When a company has a long-term track record of consistent and rising dividend payments, it is a clear indicator that the company's financial position is good.
I have searched for profitable companies that are included in the S&P 500 index that pay rich dividends, and that have raised their payouts at a very high rate over the last five years.
S&P 500 index
Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes 500 leading companies in leading industries of the U.S. economy. Although the S&P 500® focuses on the large cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. S&P 500 is part of a series of S&P U.S. indices that can be used as building blocks for portfolio construction.
The screen's formula requires all stocks to comply with all following demands:
- Dividend yield is greater than 2.0%.
- The payout ratio is less than 70%.
- The annual rate of dividend growth over the past five years is greater than 6%.
- Forward P/E is less than 17.
- The 10 stocks with the highest dividend growth over the past five years among all the stocks that complied with the first four demands.
I used the Portfolio123's powerful screener to perform the search and to run a back-test. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Portfolio123.
After running this screen on April 22, 2013, before the market open, I discovered the following ten stocks: ENSCO Plc (NYSE:ESV), Western Union Co (NYSE:WU), TE Connectivity Ltd (NYSE:TEL), Molex Inc. (NASDAQ:MOLX), CMS Energy Corp (NYSE:CMS), Fidelity National Information Services Inc (NYSE:FIS), Xerox Corp (NYSE:XRX), Accenture PLC (NYSE:ACN), Darden Restaurants Inc. (NYSE:DRI) and Newmont Mining Corp (NYSE:NEM).
The table below presents the ten 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 Trailing P/E, the PEG ratio and the total debt-to-equity ratio for the ten 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 5 years average annual earnings growth for the ten companies.
In order to find out how such a screening formula would have performed during the last 10 years, I ran the back-test, which is available by the Portfolio123's screener.
The back-test takes into account running the screen every three months 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 S&P-500 Good-Yielding Stocks screen has given a much better return, during the last 10 years than the S&P 500 benchmark. The Sharpe ratio, which measures the ratio of reward to risk, was also much better. The ten years average annual return of the screen was at 10.68%, while the average annual return of the S&P 500 index during the same period was about a half, 5.72%. Although the past guarantees nothing, it does provide insight into how this screen has performed under various economic conditions over varying time frames.