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In my previous posts (here and here), I decided to rank all the energy stocks and the technology stocks, which are traded in U.S. markets, by the sum of their dividend and earnings yield. In this article, I have done the same for all industrial stocks, which are included in the Russell 3000 index.

I used the Portfolio123's powerful ranking system to grade all industrial stocks based on this theme. Only stocks with a market cap greater than $100 million and price greater than $1.00 were taken into account. All the data for this article were taken from Portfolio123.

The ranking system that I built searched for the best 20 industrial stocks by the sum of their dividend and earnings yield. 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 July 05, 2013, before the market open, I discovered the following twenty stocks:

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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 twenty companies.

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Pitney Bowes Inc. (NYSE:PBI)

Pitney Bowes Inc. provides software, hardware, and services to enable physical and digital communications in the United States and internationally.

Pitney Bowes' valuation metrics are much better than those of its industry peers, as shown in the table below.

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PBI will report its latest quarterly financial results on July 29. PBI is expected to post a profit of $0.44 a share, a 12% decline from the company's actual earnings for the same quarter a year ago. The reported results will probably affect the stock price in the short term.

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TAL International Group Inc (NYSE:TAL)

TAL International Group, Inc. engages in leasing intermodal containers and chassis worldwide.

TAL International's valuation metrics are much better than those of its industry peers, as shown in the table below.

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TAL will report its latest quarterly financial results on July 22. TAL is expected to post a profit of $1.07 a share, a 7% rise from the company's actual earnings for the same quarter a year ago.

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Intersections Inc (NASDAQ:INTX)

Intersections Inc. provides consumer identity risk management services in the United States. Its services help consumers understand and monitor their credit profiles and other personal information, and protect themselves against identity theft or fraud.

Intersections Inc's valuation metrics are much better than those of its industry peers, as shown in the table below.

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INTX will report its latest quarterly financial results on August 05.

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American Railcar Industries Inc (NASDAQ:ARII)

American Railcar Industries, Inc. designs, manufactures, and sells hopper and tank railcars in North America.

ARII will report its latest quarterly financial results on July 22. ARII is expected to post a profit of $0.82 a share, a 30% rise from the company's actual earnings for the same quarter a year ago.

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Exelis Inc (NYSE:XLS)

Exelis Inc. provides command, control, communications, computers, intelligence, and surveillance and reconnaissance related products and systems in the United States and internationally.

XLS will report its latest quarterly financial results on July 29. XLS is expected to post a profit of $0.37 a share, a 20% decline from the company's actual earnings for the same quarter a year ago.

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Joy Global Inc (NYSE:JOY)

Joy Global Inc. engages in the manufacture and servicing of mining equipment for the extraction of coal, copper, iron ore, oil sands, and other minerals.

JOY will report its latest quarterly financial results in August. JOY is expected to post a profit of $1.37 a share, a 25% decline from the company's actual earnings for the same quarter a year ago.

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Deluxe Corp (NYSE:DLX)

Deluxe Corporation, together with its subsidiaries, provides printed products, forms, and marketing solutions to small businesses and financial institutions primarily in the United States, Canada, Europe, and South America.

DLX will report its latest quarterly financial results on July 24. DLX is expected to post a profit of $0.87 a share, a 2.4% rise from the company's actual earnings for the same quarter a year ago.

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Deere & Co (NYSE:DE)

Deere & Company manufactures and distributes agriculture and turf equipment, and construction and forestry equipment worldwide.

DE will report its latest quarterly financial results on August 13. DE is expected to post a profit of $2.16 a share, a 9.1% rise from the company's actual earnings for the same quarter a year ago.

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Lockheed Martin Corp (NYSE:LMT)

Lockheed Martin Corporation, a security and aerospace company, engages in the research, design, development, manufacture, integration, and sustainment of advanced technology systems and products for defense, civil, and commercial applications in the United States and internationally.

LMT will report its latest quarterly financial results on July 22. LMT is expected to post a profit of $2.19 a share, a 8% decline from the company's actual earnings for the same quarter a year ago.

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Caterpillar Inc (NYSE:CAT)

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide.

CAT will report its latest quarterly financial results on July 23. CAT is expected to post a profit of $1.72 a share, a 32% decline from the company's actual earnings for the same quarter a year ago.

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Back-testing

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 through 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

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Five years back-test

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Fourteen years back-test

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Summary

In addition to good yield and low P/E ratio, the best industrial stocks, in terms of the sum of dividend and earnings yield, are characterized by low price-to-sales ratio; while the average price-to-sales ratio of the twenty companies is only 0.87.

The best industrial 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 very high at 35.39% while the return of the S&P 500 during the same period was 18.06%. The difference between the best industrial stocks screen to the S&P 500 benchmark was even more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 14.96% while the average annual return of the S&P 500 index during the same period was only 1.90%. Although this ranking system has given superior results, I recommend readers use this list of stocks as a basis for further research.

Source: Ranking Industrial Stocks By Dividend And Earnings Yield