I have created a good-yielding stock portfolio that I am using for my own investments. This portfolio, which should be rebalanced every four weeks, can outperform the market by a big margin. For this portfolio, I have searched for companies that are included in the Russell 3000 index that pay rich dividends with a low payout ratio and high dividend growth over the past five years. Those stocks also would have to show low debt.
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, that I use to build my portfolio requires all stocks to comply with all following demands:
- Dividend yield is greater than 3%.
- The payout ratio is less than 75%.
- The annual rate of dividend growth over the past five years is greater than 5%.
- The forward P/E is less than 15.
- The PEG ratio is less than 1.50.
- Total debt-to-equity ratio is less than 0.50.
- The five stocks with the lowest payout ratio among all the stocks that complied with the first six 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 17, 2013, before the market open, I discovered the following five stocks: Horace Mann Educators Corporation (NYSE:HMN), Validus Holdings Ltd (NYSE:VR), Janus Capital Group Inc (NYSE:JNS), Intel Corp (NASDAQ:INTC) and IAMGold Corp (NYSE:IAG).
The table below presents the five 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 forward P/E, the PEG ratio, and the total debt-to-equity ratio for the five companies.
In order to find out how such a screening formula 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
Just a matter of curiosity, the table below presents the five companies originated by the screen formula one year before, on May 16, 2012.
Five years back-test
The table below presents the five companies originated by the screen formula five years before, on May 17, 2008.
14 years back-test
The table below presents the five companies originated by the screen formula 14 years and four months before, on January 02, 1999.
The good-yielding stock 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 37.22% while the return of the S&P 500 index during the same period was at 24.60%. The difference between the good-yielding 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 18.72% while the average annual return of the S&P 500 index during the same period was only 2.07%. Although this screening system has given superior results, and I am using it for my own investments, I recommend readers use this list of stocks as a basis for further research.
Disclosure: I am long HMN, IAG, INTC, JNS, VR. 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.