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In order to create a dividend stock portfolio that can outperform the market by a big margin, I have used the following screen. It is based on the attempt to search for profitable companies that not only pay exceptionally rich dividends, but the last dividend declared should be greater than the last dividend paid.

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 3.0%.
  4. The payout ratio is less than 100%.
  5. Last dividend declared is greater than the last dividend paid.
  6. Debt to equity is less than 1.00.
  7. The 20 stocks with the highest dividend yield 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 22, 2013, before the market open, I discovered the following 20 stocks:

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The table below presents the dividend yield, the payout ratio, the last quarterly dividend declared, and the debt-to-equity ratio for the 20 companies.

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PetroLogistics LP (NYSE:PDH)

PetroLogistics LP owns and operates propane dehydrogenation facility that processes propane into propylene in North America.

PetroLogistics LP has a very low forward P/E of 9.20, and the forward annual dividend yield is extremely high at 20.18%, and the payout ratio is at 56.5%.

The PDH stock price is 3.39% above its 20-day simple moving average, 2.39% above its 50-day simple moving average and 3.30% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

PDH will report its latest quarterly financial results on July 24. PDH is expected to post a profit of $0.27 a share, a 41% 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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Chart: finviz.com

Transportadora De Gas Del Sur SA Tgs (NYSE:TGS)

Transportadora de Gas del Sur S.A. engages in the transportation of natural gas primarily in Latin America. The company was founded in 1992 and is based in Buenos Aires, Argentina.

Transportadora de Gas del Sur has an extremely low trailing P/E of 6.03, and very low price-to-sales ratio of 0.59. The price to free cash flow for the trailing 12 months is extremely low at 5.55, and the price-to-book-value ratio is also very low at 0.79. The forward annual dividend yield is very high at 15.51%, and the payout ratio is 54%. The annual rate of dividend growth over the past five years was very high at 31.75%.

The TGS stock price is 3.60% above its 20-day simple moving average, 3.38% above its 50-day simple moving average and 18.55% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

The compelling valuation metrics, the very rich dividend, the fact that the stock is trading way below book value, and the fact that the stock is in an uptrend are all factors that make TGS stock quite attractive.

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Chart: finviz.com

Nam Tai Electronics Inc (NTE)

Nam Tai Electronics, Inc. provides electronics manufacturing and design services to the original equipment manufacturers of telecommunication and consumer electronic products. The company was founded in 1975 and is based in Shenzhen, the People's Republic of China.

Nam Tai Electronics has almost no debt at all (total debt to equity is only 0.01), and it has an extremely low trailing P/E of 4.06 and a very low forward P/E of 11.96. The PEG ratio is exceptionally low at 0.32, and the average annual earnings growth estimates for the next five years is quite high at 12.50%. The price to free cash flow for the trailing 12 months is very low at 6.18, and the price-to-book-value ratio is also very low at 0.80. The forward annual dividend yield is very high at 9.12%, and the payout ratio is only 22%.

NTE will report its latest quarterly financial results on August 5. NTE is expected to post a profit of $0.05 a share, a 25% rise from the company's actual earnings for the same quarter a year ago.

Based on valuation metrics, the NTE stock is very cheap, and if the data is accurate, the NTE stock is a great bargain.

(click to enlarge)

Chart: finviz.com

Terra Nitrogen Co LP (NYSE:TNH)

Terra Nitrogen Company, L.P. engages in the production and sale of nitrogen fertilizer products.

Terra Nitrogen Company has no debt at all, and it has a very low trailing P/E of 11.86. The forward annual dividend yield is very high at 8.65%, and the payout ratio is at 70%. The annual rate of dividend growth over the past five years was very high at 17.15%.

The TNH stock price is 0.48% above its 20-day simple moving average, 1.51% above its 50-day simple moving average and 1.36% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

TNH will report its latest quarterly financial results on August 5.

All these factors - the very rich dividend, the fact the company consistently has raised dividend payments, and the fact that the company is rich in cash ($15.71 a share) and has no debt -- make TNH stock quite attractive.

(click to enlarge)

Chart: finviz.com

Grupo Aeroportuario Del Pacifico SA (NYSE:PAC)

Grupo Aeroportuario del Pacífico, S.A.B. de C.V. engages in the development, operation, and management of airports primarily in Mexico's Pacific region.

PAC has a very low debt (total debt to equity is only 0.09), and it has a forward P/E of 16.47. The forward annual dividend yield is very high at 8.26%, and the payout ratio is at 59%. The annual rate of dividend growth over the past five years was quite high at 8.22%.

PAC will report its latest quarterly financial results in August. PAC is expected to post a profit of $0.55 a share, a 17% rise from the company's actual earnings for the same quarter a year ago.

All these factors - the very rich dividend, the fact the company consistently has raised dividend payments, and the fact that the company is rich in cash ($2.90 a share) and has a very low debt -- make PAC stock quite attractive.

(click to enlarge)

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.

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, which I used for building this screen and the back-tests.

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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 high-yielding 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. The one-year return of the screen was very high at 32.53% while the return of the S&P 500 index during the same period was at 25.24%.

The difference between the high-yielding 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 17.97% while the average annual return of the S&P 500 index during the same period was only 2.22%. The maximum drawdown of the screen was at 48.94% 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: High-Yielding Dividend Growth Portfolio That Has Outperformed By A Big Margin