Earnings yield is an easy but useful ratio for investors putting their money into stocks or bonds. It is the reciprocal of the price-to-earnings (P/E) ratio and used to spot undervalued stocks. This ratio comes in handy for investors when they want to compare stocks with fixed income securities or the market.

Earnings yield is derived 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.

This ratio can also be utilized for comparing the performance of a market index with the 10-year Treasury yield. When the yield of the market index exceeds the 10-year Treasury yield, stocks can be considered as undervalued in comparison to bonds. This implies that investing in the stock market is a better option for a value investor.

However, it is to be noted 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. You can see the complete list of today’s Zacks #1 Rank stocks here.

Here are four of the 12 stocks that made it through the screen:

Volkswagen AG (VLKAY - Free Report) is an automobile manufacturer in Europe. This Zacks Rank #1 stock has an expected EPS growth rate of 17.5% for the next 3–5 years.

Brentwood, TN-based Brookdale Senior Living Inc. (BKD - Free Report) is a leading owner and operator of senior living facilities throughout the United States. Currently, the company has a Zacks Rank #2 and an expected EPS growth rate of 16.5% for the next 3–5 years.

Web.com Group, Inc. (WEB - Free Report) is a Jacksonville, FL-based provider of online marketing for small businesses. This Zacks Rank #2 stock has an expected EPS growth rate of 7.5% for the next 3–5 years.

Phoenix, AZ-based ON Semiconductor Corporation (ON - Free Report) is engaged in manufacture and sale of semiconductor components for various electronic devices. Currently, the company has a Zacks Rank #1 and an expected EPS growth rate of 16.7% for the next 3–5 years.