After scrupulous back-testing, I have elaborated a screening method for good-yielding dividend stocks, which has proven to perform much better than the main indexes of the U.S. stock markets.
The screen's formula requires all stocks to comply with all following demands:
- Dividend yield is greater than 3.0%.
- The payout ratio is less than 75%.
- The annual rate of dividend growth over the past five years is greater than 5%.
- Forward P/E is less than 15.
- The PEG ratio is less than 1.50.
- Debt to equity is less than 0.50.
- The 10 stocks with the lowest payout ratio among all the stocks that complied with the first six demands.
I used the Portfolio123's powerful screener to perform the search and to run the back-test. All the data for this article were taken from Portfolio123. After running this screen on April 18, 2013, before the market open, I discovered the following ten stocks:
Schweitzer-Mauduit Intl Inc (NYSE:SWM), Horace Mann Educators Corporation (NYSE:HMN), Validus Holdings Ltd (NYSE:VR), The Toronto-Dominion Bank (NYSE:TD), ENSCO Plc (NYSE:ESV), Cal Maine Foods Inc (NASDAQ:CALM), Intel Corp (NASDAQ:INTC), Microsoft Corp (NASDAQ:MSFT), CA Inc (NASDAQ:CA) and Met-Pro Corp (NYSE:MPR).
The table below presents the 10 companies, their last price, their market cap and their industry.
The table below presents the dividend yield, the average annual dividend rate of growth over the past five years, the payout ratio, the forward P/E, the PEG ratio and the debt to equity ratio for the 10 companies.
The table below presents the trailing P/E, the forward P/E, the price-to-sales ratio, the price to book value, the long term average annual earnings growth estimates and the past five-year average annual earnings growth for the 10 companies.
In order to find out how such a screening formula would have performed during the last 14 years, I ran the back-test, which is available by the Portfolio123's screener.
The back-test takes into account running the screen every four weeks and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmark (S&P 500), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-test results are shown in the chart and the table below.
The good-yielding dividend stocks screen has given a much better return, during the last 14 years, than the S&P 500 benchmark, with a much lower Sharpe ratio, which measures the ratio of reward to risk. Although the past guarantees nothing, it does provide insight into how this screen has performed under various economic conditions over varying time frames.
Disclosure: I am long INTC, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.