimum dividend yield at 2.25%, then a stock with a yield of 3% and another stock with a yield of 4% would both pass the dividend screen you've set and be added to your list of candidates. 

Later, when ranking your candidates to decide which ones to buy, you can use the dividend yield measurement again - but this time as a standard.  On the basis of the dividend yield standard, the 4% stock would rank higher than the one with a yield of 3%.

How high the dividend yield should be to pass through your screen depends largely on
  • how much income you need to take from your portfolio, and
  • how much risk you're comfortable assuming. 
If you haven't stopped to address these two important factors, now would be a great time to do so.

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