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Arie Goren, Portfolio123 (474 clicks)
Long only, value, research analyst, dividend investing
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I tried to create a high-yielding stock portfolio that can outperform the market by a big margin. The following screen shows such promise. I have searched for companies that pay very rich dividends with a low payout ratio. 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 does not trade over-the-counter [OTC].
  2. Price is greater than 1.00.
  3. Market cap is greater than $100 million.
  4. Dividend yield is greater than 5.0%.
  5. The payout ratio is less than 100%.
  6. Total debt to equity is less than 1.0.
  7. The eight 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 Yahoo Finance, finviz.com and Portfolio123.

After running this screen on August 11, 2013, I discovered the following eight stocks:

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

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Corrections Corp of America (CXW)

Corrections Corporation of America, together with its subsidiaries, owns and operates privatized correctional and detention facilities in the United States.

Corrections Corp of America has a very low trailing P/E of 12.10 and a forward P/E of 17.12. The PEG ratio is very low at 0.88, and the average annual earnings growth estimates for the next five years is quite high at 13%. The forward annual dividend yield is very high at 5.54%, and the payout ratio is only 19.6%.

Analysts recommend the stock. Among the four analysts covering the stock, one rates it as a strong buy, and three rate it as a buy.

The CXW stock price is 4.35% above its 20-day simple moving average, 3.82% above its 50-day simple moving average and 9.47% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

On August 07, Corrections Corp of America reported its second-quarter financial results.

Second Quarter 2013 Financial Highlights

  • Diluted EPS $0.19, including debt refinancing and other charges
  • Adjusted Diluted EPS $0.52, up 36.8% over prior year second quarter
  • Normalized FFO Per Diluted Share $0.71, up 24.6% over prior-year second quarter
  • AFFO Per Diluted Share $0.71, up 26.8% over prior year second quarter

In the report, CCA President and Chief Executive Officer, Damon Hininger, stated:

We are pleased with our second quarter financial results, our new three-year contract with the California Department of Corrections and Rehabilitation, and the increase in beds utilized by Oklahoma under our existing contract.

All these factors -- the very low multiples, the very rich dividend, and the fact that the stock is in an uptrend -- make CXW 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 no debt at all, and it has an extremely low trailing P/E of 4.67 and a very low forward P/E of 13.93. The PEG ratio is exceptionally low at 0.38, 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 7.19, and the price-to-book-value ratio is also very low at 0.93. The forward annual dividend yield is very high at 7.83%, and the payout ratio is only 26.6%.

On August 5, Nam Tai Electronics reported its second-quarter results. Net sales in the second quarter of 2013 were $167.9 million, excluding the discontinued LCMs for tablets business of $30.7 million, an increase of 64.1%, compared to the net sales of $102.3 million, excluding the discontinued businesses of $113.7 million, for the same quarter of 2012. Gross profit in the second quarter of 2013 was $15.7 million, an increase of 2.7%, compared to $15.3 million in the second quarter of last year. Gross profit margin for the second quarter of 2013 was 9.4%, a decrease of 5.6%, compared to 15.0% in the second quarter of last year. Operating income for the second quarter of 2013 was $8.4 million, a decrease of 14.3%, compared to $9.8 million in the second quarter of last year. Net loss in the second quarter of 2013 was $31.9 million, or negative $0.71 per diluted share, compared to net income of $9.4 million, or $0.21 per diluted share, in the second quarter of last year.

In the report, the company explained its dividend policy:

The Company's decision to continue dividend payments in 2013 as set out in the above table does not necessarily mean that cash dividend payments will continue after 2013. Whether future dividends will be declared will depend upon Company's future growth and earnings, of which there can be no assurance, and the Company's cash flow needs for business transformation. Accordingly, there can be no assurance that cash dividends on the Company's common shares will be declared beyond those declared for 2013, what the amounts of such dividends will be or whether such dividends, once declared for a specific period, will continue for any future period, or at all.

Although Nam Tai's valuation metrics are excellent, and it is rich in cash ($4.41 a share) and has no debt, the NTE stock is very volatile and quite dangerous.

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Chart: finviz.com

Hi-Crush Partners LP (HCLP)

Hi-Crush Partners LP operates as a producer of monocrystalline sand. Monocrystalline sand is a mineral that is used as a proppant to enhance the recovery rates of hydrocarbons from oil and natural gas wells.

Hi-Crush Partners has a very low debt (total debt to equity is only 0.41), and it has a low trailing P/E of 12.26 and a very low forward P/E of 7.79. The PEG ratio is extremely low at 0.23, and the average annual earnings growth estimates for the next five years is very high at 33.1%. The forward annual dividend yield is very high at 8.80%, and the payout ratio is at 26.9%.

HCLP will report its latest quarterly financial results on August 13. HCLP is expected to post a profit of $0.51. The reported results will probably affect the stock price in the short term.

The compelling valuation metrics, the very rich dividend, and the very strong earnings growth prospects are all factors that make HCLP stock quite attractive.

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Chart: finviz.com

Main Street Capital Corp (MAIN)

Main Street Capital Corporation is a business development company specializing in equity, equity related, and debt investments in small and lower middle market companies.

