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Usually, my investment strategy is based on buying a stock only after studying the company and analyzing the future prospects of the company's business, but recently I have started to invest also in groups of stocks that I have discovered through screening and back-testing. After running many stocks screens, I have found two screens that have shown exceptionally returns after running back-tests during the last year, last 5 years and last 14 years. Both portfolios are based on dividend growth stocks. In this article, I will describe one of these two screens. Although the past guarantees nothing, it does provide insight into how these screens have performed under various economic conditions over varying time frames.

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

  1. The stock is included in the Russell 3000 index.
  2. The stock does not trade over-the-counter (OTC).
  3. Dividend yield is greater than 2.0%.
  4. The annual rate of dividend growth over the past five years is greater than 5%.
  5. The payout ratio is less than 75%.
  6. Forward P/E is less than 15.
  7. PEG ratio is less than 1.5.
  8. Total debt to equity is less than 0.4.
  9. The eight stocks with the lowest payout ratio among all the stocks that complied with the first eight 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 Yahoo Finance, finviz.com and Portfolio123.

After running this screen on July 27, 2013, I discovered the following eight stocks:

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The table below presents the dividend yield, the payout ratio, the annual rate of dividend growth over the past five years, the PEG ratio, and the total debt to equity for the eight companies.

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Valero Energy Corp. (NYSE:VLO)

Valero Energy Corporation operates as an independent petroleum refining and marketing company.

Valero Energy has a low debt (total debt to equity is only 0.38), and it has a very low trailing P/E of 6.35 and a very low forward P/E of 6.75. The price-to-sales ratio is very low at 0.14, and the PEG ratio is also very low at 0.74. The price to free cash flow for the trailing 12 months is very low at 9.42, and the average annual earnings growth estimates for the next five years is quite high at 8.60%. The forward annual dividend yield is at 2.24%, and the payout ratio is only 12.2%. The annual rate of dividend growth over the past five years was quite high at 6.25%.

On July 23, Valero Energy reported its second quarter 2013 results; EPS was at $0.96, a $0.02 better than estimates. Revenue was at $34.03 billion, topped street estimates of $30.18 billion on the same basis. In the report, Valero Chairman and CEO Bill Klesse said:

Valero performed well financially given the margin environment and maintenance activities. We also returned $364 million in cash to our stockholders through dividends and stock buybacks in the second quarter. On May 1, we spun off 80 percent of the outstanding equity in CST Brands to our stockholders. We also entered into long-term supply agreements with CST Brands, and they became Valero`s largest wholesale marketing customer. We recently completed two significant projects at our St. Charles refinery in connection with our strategy to increase production of high-quality diesel. At the end of June, we started up the Diamond Green Diesel joint venture biofuels plant, and in July, we started our new hydrocracker.

The compelling valuation metrics, the solid dividend, the very low payout ratio, and the fact that the company consistently has raised dividend payments, are all factors that make VLO stock quite attractive.

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Source: Portfolio123

SL Delek US Holdings Inc. (NYSE: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 5.76 and a very low forward P/E of 9.18. The price-to-sales ratio is very low at 0.20, 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 5.47, 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 2.07%, and the payout ratio is only 12.9%. The annual rate of dividend growth 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 $0.79 a share, a 32% 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

AFLAC Inc. (NYSE: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 9.65 and a very low forward P/E of 9.37. The price to free cash flow for the trailing 12 months is extremely low at 1.95, and the average annual earnings growth estimates for the next five years is at 6.92%. The forward annual dividend yield is at 2.32%, and the payout ratio is only 20.6%. The annual rate of dividend growth over the past five years was very high at 16.85%.

The AFL stock price is 3.98% above its 20-day simple moving average, 6.82% above its 50-day simple moving average and 16.34% 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

PartnerRe Ltd. (NYSE:PRE)

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

PartnerRe Ltd. has a very low debt (total debt to equity is only 0.12), and it has a very low trailing P/E of 6.02 and a very low forward P/E of 10.82. The price to free cash flow for the trailing 12 months is very low at 10.32, and the average annual earnings growth estimates for the next five years is at 9.0%. The price-to-sales ratio is very low at 0.96, and the price-to-book-value is also very low at 0.77. The forward annual dividend yield is quite high at 2.82%, and the payout ratio is only 21.2%. The annual rate of dividend growth over the past five years was at 7.59%.

The PRE stock price is 0.01% above its 20-day simple moving average, 1.19% above its 50-day simple moving average and 5.65% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

PRE will report its latest quarterly financial results on July 29. PRE is expected to post a profit of $0.94 a share, a 57% 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, the fact that the stock is in an uptrend, and the fact that PRE stock is selling way below book value -- make PRE stock quite attractive.

