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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 a very low risk. The following screen shows such promise. I have searched for profitable companies that pay solid dividends with a very low payout ratio. Those stocks also would have to show very low debt.

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

  1. Price is greater than 1.00.
  2. Market cap is greater than $100 million.
  3. Dividend yield is greater than 2.0%.
  4. The payout ratio is less than 40%.
  5. Total debt-to-equity ratio is less than 0.40.
  6. The 20 stocks with the lowest payout ratio among all the stocks that complied with the first five demands.

I used 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 18, 2013, before the market open, I discovered the following 20 stocks:

Click to enlarge images.

The table below presents the dividend yield, the payout ratio, the total debt-to-equity ratio, the trailing P/E and the forward P/E for the 20 companies.

Here is a breakdown of the first 10 stocks:

Equal Energy Ltd. (NYSE:EQU)

Equal Energy Ltd. engages in the acquisition, exploration, development, and production of petroleum and natural gas properties in Canada. Equal Energy's valuation metrics are better than those of its industry peers, as shown in the table below.

Source: Finviz.com.

Helmerich & Payne, Inc. (NYSE:HP)

Helmerich & Payne engages in the contract drilling of oil and gas wells. Helmerich & Payne's valuation metrics are better than those of its industry peers, as shown in the table below.

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.

Source: Finviz.com.

Phillips 66 (NYSE:PSX)

Phillips 66 operates as an independent downstream energy company. PSX will report its latest quarterly financial results on July 30. PSX is expected to post a profit of $1.98 a share, an 11% decline from the company's actual earnings for the same quarter a year ago.

Source: Finviz.com.

Questcor Pharmaceuticals. Inc. (NASDAQ:QCOR)

Questcor Pharmaceuticals, a biopharmaceutical company, provides drugs for the treatment of multiple sclerosis, nephrotic syndrome, and infantile spasms indications. QCOR will report its latest quarterly financial results on July 29. QCOR is expected to post a profit of $1.00 a share, a 45% rise from the company's actual earnings for the same quarter a year ago.

Source: Finviz.com.

Valero Energy Corp. (NYSE:VLO)

Valero Energy operates as an independent petroleum refining and marketing company. VLO will report its latest quarterly financial results on July 22. VLO is expected to post a profit of $0.99 a share, a 34% rise from the company's actual earnings for the same quarter a year ago.

Source: Finviz.com.

Golar LNG Ltd. (NASDAQ:GLNG)

Golar LNG, a midstream liquefied natural gas (LNG) company, engages in the transportation, regasification and liquefaction, and trading of LNG. GLNG will report its latest quarterly financial results on Aug. 19. GLNG is expected to post a profit of $0.26 a share, a 44% decline from the company's actual earnings for the same quarter a year ago.

Source: Finviz.com.

Marathon Petroleum Corp. (NYSE:MPC)

Marathon Petroleum Corporation, together with its subsidiaries, engages in refining, transporting, and marketing petroleum products primarily in the United States. MPC will report its latest quarterly financial results on July 31. MPC is expected to post a profit of $2.19 a share, a 13.4% decline from the company's actual earnings for the same quarter a year ago.

Source: Finviz.com.

Silicon Motion Technology Corp. (NASDAQ:SIMO)

Silicon Motion Technology Corporation, a fabless semiconductor company, designs, develops, and markets semiconductor solutions for the multimedia consumer electronics market. SIMO will report its latest quarterly financial results on July 28. SIMO is expected to post a profit of $0.26 a share, a 38% decline from the company's actual earnings for the same quarter a year ago.

Source: Finviz.com.

Delek US Holdings, Inc. (NYSE:DK)

Delek US Holdings operates as an integrated downstream energy company that operates in petroleum refining, logistics, and convenience store retailing businesses. DK will report its latest quarterly financial results on Aug. 6. DK is expected to post a profit of $0.86 a share, a 26% decline from the company's actual earnings for the same quarter a year ago.

Source: Finviz.com.

American Railcar Industries, Inc. (NASDAQ:ARII)

American Railcar Industries designs, manufactures, and sells hopper and tank railcars in North America. ARII will report its latest quarterly financial results on July 23. 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.

Source: Finviz.com.

Back-Testing

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 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.

Since some readers could not get the same results that I got in some of my previous posts, I am giving, in the charts below, the Portfolio123 exact codes I used for building this screen and the back-tests.

One-Year Back-Test

Five Years Back-Test

Fourteen Years Back-Test

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 extremely high at 50.20%, while the return of the S&P 500 index during the same period was at 23.28%. The maximum drawdown of the screen was only -6.51% 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 19.49% while the average annual return of the S&P 500 index during the same period was only 2.18%. The maximum drawdown of the screen was only 47.75% 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: Good-Yielding Dividend Portfolio With Very Low Risk