Searching for the best value stocks, I decided to rank all the stocks that are included in the S&P 500 Index by the sum of their dividend and earnings yields.
Earnings are defined as:
The earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company. The earnings yield is used by many investment managers to determine optimal asset allocations.
I used the Portfolio123's powerful ranking system to grade all S&P 500 stocks based on this theme. All the data for this article were taken from Portfolio123.
The ranking system that I built searched for the best 20 stocks that are included in the S&P 500 by the sum of their dividend and earnings yields. For the earnings yield, I used the average of the inverse of the trailing P/E ratio and the inverse of the forward P/E ratio. After running the ranking system on May 4, 2013, I discovered the following 20 stocks:
Seagate Technology Plc
Valero Energy Corp
Pitney Bowes Inc.
Lincoln National Corp
Freeport-McMoran Copper & Gold Inc.
Western Digital Corp
CF Industries Holdings Inc
Marathon Petroleum Corp
Gannett Co Inc.
Newmont Mining Corp
JPMorgan Chase & Co
Frontier Communications Corp
Ford Motor Co
Jabil Circuit Inc
The table below presents the 20 companies, their last price, their market cap, and their industry.
Click to enlarge images.
The table below presents the trailing earnings yield, the forward earnings yield, the average earnings yield, the dividend yield, and the sum of the average earnings yield and the dividend yield for the 20 companies.
In order to find out how a portfolio based on this ranking system would have performed during the last year, the last five years, and the last 14 years, I ran backtests that are available from Portfolio123's screener. The backtest 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 backtest results are shown in the charts and tables below.
One Year Backtest
5 Years Backtest
14 Years Backtest
The best S&P 500 stocks in terms of the sum of dividend and earnings yield 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 three tests. The one-year return of the screen was 30.37%, while the return of the S&P 500 during the same period was 16.92%. The 14-year average annual return of the screen was 9.67%, while the average annual return of the S&P 500 during the same period was only 1.92%. Although this ranking system has given superior results, I recommend readers use this list of stocks as a basis for further research.
Disclosure: I am long STX. 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.