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Chart: finviz.com

Schweitzer-Mauduit Intl Inc. (NYSE:SWM)

Schweitzer-Mauduit International, Inc. manufactures and sells paper and reconstituted tobacco products to the tobacco industry; and specialized paper products for use in various applications.

Schweitzer-Mauduit has a very low debt (total debt to equity is only 0.31), and it has a trailing P/E of 17.29 and a low forward P/E of 13.23. The price to free cash flow for the trailing 12 months is very low at 14.06, and the average annual earnings growth estimates for the next five years is very high at 15%. The forward annual dividend yield is at 2.19%, and the payout ratio is only 21.7%. The annual rate of dividend growth over the past five years was high at 8.45%.

The SWM stock price is 3.68% above its 20-day simple moving average, 9.25% above its 50-day simple moving average and 34.54% 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.

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Chart: finviz.com

AXIS Capital Holdings Ltd. (NYSE:AXS)

AXIS Capital Holdings Limited provides specialty lines insurance and treaty reinsurance products worldwide.

AXIS Capital has a very low debt (total debt to equity is only 0.18) and it has a very low trailing P/E of 8.23 and a very low forward P/E of 9.75. The price to free cash flow for the trailing 12 months is very low at 5.32, and the average annual earnings growth estimates for the next five years is at 5%. The price-to-sales ratio is at 1.35, and the price-to-book-value is very low at 0.99. The forward annual dividend yield is at 2.19%, and the payout ratio is only 22%. The annual rate of dividend growth over the past five years was quite high at 7.36%.

AXS will report its latest quarterly financial results on July 30. AXS is expected to post a profit of $0.50 a share, a 44% decline from the company's actual earnings for the same quarter a year ago.

The compelling valuation metrics, the solid dividend, the fact that the company consistently has raised dividend payments, and the fact that AXS stock is selling below book value are all factors that make AXS stock quite attractive.

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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.

Exxon Mobil has a very low debt (total debt to equity is only 0.08) and it has a very low trailing P/E of 9.66 and a very low forward P/E of 11.58. The forward annual dividend yield is at 2.65%, and the payout ratio is only 23%. The annual rate of dividend growth over the past five years was quite high at 9.74%.

The XOM stock price is 2.02% above its 20-day simple moving average, 3.33% above its 50-day simple moving average and 6.40% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

XOM will report its latest quarterly financial results on August 1. XOM is expected to post a profit of $1.90 a share, a 5.6% 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 XOM stock quite attractive.

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Chart: finviz.com

Travelers Companies Inc. (NYSE:TRV)

The Travelers Companies, Inc., through its subsidiaries, provides various commercial and personal property and casualty insurance products and services to businesses, government units, associations, and individuals primarily in the United States.

The Travelers has a very low debt (total debt to equity is only 0.23), and it has a very low trailing P/E of 12.69 and a very low forward P/E of 10.73. The price to free cash flow for the trailing 12 months is very low at 14.51, and the average annual earnings growth estimates for the next five years is at 7.67%. The forward annual dividend yield is at 2.41%, and the payout ratio is only 24%. The annual rate of dividend growth over the past five years was quite high at 9.64%.

The TRV stock price is 1.48% above its 20-day simple moving average, 1.27% above its 50-day simple moving average and 7.09% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

On July 23, The Travelers reported its second quarter 2013 results. Travelers posted a second-quarter operating profit of $2.13 a share, easily beating expectations of $1.60 a share. Revenues of $6.67 billion also topped estimates of $5.97 billion.

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

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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 benchmarks (S&P 500, Russell 3000), 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 years back-test

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Fourteen years back-test

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Summary

My 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 and the Russell 3000 benchmarks. 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 extremely high at 75.83%, while the return of the S&P 500 index during the same period was at 22.84% and that of the Russell 3000 index was at 24.59%.

The difference between my dividend screen to the benchmarks was even more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 21.74%, while the average annual return of the S&P 500 index during the same period was only 2.21% and that of the Russell 3000 index was at 2.91%. Furthermore, the maximum drawdown of the screen was at 43.63%, while that of the S&P 500 was at 56.39% and the maximum drawdown of the Russell 3000 index was at 57.07%.

Although this screening system has given superior results, and I am using it for my own investments, I recommend readers use this list of stocks as a basis for further research.

Source: My Good-Yielding Dividend Growth Portfolio

Additional disclosure: I plan to buy TRV for AIZ at the first opportunity.