Building A Small-Cap Dividend Portfolio That Can Outperform The Market By A Big Margin

by: Arie Goren

I tried to create a small-cap dividend 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 S&P SmallCap 600 index, with a dividend yield is greater than 3.0% and dividends per share TTM greater than their 5-year dividends per share average. Those companies would have to show also a low price-to-sales ratio.

S&P SmallCap 600

Description from Standard & Poor's:

The S&P SmallCap 600 covers approximately 3% of the domestic equities market. Measuring the small cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable.

The screen's method requires all stocks to comply with all following demands:

  1. Dividend yield is greater than 3.0%.
  2. The payout ratio is less than 100%.
  3. The dividends per share TTM are greater than the 5 years dividends per share average.
  4. The price-to-sales ratio is less than 2.0.
  5. The 10 stocks with the lowest price-to-sales ratio 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 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 May 02, 2013, before the market open, I discovered the following 10 stocks: CDI Corp. (NYSE:CDI), Calamos Asset Management Inc (NASDAQ:CLMS), Cal Maine Foods Inc (NASDAQ:CALM), New Jersey Resources Corp (NYSE:NJR), Horace Mann Educators Corporation (NYSE:HMN), Laclede Group Inc. (LG), Safety Insurance Group Inc (NASDAQ:SAFT), CH Energy Group Inc. (NYSE:CHG), Avista Corp (NYSE:AVA) and Brooks Automation Inc (NASDAQ:BRKS).

The table below presents the 10 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 10 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 10 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 small-cap dividend portfolio 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 31.91% while the return of the S&P 500 index during the same period was at 13.08%. The 14-year average annual return of the screen was at 11.61% 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.