Long-Term Dividend Portfolio That Has Outperformed By A Big Margin

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 |  Includes: CALM, GLW, HFC, HMN, MSFT, POT, PRE, XOM
by: Arie Goren

In my previous posts, I tried to create dividend stock portfolios that can outperform the market by a big margin. In those cases, I created screening methods that show such promise, but the demand was to rebalance the portfolio every four weeks and replace the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. Since most investors do not have the opportunity to rebalance the portfolio every four weeks, I created a new screening method that requires rebalancing the portfolio just once a year. Furthermore, in order to decrease the maximum expected drawdown to a lower level than that of the benchmarks, I had to be satisfied with a bit lower return, but still much better than the benchmarks.

I have searched for profitable companies that are included in the Russell 3000 index that pay solid dividends with a low payout ratio and high dividend growth over the past five 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. The stock is included in the Russell 3000 index.
  2. The stock does not trade over-the-counter [OTC].
  3. Price is greater than 2.00.
  4. Market cap is greater than $200 million.
  5. Dividend yield is greater than 2.5%.
  6. The payout ratio is less than 50%.
  7. The annual rate of dividend growth over the past five years is greater than 5%.
  8. Total debt to equity is less than 0.50.
  9. Average annual earnings growth estimates for the next five years is greater than 5%.
  10. The eight stocks with the lowest payout ratio among all the stocks that complied with the first nine 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 August 03, 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 average annual earnings growth estimates for the next five years, and the total debt to equity for the eight companies.

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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 5.93 and a very low forward P/E of 10.72. The price to free cash flow for the trailing 12 months is very low at 10.17, and the average annual earnings growth estimates for the next five years is at 9.5%. The price-to-sales ratio is very low at 0.95, and the price-to-book-value is also very low at 0.76. The forward annual dividend yield is quite high at 2.85%, and the payout ratio is only 21.2%. The annual rate of dividend growth over the past five years was at 7.59%.

On July 29, PartnerRe reported its second-quarter results, which beat EPS expectations by $0.10 and beat on revenues. In the report, Costas Miranthis PartnerRe President & Chief Executive Officer said:

I am pleased that despite above average catastrophe and other large loss activity, as well as a meaningful expense charge related to the organizational restructuring we announced earlier in the quarter, we had a profitable operating quarter. Our book value was impacted by mark-to-market losses on our fixed income portfolio as a result of the recent increase in interest rates. Despite the negative impact on book value during the quarter, we believe a higher interest rate environment is beneficial to our business over the longer term.

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 PRE stock quite attractive.

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Source: Portfolio123

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 9.37 and a very low forward P/E of 11.26. The forward annual dividend yield is at 2.72%, and the payout ratio is only 23%. The annual rate of dividend growth over the past five years was quite high at 9.74%.

On August 01, Exxon Mobil reported its second-quarter results, which missed EPS expectations by $0.35 and beat on revenues. In the report, ExxonMobil's chairman Rex W. Tillerson commented:

  • ExxonMobil's second quarter results reflect continued strong operational performance and investments to meet growing demand for oil, natural gas and chemical products in the years ahead.
  • Second quarter earnings were $6.9 billion, down 57% from the second quarter of 2012. Excluding the prior year net gain of $7.5 billion associated with divestments and tax-related items, earnings were down 19%. Weaker refining margins and volumes associated with planned refinery turnaround and maintenance activities negatively impacted Downstream earnings.
  • Capital and exploration expenditures were $10.2 billion in the second quarter and $22 billion for the first six months of 2013, in line with anticipated spending plans.
  • The Corporation distributed $6.8 billion to shareholders in the second quarter through dividends and share purchases to reduce shares outstanding.

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

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Chart: finviz.com

Horace Mann Educators Corporation (NYSE:HMN)

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

Horace Mann Educators has a very low debt (total debt to equity is only 0.19), and it has a very low trailing P/E of 10.12 and a very low forward P/E of 12.81. The price to book value is very low at 0.94, and the average annual earnings growth estimates for the next five years is at 8%. The forward annual dividend yield is at 2.73%, and the payout ratio is only 24.2%. The annual rate of dividend growth over the past five years was at 5.54%.

The HMN stock price is 6.01% above its 20-day simple moving average, 12.54% above its 50-day simple moving average and 33.01% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

On July 24, Horace Mann reported its second-quarter results. In the report, Horace Mann's President and CEO Peter H. Heckman said:

Horace Mann's second quarter operating income was $0.39 per share, a solid result considering the higher than anticipated level of catastrophe losses in the quarter. Compared to the second quarter and first six months of 2012, both the reported and underlying property and casualty combined ratios improved, while written and earned premiums increased 3%. In our annuity segment, assets under management increased 10% over prior year, more than offsetting the modest impact of spread compression, with deferred policy acquisition cost unlocking also benefitting the quarterly earnings comparison to prior year. In the life segment, second quarter sales of Horace Mann products increased 31% compared to a year earlier, with the anticipated decline in earnings reflecting more normalized mortality losses and a slight decrease in investment income.

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 HMN stock quite attractive.

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Chart: finviz.com

Corning Inc (NYSE:GLW)

Corning Incorporated produces and sells specialty glasses, ceramics, and related materials worldwide.

Corning has a very low debt (total debt to equity is only 0.14), and it has a very low trailing P/E of 13.05 and a very low forward P/E of 10.96. The price to book value is quite low at 1.06, and the average annual earnings growth estimates for the next five years is quite high at 8.5%. The forward annual dividend yield is at 2.59%, and the payout ratio is only 27%. The annual rate of dividend growth over the past five years was very high at 25.79%.

