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Arie Goren, Portfolio123 (473 clicks)
Long only, value, research analyst, dividend investing
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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 attempt to search for profitable companies that pay rich dividends and that have raised their payouts at a high rate for the last three and five years.

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 50%.
  5. The annual rate of dividend growth over the past three years is greater than 10%.
  6. The annual rate of dividend growth over the past five years is greater than 5%.
  7. The twenty 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 24, 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, and the annual rate of dividend growth over the past three and five years for the 20 companies.

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Helmerich & Payne Inc. (HP)

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

Helmerich & Payne has a very low debt (total debt to equity is only 0.06), and it has a very low trailing P/E of 11.85 and a very low forward P/E of 11.99. The forward annual dividend yield is quite high at 2.99%, and the payout ratio is only 6.3%. The annual rate of dividend growth over the past three years was high at 11.87%, and over the past five years was also high at 9.24%.

The HP stock price is 3.45% above its 20-day simple moving average, 5.15% above its 50-day simple moving average and 13.76% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

HP will report its latest quarterly financial results on July 26. HP is expected to post a profit of $1.34 a share, a 2.2% 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.

The compelling valuation metrics, the rich dividend, the fact that the company consistently has raised dividend payments, and the fact that the stock is in an uptrend are all factors that make HP stock quite attractive.

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Chart: finviz.com

Agrium Inc. (AGU)

Agrium Inc. engages in the retail of agricultural products and services.

Agrium has a low debt (total debt to equity is 0.56), and it has a very low trailing P/E of 9.32 and a very low forward P/E of 9.34. The forward annual dividend yield is at 2.25%, and the payout ratio is only 10.4%. The annual rate of dividend growth over the past three years was very high at 109%, and over the past five years was also very high at 55.5%.

AGU will report its latest quarterly financial results at the beginning of August. AGU is expected to post a profit of $4.98 a share, a 9% decline from the company's actual earnings for the same quarter a year ago.

The very low multiples, the solid dividend, and the very strong rate that the company has raised dividend payments are all factors that make AGU stock quite attractive.

(click to enlarge)

Chart: finviz.com

Delek US Holdings Inc (DK)

Delek US Holdings, Inc. operates as an integrated downstream energy company that operates in petroleum refining, logistics, and convenience store retailing businesses.

Delek US Holdings has a low debt (total debt to equity is only 0.38), and it has a very low trailing P/E of 5.67 and a very low forward P/E of 9.03. The price-to-sales ratio is very low at 0.19, and the PEG ratio is extremely low at 0.48. The price to free cash flow for the trailing 12 months is very low at 5.38, and the average annual earnings growth estimates for the next five years is quite high at 11.92%. The forward annual dividend yield is at 2.09%, and the payout ratio is only 12.9%. The annual rate of dividend growth over the past three years was high at 12.31%, and over the past five years was at 7.21%.

DK will report its latest quarterly financial results on August 6. DK is expected to post a profit of $0.81 a share, a 30.8% decline from the company's actual earnings for the same quarter a year ago.

All these factors - the very low multiples, the solid dividend, and the fact the company consistently has raised dividend payments -- make DK stock quite attractive.

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Chart: finviz.com

Cresud Sa Comercial Industrial Financiera Y Agropecuaria Cres (CRESY)

Cresud Sociedad Anónima Comercial, Inmobiliaria, Financiera y Agropecuaria, an agricultural company, engages in the production of basic agricultural commodities in Brazil and other Latin American countries.

CRESY has a very low forward P/E of 9.03.The price-to-sales ratio is very low at 0.77, and the price-to-book-value is also very low at 0.86. The price to free cash flow for the trailing 12 months is extremely low at 3.95, and the average annual earnings growth estimates for the next five years is very high at 25%. The forward annual dividend yield is very high at 5.61%, and the payout ratio is only 13.5%. The annual rate of dividend growth over the past three years was very high at 38.12%, and over the past five years was also very high at 31.57%.

CRESY will report its latest quarterly financial results in August. CRESY is expected to post a profit of $0.13 a share.

All these factors - the very low multiples, the very rich dividend, the fact the company consistently has raised dividend payments, and the fact that CRESY stock is selling way below book value -- make CRESY stock quite attractive.

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Chart: finviz.com

American Railcar Industries Inc (ARII)

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

American Railcar Industries has a low debt (total debt to equity is only 0.39), and it has a very low trailing P/E of 11.00 and a very low forward P/E of 8.76. The PEG ratio is very low at 0.73, and the average annual earnings growth estimates for the next five years is very high at 15%. The forward annual dividend yield is quite high at 2.71%, and the payout ratio is only 15.3%. The annual rate of dividend growth over the past three years was very high at 60.91%, and over the past five years was also very high at 15.81%.

The ARII stock price is 10.02% above its 20-day simple moving average, 8.29% above its 50-day simple moving average and 3.25% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

ARII will report its latest quarterly financial results on July 24. 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.

All these factors - the very low multiples, the rich dividend, and the fact that the stock is in an uptrend -- make ARII stock quite attractive.

(click to enlarge)

Chart: finviz.com

Neenah Paper Inc (NP)

Neenah Paper, Inc. produces technical products and fine papers worldwide.

