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I tried to create a good-yielding stock portfolio that can outperform the market by a big margin, but at the same time, would have much lower maximum drawdown. The following screen shows such promise.

I have searched for profitable companies that are included in the Russell 3000 index that pay solid dividends with a low payout ratio and have shown dividend growth over the past three years. Those stocks also would have to show low debt.

The screen's method that I use to build this portfolio requires all stocks to comply with all following demands:

  1. Dividend yield is greater than 2.5%.
  2. The payout ratio is less than 75%.
  3. The annual rate of dividend growth over the past three years is positive.
  4. Last dividend declared is greater or equal to the last dividend paid.
  5. Total debt-to-equity ratio is less than 0.50.
  6. The Sharpe ratio is greater than 1.0.
  7. The 10 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 July 10, 2013, before the market open, I discovered the following ten stocks:

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The table below presents the dividend yield, the payout ratio, the annual rate of dividend growth over the past three years, the Sharpe ratio, and the total debt-to-equity ratio for the 10 companies.

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Helmerich & Payne Inc. (NYSE:HP)

Helmerich & Payne, Inc. engages in the contract drilling of oil and gas wells.

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

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HP will report its latest quarterly financial results on July 22. HP is expected to post a profit of $1.34 a share, a 2.2% rise 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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Chart: finviz.com

PartnerRe Ltd. (NYSE:PRE)

PartnerRe Ltd., through its subsidiaries, provides reinsurance services worldwide.

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

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PRE will report its latest quarterly financial results on July 29. PRE is expected to post a profit of $1.70 a share, a 23% decline from the company's actual earnings for the same quarter a year ago.

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Chart: finviz.com

Exxon Mobil Corp (NYSE:XOM)

Exxon Mobil Corporation engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products.

XOM will report its latest quarterly financial results on July 31. XOM is expected to post a profit of $1.92 a share, a 6.7% rise from the company's actual earnings for the same quarter a year ago.

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Chart: finviz.com

Horace Mann Educators Corporation (NYSE:HMN)

Horace Mann Educators Corporation, through its subsidiaries, operates as a multiline insurance company in the United States.

HMN will report its latest quarterly financial results on July 23. HMN is expected to post a profit of $0.33 a share, a 106% rise from the company's actual earnings for the same quarter a year ago.

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Chart: finviz.com

Chevron Corp (NYSE:CVX)

Chevron Corporation, through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide.

CVX will report its latest quarterly financial results on August 01. CVX is expected to post a profit of $3.03 a share, a 15% decline from the company's actual earnings for the same quarter a year ago.

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Chart: finviz.com

Northrop Grumman Corp (NYSE:NOC)

Northrop Grumman Corporation provides systems, products, and solutions in aerospace, electronics, information systems, and technical service areas to government and commercial customers worldwide.

NOC will report its latest quarterly financial results on July 23. NOC is expected to post a profit of $1.72 a share, a 8.5% decline from the company's actual earnings for the same quarter a year ago.

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Chart: finviz.com

EMC Insurance Group Inc (NASDAQ:EMCI)

EMC Insurance Group Inc., an insurance holding company, engages in property and casualty insurance, and reinsurance activities.

EMCI will report its latest quarterly financial results on August 05. EMCI is expected to post a profit of $0.30 a share, a $0.44 rise from the company's actual earnings for the same quarter a year ago.

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Chart: finviz.com

1st Source Corp (NASDAQ:SRCE)

1st Source Corporation operates as the bank holding company for 1st Source Bank that provides commercial and consumer banking services, trust and investment management services, and insurance to individual and business clients.

SRCE will report its latest quarterly financial results on July 25.

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Chart: finviz.com

Houston Wire & Cable Co (NASDAQ:HWCC)

Houston Wire & Cable Company, through its subsidiaries, provides wire and cable, hardware, and related services in the United States.

HWCC will report its latest quarterly financial results on August 5. HWCC is expected to post a profit of $0.27 a share, a 8% rise from the company's actual earnings for the same quarter a year ago.

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Chart: finviz.com

Umpqua Holdings Corp (NASDAQ:UMPQ)

Umpqua Holdings Corporation operates as the holding company for Umpqua Bank and Umpqua Investments, Inc. that provide commercial, and retail banking and brokerage services to corporate, institutional, and individual customers in the United States.

UMPQ will report its latest quarterly financial results on July 16. UMPQ is expected to post a profit of $0.22 a share, a 5% rise from the company's actual earnings for the same quarter a year ago.

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Chart: finviz.com

Back-testing

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 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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14 years back-test

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Summary

The dividend 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. Furthermore, the maximum drawdown, which normally is much bigger in a small portfolio than in the benchmark, was much smaller in all the three tests. One year return of the screen was at 37.62% while the return of the S&P 500 index during the same period was at 21.31%. The maximum drawdown of the screen was only -5.59% while the maximum drawdown of the S&P 500 index was at -7.77%.

The difference between the dividend screen to the benchmark was much more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 14.24% while the average annual return of the S&P 500 index during the same period was only 2.01%. The maximum drawdown of the screen was only 28.31% while that of the S&P 500 was at 56.39%.

Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.

Source: Dividend Portfolio That Has Had Much Lower Maximum Drawdown Than The S&P 500 Benchmark