The GLW stock price is 2.52% above its 20-day simple moving average, 2.78% above its 50-day simple moving average and 16.06% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

On July 30, Corning reported its second-quarter results, which beat EPS expectations by $0.01 and beat on revenues.

Second-quarter performance highlights

  • Core sales were $2.0 billion, an increase of 11% over the same period of 2012. Net sales [GAAP] for the quarter were $2.0 billion.
  • Core earnings per share were $0.32, representing a 23% improvement over the second quarter of 2012 and the third consecutive quarter of year-over-year double-digit growth. GAAP earnings per share were $0.43, compared with $0.31 a year ago, a 39% increase.
  • In the Display Technologies segment, second-quarter LCD glass price declines were moderate and less than the previous quarter.
  • Sales and net income in Corning`s Telecommunications segment improved significantly on both a year-over-year and sequential basis.

Remarking on the second quarter, Wendell P. Weeks, chairman, chief executive officer, and president, said:

In Corning`s strong second quarter, we achieved our third consecutive period of year-over-year EPS improvement. For the past 18 months, we have effectively managed our cost structure, brought stability to our LCD glass business, returned to earnings growth, and advanced our new-product portfolio. We are pleased with the progress we are making and believe our strategy is working.

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 GLW stock quite attractive.

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Chart: finviz.com

Potash Corporation of Saskatchewan Inc (NYSE:POT)

Potash Corporation of Saskatchewan Inc., together with its subsidiaries, produces and sells fertilizers and related industrial and feed products primarily in the United States and Canada.

Potash has a low debt (total debt to equity is only 0.34), and it has a very low trailing P/E of 11.21 and a very low forward P/E of 9.60. The forward annual dividend yield is quite high at 4.75%, and the payout ratio is only 30.9%. The annual rate of dividend growth over the past five years was very high at 43.1%.

On July 30, the POT stock lost 16.54% of its value and the day after another 8.31%, after the announcement of Uralkali, the world's biggest potash producer that it would no longer abide by limits on its output. This move will probably cause potash prices to fall to as low as $300 a ton by the end of the year from the about $400 a ton level it is selling now.

In my opinion, the POT stock is now oversold, and at this level the stock is quite attractive, due to good valuation and a very rich dividend.

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Chart: finviz.com

Cal Maine Foods Inc (NASDAQ:CALM)

Cal-Maine Foods, Inc. engages in producing, grading, packaging, marketing, and distributing shell eggs.

Cal-Maine Foods has a very low debt (total debt to equity is only 0.13) and it has a very low trailing P/E of 13.14 and a very low forward P/E of 14.19. The current ratio is quite high at 3.20, and the price-to-sales ratio is very low at 0.97. The forward annual dividend yield is quite high at 3.44%, and the payout ratio is only 31.7%. The annual rate of dividend growth over the past five years was at 8.88%.

On July 29, Cal Maine Foods announced its fiscal fourth quarter 2013 results. In the report, Dolph Baker, chairman, president and chief executive officer of Cal-Maine Foods, Inc., stated:

We were pleased with our results with our fourth quarter sales up 18 percent over the same period a year ago. These results reflect higher volumes related to acquisitions with a 6 percent increase in eggs produced and sold compared with the same period a year ago. Notably, we achieved this growth even though we had an extra week of sales in the previous year's fourth quarter.

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

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Chart: finviz.com

Microsoft Corp (NASDAQ:MSFT)

Microsoft has a very low debt (total debt to equity is only 0.20) and it has a very low trailing P/E of 12.31 and a very low forward P/E of 10.51. The average annual earnings growth estimates for the next five years is quite high at 8.98%. The forward annual dividend yield is quite high at 2.90%, and the payout ratio is only 34%. The annual rate of dividend growth over the past five years was very high at 15.90%.

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

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Chart: finviz.com

HollyFrontier Corp (NYSE:HFC)

HollyFrontier Corporation operates as an independent petroleum refiner and marketer in the United States.

HollyFrontier has a very low debt (total debt to equity is only 0.20), and it has a very low trailing P/E of 5.08 and a very low forward P/E of 9.70. The price to free cash flow for the trailing 12 months is very low at 13.55, 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 2.59%, and the payout ratio is only 35%. The annual rate of dividend growth over the past five years was very high at 21.14%.

HFC will report its latest quarterly financial results on August 07. HFC is expected to post a profit of $1.41 a share, a 41% decline 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 the company consistently has raised dividend payments -- make HFC 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 once a year 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

The long-term 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. Furthermore, the maximum drawdown, which normally is much bigger in a small portfolio than in the benchmarks, was much smaller in all the three tests.

One year return of the screen was very high at 45.45%, while the return of the S&P 500 index during the same period was at 23.58% and that of the Russell 3000 index was at 25.52%. The maximum drawdown of the screen was only 5.37%, while the maximum drawdown of the S&P 500 index during the same period was at 7.77% and that of the Russell 3000 index was at 7.93%.

The difference between the long-term 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 13.75%, while the average annual return of the S&P 500 index during the same period was only 2.28% and that of the Russell 3000 index was at 2.99%. The maximum drawdown of the screen was at 53.30%, 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, I recommend readers use this list of stocks as a basis for further research.

Disclosure: I am long CALM, MSFT, POT, PRE, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.