The buy-and-don't-worry portfolio

By Harry Domash

Editor's note: To view the stock screens mentioned in this column, download the free MSN Money Investment Toolbox.

If the past few bearish months have you almost afraid to look at your portfolio day after day, here's a solution: Don't.

Truth is, even in the best of times, most investors have neither the time nor inclination to monitor their stocks daily or even weekly. The good news is that you don't need to; investing is a long-term game.

Of course, you might also be worried about the damage you could suffer while you looked away. If you're in that boat, I've devised a strategy for finding stocks likely to do well over the next few months no matter which way the market heads.

These are not rockets. You won't find the next Google (GOOG, news, msgs) in this bunch. But they are profitable, low-debt, dividend-paying moderate-growth stocks selected for their low risk. You can buy stocks like these, run away until the market looks safer and not worry too much about what you'll find when you return. Call it a buy-and-hide portfolio.

Here's how it works, starting with earnings growth:

Growth still matters

No matter which way the economy is heading, stocks that grow earnings usually perform best. However, companies with fast earnings growth require constant attention because they almost always get hit when growth slows. Worse, this market is especially tough on stocks that disappoint.

Instead of entering that fray, I'll stick with the slower growers that most investors tend to ignore. These are stocks expected to record at least 5% earnings growth this year, not the 20% to 30% that many growth investors love. Checking analysts' earnings forecasts is the best way to pinpoint these moderate growers.

MSN Money tabulates the forecasts of all analysts covering a stock into a consensus number. Though individual analysts may be off, consensus forecasts are the best available resource for determining a company's earnings-growth outlook. One caveat, though: Analysts, like the rest of us, work from currently available information. All bets are off if something unexpected happens, such as a sudden change in interest rates.

Along those lines, I'm requiring a minimum 5% expected earnings growth for this year, based partly on current market volatility. Consider increasing that to as high as 10% if the market is stronger when you run the following screen -- for instance, if the S&P 500 Index ($INX) is trading above its 200-day moving average.

Screening parameter: Current year growth rate >= 5

Profitability

Although earnings growth drives share prices, the earnings number by itself doesn't tell the whole story. Profitability, which measures the return on shareholders' investments, is equally important.

For example, say two companies each report $20 million in earnings. But in one case, shareholders invested $100 million to get that profit, while the other company's shareholders put in only $50 million.

Return on invested capital, or ROIC, is a profitability ratio that compares net income to shareholders' equity plus long-term debt. In essence, it's the return you'd receive on your investment if you bought the company and paid off its debt.

Though ROIC numbers run as high as 50%, high single-digit values are good enough, especially considering current conditions. I set my minimum ROIC at 8%. Consider lowering it to 7% if you want to see more stocks and raising it to 12% or so if you want to see only the most profitable companies.

Screening parameter: Return on invested capital >= 8

Dividends reduce downside risk

With rates for money market funds and certificates of deposit sinking, a strong dividend can help support a company's share price during a market downdraft. However, to be effective, that safety net requires a meaningful dividend yield and little risk of a dividend cut.

When you buy a stock, your dividend yield is the value of the dividends you expect to receive over the next 12 months divided by your purchase price. For instance, if you pay $20 per share and receive $1 in dividends over the next year, your yield would be 5%.

Currently, most money market funds and CDs yield around 2.5% in annual interest. So, for the screen, I set my minimum dividend yield 1% higher, at 3.5%. In my experience, that's enough of a premium to get investors' attention. Adjust that figure up or down if conditions have changed when you run the screen.

Screening parameter: Current dividend yield >=3.5

With dividend yields, higher is better, but only to a point. The dividend yields listed by the screener and quoted on financial sites assume that a company will continue paying at its current rate for the next 12 months.

A dividend cut can ruin your returns. It reduces your dividend yield and, to make matters worse, usually triggers a drop in share price.

Because dividend cuts usually follow an earnings drop, our requirement of a 5% forecast earnings growth reduces the chance of such a cut. Nevertheless, an unusually high yield warns that we may have missed something and that many investors do expect a dividend cut.

What defines an unusually high yield is a judgment call. I set my maximum yield at 10%. Consider lowering that figure to 7% or 8% if you want to reduce your risk. Try increasing it to 11% or 12% if you're the adventurous type.

Screening parameter: Current dividend yield <=10%

Continued: Minimize debt

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