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.
The screen's method that I use to build my portfolio requires all stocks to comply with all of the 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 seven 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 June 23, 2013, I discovered the following seven stocks: Houston Wire & Cable Co (NASDAQ:HWCC), Janus Capital Group Inc (NYSE:JNS), Intel Corp (NASDAQ:INTC), Donegal Group Inc (NASDAQ:DGICA), Maxim Integrated Products Inc. (NASDAQ:MXIM), Silvercorp Metals Inc (NYSE:SVM) and Validus Holdings Ltd (NYSE:VR).
The table below presents the seven 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 seven 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 benchmarks (S&P 500, Russell 3000), 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 as a matter of curiosity, the table below presents the seven companies originated by the screen formula one year before, on June 23, 2012.
Five years back-test
The table below presents the seven companies originated by the screen formula on July 19, 2009.
Fourteen years back-test
The table below presents the seven companies originated by the screen formula on September 11, 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 and the Russell 3000 benchmarks. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in all three tests. One year return of the screen was at 41.33% while the return of the S&P 500 index during the same period was at 20.20% and the return of the Russell 3000 was at 21.23%. The difference between the good-yielding stocks screen to the benchmarks was much more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 20.25% while the average annual return of the S&P 500 index during the same period was only 1.81% and the return of the Russell 3000 was at 2.47%. 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 HWCC, INTC, JNS, SVM, 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.