Main Street Capital has a very low trailing P/E of 9.85 and a low forward P/E of 14.31. The average annual earnings growth estimates for the next five years is at 7.0%. The forward annual dividend yield is very high at 6.01%, and the payout ratio is at 51.9%. The annual rate of dividend growth for the last year was at 10.38%, for the last three years was at 5.37%, and over the past five years was at 9.22%.

MAIN's stock price is 1.45% above its 20-day simple moving average, 7.80% above its 50-day simple moving average and 5.12% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

On August 8, Main Street Capital reported its second-quarter financial results.

Second-Quarter 2013 Highlights

  • Total investment income of $27.8 million, representing a 33% increase from the second quarter of 2012
  • Net investment income of $17.8 million (or $0.51 per share), representing a 39% increase from the second quarter of 2012
  • Distributable net investment income of $18.4 million (or $0.53 per share), representing a 38% increase from the second quarter of 2012
  • Net Asset Value of $18.72 per share at June 30, 2013, which represents an increase of $0.48 per share, or 3%, after excluding the effect of the $0.35 per share special dividend paid in January 2013, compared to $18.59 per share at December 31, 2012
  • Paid regular monthly dividends of $0.465 per share, or $0.155 per share for each of April, May and June 2013, representing an 11% increase compared to the second quarter of 2012 regular monthly dividends
  • Declared regular monthly dividends of $0.465 per share, or $0.155 per share for each of July, August and September 2013, representing a 7% increase compared to the third quarter of 2012
  • Declared semi-annual supplemental cash dividend of $0.20 per share payable in July 2013

The very low multiples, the very 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 MAIN stock quite attractive.

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Chart: finviz.com

KKR & Co LP (KKR)

Kohlberg Kravis Roberts & Co. is a private equity investment firm specializing in acquisitions, leveraged buyouts, management buyouts, special situations, growth equity, mature, and middle market investments.

Kohlberg Kravis Roberts has a very low trailing P/E of 12.67 and a very low forward P/E of 8.63. The price to free cash flow for the trailing 12 months is extremely low at 0.71. The forward annual dividend yield is very high at 8.09%, and the payout ratio is at 53.5%.

Analysts recommend the stock. Among the 14 analysts covering the stock, five rate it as a strong buy, six rate it as a buy, and three rate it as a hold.

On July 26, KKR reported its second-quarter results, which missed EPS expectations by $0.02. Total distributable earnings were $403.8 million for the quarter ended June 30, 2013, down from $406.1 million for the quarter ended June 30, 2012. Total distributable earnings were $694.4 million for the six months ended June 30, 2013, up from $570.2 million in the comparable period of 2012.

All these factors -- the very low multiples, and the very rich dividend -- make KKR stock quite attractive.

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Chart: finviz.com

Star Gas Partners LP (SGU)

Star Gas Partners, L.P., through its subsidiary, Petro Holdings, Inc., operates as a home heating oil and propane distributor and services provider in the United States.

Star Gas Partners has a low long-term debt (total long-term debt to equity is only 0.42), and it has a very low trailing P/E of 10.40. The price-to-sales ratio is very low at 0.17, and the price-to-book-value is also very low at 1.01. The forward annual dividend yield is very high at 6.61%, and the payout ratio is at 56%.

The SGU stock price is 1.0% above its 20-day simple moving average, 2.65% above its 50-day simple moving average and 12.63% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

On August 7, Star Gas Partners LP reported its third-quarter fiscal 2013 financial results. The company reported a 12.9 percent increase in total revenue to $262.5 million, compared with $232.5 million in the prior-year period. The higher revenue was primarily due to an increase in home heating oil and propane volume, which rose by 7.6 million gallons, or 21.7 percent, to 42.7 million gallons, as the impact of colder temperatures and the additional volume provided by acquisitions more than offset the impact of net customer attrition, conservation and other factors. Temperatures in Star's geographic areas of operation for the fiscal 2013 third quarter were 27.4 percent colder than the fiscal 2012 third quarter and 4.1 percent warmer than normal, as reported by the National Oceanic and Atmospheric Administration. During the fiscal 2013 third quarter, Star's net loss decreased by $4.2 million to $7.6 million largely due to the impact of a favorable change in the fair value of derivative instruments.

For the nine months ended June 30, 2013, the company reported that net income increased by $12.2 million to $43.8 million as the impact of colder weather on operating results was partially offset by the impact of an unfavorable non-cash change in the fair value of derivative instruments of $5.1 million. In addition, net income for the nine months ended June 30, 2012 was positively impacted by a $12.5 million benefit recorded under Star's weather hedge contract.

In the report, Dan Donovan, Star Gas Partners' Chief Executive Officer said:

We were pleased with the favorable results this quarter, reflecting both colder weather as well as our ongoing expansion initiatives. While volume climbed 21.7 percent due to cooler temperatures, our installation and service revenue rose nearly six percent as we continued to focus on broadening our offerings. We also remained focused on organic growth within our propane operations.

All these factors -- the very low multiples, the very rich dividend, and the fact that the stock is in an uptrend -- make SGU 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 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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14-year 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 better in all the three tests.

One year return of the screen was very high at 39.85%, while the return of the S&P 500 index during the same period was at 20.82%.

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 20.80%, while the average annual return of the S&P 500 index during the same period was only 2.21%. The maximum drawdown of the screen was at 66.60%, 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 Stocks Portfolio That Outperformed By A Big Margin