In my previous posts (here and here), I tried to rank all the stocks that are included in the S&P 500 and in the S&P MidCap 400 indexes by the sum of their dividend and earnings yields. In this article, I did the same for all stocks that are included in the Russell 1000 index.
The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.
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 Russell 1000 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 Russell 1000 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 08, 2013, before the market open, I discovered the following twenty stocks:
American Capital Agency Corp
Annaly Capital Management Inc
Hatteras Financial Corp
Ares Capital Corp
Warner Chilcott Plc
MFA Financial Inc
Chimera Investment Corp
Natural Resource Partners LP
Energy Transfer Partners LP
KKR & Co LP
Seagate Technology Plc
Southern Copper Corp
Virgin Media Inc
Pitney Bowes Inc.
Valero Energy Corp
Validus Holdings Ltd
The table below presents the twenty companies, their last price, their market cap and their industry.
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 twenty companies.
In order to find out how a portfolio based on this ranking system 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 best Russell 1000 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 33.18%, while the return of the S&P 500 during the same period was 19.71%. The difference between the best Russell 1000 stocks screen and 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 10.40%, while the average annual return of the S&P 500 index during the same period was only 1.97%. 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 ARCC, IAG, 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.