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👋 Howdy Partner,
Screens are a great tool to find investing ideas.
When you screen for income, it’s easy to get pulled towards the highest yields you can find.
But there’s a much better way, and today I’ll show it to you.
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The Second Quintile
Historically, the secret to outperforming the market isn’t buying the top 20% of high dividend yielders.
It’s buying the next 20%, the Second Quintile.
Hartford Funds looked at the performance from 1930 to 2023.
$1,000 in the S&P 500 grew to $8.6 million
$1,000 in the Second Quintile grew to $31.2 million
That is nearly 4x more wealth.
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Why it Works
The Second Quintile is a great place to invest for several reasons:
Safety: You avoid the yield traps and distressed companies in the top tier.
Quality: You own profitable companies with enough cash flow to pay you and grow the business.
Stability: Historically, this group has the fewest negative years of any quintile.
That third one is huge - protect the downside and the upside takes care of itself.
These companies tend to have a much lower Payout Ratio than the first quintile as well.
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I screened the Russell 1000 to find the companies sitting in that Second Quintile today.
Let’s look at a few that are interesting:
Otis Worldwide (OTIS)
How they make money:
Otis is the world’s leading manufacturer, installer, and servicer of elevators and escalators.
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Why They’re Interesting:
Recurring Revenue: While new equipment sales are cyclical, the real money is made on the back end. Elevators require strict, legally mandated maintenance.
High Consolidation: The global market is an oligopoly dominated by just a handful of major players.
Otis’ Competitive Advantages: