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In my previous post, I tried to rank all the stocks that are included in the S&P 500 index by the sum of their dividend and earnings yields. In this article, I did the same for all stocks that are included in the S&P MidCap 400 index.

S&P MidCap 400

Description from Standard & Poor's:

The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index covers over 7% of the U.S. equity market, and seeks to remain an accurate measure of mid-sized companies, reflecting the risk and return characteristics of the broader mid-cap universe on an on-going basis

Definition of Earnings Yield by Investopedia:

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 MidCap 400 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 MidCap 400 index 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 07, 2013, before the market open, I discovered the following 20 stocks:

Rank

Ticker

Name

1

(NYSE:SNV)

Synovus Financial Corp.

2

(NASDAQ:AINV)

Apollo Investment Corp

3

(NYSE:VCI)

Valassis Communications Inc.

4

(NYSE:XLS)

Exelis Inc

5

(NYSE:AOL)

AOL Inc

6

(NYSE:HFC)

HollyFrontier Corp

7

(NYSE:NYCB)

New York Community Bancorp Inc.

8

(NYSE:RGA)

Reinsurance Group of America Inc.

9

(NYSE:VLY)

Valley National Bancorp

10

(NYSE:RE)

Everest Re Group Ltd

11

(NYSE:PL)

Protective Life Corp

12

(NYSE:DLX)

Deluxe Corp

13

(NYSE:ATK)

Alliant Techsystems Inc.

14

(NYSE:ARW)

Arrow Electronics Inc

15

(NYSE:FII)

Federated Investors Inc.

16

(NYSE:OLN)

Olin Corp

17

(NYSE:FNF)

Fidelity National Financial Inc

18

(NASDAQ:TECD)

Tech Data Corp

19

(NYSE:UFS)

Domtar Corp

20

(NYSE:LXK)

Lexmark International Inc.

The table below presents the 20 companies, their last price, their market cap and their industry.

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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.

(click to enlarge)

Back-testing

In order to find out how a portfolio based on this ranking system would have performed during the last year, last five 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

(click to enlarge)

Five years back-test

(click to enlarge)

14 years back-test

(click to enlarge)

Summary

The best S&P MidCap 400 stocks in terms of the sum of dividend and earnings yield have 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 26.95% while the return of the S&P 500 during the same period was 17.46%. The difference between the best S&P MidCap 400 stocks screen to the S&P 500 benchmark was much more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 13.40% while the average annual return of the S&P 500 index during the same period was only 1.89%. Although this ranking system has given superior results, I recommend readers use this list of stocks as a basis for further research.

Source: Ranking The S&P MidCap 400 Stocks By Dividend And Earnings Yields