Neenah Paper has a low trailing P/E of 14.85 and a very low forward P/E of 12.76.The price-to-sales ratio is very low at 0.75, and the average annual earnings growth estimates for the next five years is quite high at 12.5%. The forward annual dividend yield is at 2.10%, and the payout ratio is only 19.3%. The annual rate of dividend growth over the past three years was very high at 16.35%, and over the past five years was also high at 9.51%.

The NP stock price is 11.44% above its 20-day simple moving average, 18.49% above its 50-day simple moving average and 31.42% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

NP will report its latest quarterly financial results on August 6. NP is expected to post a profit of $0.79 a share, a 8% decline from the company's actual earnings for the same quarter a year ago.

The compelling valuation metrics, the rich dividend, the fact that the company consistently has raised dividend payments, and the fact that the stock is in an uptrend are all factors that make NP stock quite attractive.

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Chart: finviz.com

Seagate Technology Plc (STX)

Seagate Technology designs, manufactures, markets, and sells hard disk drives for enterprise storage, client compute, and client non-compute market applications worldwide.

Seagate Technology has a very low trailing P/E of 7.28 and a very low forward P/E of 8.30.The price-to-sales ratio is at 1.05, and the price to free cash flow for the trailing 12 months is extremely low at 4.06. The forward annual dividend yield is quite high at 3.25%, and the payout ratio is only 19.5%. The annual rate of dividend growth over the past three years was very high at 47.13%, and over the past five years was also very high at 17.75%.

STX will report its latest quarterly financial results on July 24. STX is expected to post a profit of $1.19 a share, a 51% decline from the company's actual earnings for the same quarter a year ago.

All these factors - the very low multiples, the very rich dividend, and the fact the company consistently has raised dividend payments -- make STX stock quite attractive.

(click to enlarge)

Chart: finviz.com

AFLAC Inc (AFL)

Aflac Incorporated, through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products.

Aflac Incorporated has a very low debt (total debt to equity is only 0.28), and it has a very low trailing P/E of 9.43 and a very low forward P/E of 9.16. The price to free cash flow for the trailing 12 months is extremely low at 1.91, and the average annual earnings growth estimates for the next five years is at 6.92%. The forward annual dividend yield is at 2.33%, and the payout ratio is only 20.6%. The annual rate of dividend growth over the past three years was very high at 16.84%, and over the past five years was also very high at 16.85%.

The AFL stock price is 2.63% above its 20-day simple moving average, 5.15% above its 50-day simple moving average and 14.17% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

AFL will report its latest quarterly financial results on July 30. AFL is expected to post a profit of $1.51 a share, a 6.2% decline from the company's actual earnings for the same quarter a year ago.

All these factors - the very low multiples, the rich dividend, the fact the company consistently has raised dividend payments, and the fact that the stock is in an uptrend -- make AFL stock quite attractive.

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Chart: finviz.com

Bank of Kentucky Financial Corp (BKYF)

The Bank of Kentucky Financial Corporation operates as the holding company for The Bank of Kentucky that provides various financial products and solutions.

The Bank of Kentucky has no debt at all, and it has a very low trailing P/E of 12.91 and a very low forward P/E of 12.65. The forward annual dividend yield is at 2.25%, and the payout ratio is only 20.7%. The annual rate of dividend growth over the past three years was very high at 12.15%, and over the past five years was also very high at 11.42%.

The BKYF stock price is 6.05% above its 20-day simple moving average, 12.45% above its 50-day simple moving average and 16.97% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

On July 18, BKYF reported its second-quarter 2013 financial results. BKYF reported EPS of $0.59, $0.02 better than analyst estimate of $0.57.

The compelling valuation metrics, the rich dividend, the fact that the company consistently has raised dividend payments, and the fact that the stock is in an uptrend are all factors that make BKYF stock quite attractive.

(click to enlarge)

Chart: finviz.com

Schweitzer-Mauduit Intl Inc (SWM)

Schweitzer-Mauduit International, Inc. manufactures and sells paper and reconstituted tobacco products to the tobacco industry.

Schweitzer-Mauduit has a very low debt (total debt to equity is only 0.31), and it has a trailing P/E of 17.23 and a very low forward P/E of 13.18. The price to free cash flow for the trailing 12 months is very low at 14.01, and the average annual earnings growth estimates for the next five years is very high at 15%. The forward annual dividend yield is at 2.20%, and the payout ratio is only 21.7%. The annual rate of dividend growth over the past three years was very high at 14.47%, and over the past five years was also high at 8.45%.

The SWM stock price is 4.91% above its 20-day simple moving average, 10.29% above its 50-day simple moving average and 35.20% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

SWM will report its latest quarterly financial results on July 30. SWM is expected to post a profit of $0.88 a share, a 7.3% rise from the company's actual earnings for the same quarter a year ago.

All these factors - the very low multiples, the rich dividend, the fact the company consistently has raised dividend payments, and the fact that the stock is in an uptrend -- make SWM 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. The number of stocks left after each demand can also be seen in the chart.

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One-year back-test

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Five-year back-test

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Fourteen-year 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. One year return of the screen was very high at 44.27% while the return of the S&P 500 index during the same period was at 25.57%.

The difference between the dividend screen to the benchmark was much more noticeable in the 14-year back-test. The 14-year average annual return of the screen was at 15.71% while the average annual return of the S&P 500 index during the same period was only 2.23%. The maximum drawdown of the screen was at 59.21% 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 Growth Portfolio That Has Outperformed By A Big Margin