I tried to create a dividend stocks portfolio that can outperform the market by a big margin. The following screen shows such promise. I have searched for profitable companies that are included in the Russell 3000 index with dividend yield and dividend growth rate that are greater than their industries' dividend yield and dividend growth. Those companies would have to show also a strong earnings growth prospects, and that their last five years earnings growth is greater than their industries' earnings growth.
Russell 3000 index
The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.
The screen's method requires all stocks to comply with all following demands:
- Dividend yield is greater than the dividend yield of the industry.
- The payout ratio is less than 100%.
- The annual rate of dividend growth over the past five years is greater than the dividend growth of the industry.
- Average annual earnings growth estimates for the next 5 years is greater than > 10%.
- Average annual earnings growth for the past 5 years is greater than the average annual earnings growth of the industry.
- The 10 stocks with the highest yield among all the stocks that complied with the first five demands.
I used the Portfolio123's powerful screener to perform the search and to run back-tests. 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 27, 2013, I discovered the following ten stocks: Sunoco Logistics Partners LP (NYSE:SXL), Leggett & Platt Inc (NYSE:LEG), Herbalife Ltd (NYSE:HLF), RPC Inc. (NYSE:RES), Schweitzer-Mauduit Intl Inc (NYSE:SWM), Tupperware Brands Corp (NYSE:TUP), Healthcare Services Group Inc (NASDAQ:HCSG), John Wiley & Sons Inc. (NYSE:JW.A), CSX Corp (NASDAQ:CSX) and C.H. Robinson Worldwide Inc. (NASDAQ:CHRW).
The table below presents the ten companies, their last price, their market cap and their industry.
The table below presents the dividend yield, the payout ratio, the annual rate of dividend growth over the past five years, the Trailing P/E, the forward P/E and the PEG ratio for the ten companies.
The table below presents the current ratio, the price-to-sales ratio, the price to book value, the average annual earnings growth estimates for the next 5 years, and the average annual earnings growth for the past 5 years for the ten companies.
In order to find out how such a screening formula would have performed during the last year, last 5 years and last 14 years, I ran the back-tests, which are 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-tests results are shown in the charts and the tables below.
One year back-test
Five years back-test
Fourteen years back-test
The dividend screen has given much better returns during the last year, the last five years and the last 14 years than the S&P 500 benchmark. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in all the three tests. One year return of the screen was at 29.51 while the return of the S&P 500 index during the same period was at 12.95%. The 14-year average annual return of the screen was at 14.53% while the average annual return of the S&P 500 index during the same period was only 1.78%. 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 have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.