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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 which are included in the Russell 3000 index with dividend yield and dividend growth rates greater than their industry averages. Those companies would also have to show strong earnings growth prospects, and their last five years earnings growth should be greater than their industries' earnings growth.

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 the dividend yield of the industry.
  4. The payout ratio is less than 100%.
  5. The annual rate of dividend growth over the past five years is greater than the dividend growth of the industry.
  6. Average annual earnings growth estimates for the next 5 years is greater than 10%.
  7. Average annual earnings growth for the past 5 years is greater than the average annual earnings growth of the industry.
  8. The fifteen stocks with the highest dividend yield among all the stocks that complied with the first seven 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 August 27, 2013, before the market open, I discovered the following fifteen stocks:


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The table below presents the dividend yield, the dividend yield of the industry, the payout ratio, the annual rate of dividend growth over the past five years, and the dividend growth of the industry for the fifteen companies.


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Leggett & Platt, Incorporated (NYSE:LEG)

Leggett & Platt, Incorporated designs and produces various engineered components and products worldwide.

Leggett & Platt has a trailing P/E of 17.25 and a forward P/E of 16.84. The price to free cash flow for the trailing 12 months is at 22.97, and the average annual earnings growth estimates for the next five years is quite high at 15%. The forward annual dividend yield is quite high at 4.04%, and the payout ratio is at 64.4%. The annual rate of dividend growth over the past three years was at 3.64% and over the past five years was at 7.89%.

Leggett & Platt has recorded strong EPS growth, during the last year, the last three years and the last five years, but the revenue growth during the last five years was negative, as shown in the table below.

Source: Portfolio123

On July 25, Leggett & Platt reported its second-quarter financial results, EPS from continuing operations came in at $0.44 in-line with expectations.

Second-Quarter 2013 Highlights

  • 2Q EPS was $.48, a 7% increase versus the prior year
  • 2Q EPS from continuing operations was $.44, a 13% increase versus the prior year
  • 2Q sales were $959 million, 3% higher than in prior year
  • 2Q EBIT margin increased to 10.3%, compared to 9.3% last year
  • Revised 2013 guidance is $1.55 - 1.70 EPS, on sales of $3.75 - 3.85 billion

In the report, the company commented about its dividends and stock repurchases policy:

In May, Leggett & Platt's Board of Directors declared a $.29 second quarter dividend, one cent higher than last year's second quarter dividend. 2013 marks the 42nd consecutive annual dividend increase for the company, with a compound annual growth rate of 13%. Only two other S&P 500 companies can claim as high a rate of dividend growth for as many years.

At yesterday's closing share price of $31.53, the indicated annual dividend of $1.16 per share generates a yield of 3.7%, one of the highest dividend yields among the S&P 500 Dividend Aristocrats.

During the second quarter the company purchased 1.2 million shares of its stock, and issued 0.3 million shares. The number of shares outstanding decreased 0.9 million, to 141.9 million. For the first half of the year, the company issued 2.7 million shares, and repurchased 2.9 million shares. Approximately two-thirds of the stock issuance reflects employee stock option exercises in response to higher stock prices.

In the report, the company also gave an outlook for the full year:

For 2013, Leggett & Platt now anticipates annual sales growth between 1% and 4%, a reduction versus prior guidance of 2% - 6% sales growth. Full year sales guidance is now $3.75-3.85 billion; EPS guidance is now $1.55-1.70, and includes the tax-related benefit recorded in discontinued operations. EPS guidance for continuing operations is $1.50-1.65, a 2% -12% improvement compared to 2012's continuing operations adjusted EPS of $1.47.[2] Prior continuing operations EPS guidance was $1.55-1.75.

Although LEG reduced somehow its outlook for the full year, considering its historical strong EPS growth, and its strong earnings growth prospects, an investor in LEG stock can expect a capital gain along the very rich dividend.

Risks to the expected capital gain and to the high dividend payment include; a downturn in the U.S. economy, and the company's debt of $976 million.


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Chart: finviz.com

Tupperware Brands Corporation (NYSE:TUP)

Tupperware Brands Corporation operates as a direct seller of various products across a range of brands and categories through an independent sales force worldwide.

Tupperware Brands has a trailing P/E of 18 and a low forward P/E of 13.47. The PEG ratio is at 1.50, and the average annual earnings growth estimates for the next five years is quite high at 12%. The forward annual dividend yield is at 2.93%, and the payout ratio is only 36.2%. The annual rate of dividend growth over the past three years was high at 16.53% and over the past five years was also high at 10.35%.

The TUP stock price is 2.79% above its 50-day simple moving average and 11.14% above its 200-day simple moving average. That indicates a mid-term and long-term uptrend.

Tupperware Brands has recorded strong revenue, EPS and dividend growth, during the last year, the last three years and the last five years, as shown in the table below.

Source: Portfolio123

On July 24, Tupperware Brands Corporation reported its second-quarter financial results, which beat EPS expectations by $0.03 and beat on revenues.

Second-Quarter 2013 Highlights

  • Second quarter 2013 net sales were $688 million. Emerging markets, accounting for 65% of sales, achieved a 14% increase in local currency, driven by large populations, penetration of un-served and underserved consumers and emerging middle classes. Established markets were down 1%, a sequential improvement versus the first quarter.
  • GAAP net income of $76 million versus $13 million in prior year. 2012 included $76.9 million of pre-tax, non-cash impairment charges to write down purchase accounting intangibles, as well as $7.5 million pre-tax gain from the sale of a previously idled manufacturing facility.
  • First half cash flow from operating activities net of investing activities $55 million, $29 million ahead of the same period last year.
  • The Company returned $133 million to shareholders through a dividend payout of $33 million and the repurchase of 1.23 million shares for $100 million. Since 2007, 18 million shares have been repurchased for $1 billion, with $1 billion left under an authorization that runs until February 2017.
  • Total sales force 3% higher than the prior year at the end of the quarter, a 2 percentage point sequential improvement.

Although the stock is not cheap by valuation metrics, its historical strong revenue, EPS and dividend growth, and its strong earnings growth prospects suggest a good possibility for the stock to move higher.

Risks to the expected capital gain and to the high dividend payment include; a downturn in the U.S. economy, and the company's debt of $803 million.


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Chart: finviz.com

KLA-Tencor Corporation (NASDAQ:KLAC)

KLA-Tencor Corporation engages in design, manufacture, and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries worldwide.

KLA-Tencor has a low debt (total debt to equity is only 0.21), and it has a trailing P/E of 17.63 and a very low forward P/E of 12.15. The price to free cash flow for the trailing 12 months is quite low at 16.31, and the average annual earnings growth estimates for the next five years is high at 15.30%. The current ratio is very high at 5.10, and the price-to-cash ratio is very low at 3.20. The forward annual dividend yield is quite high at 3.18%, and the payout ratio is at 49%. The annual rate of dividend growth over the past three years was very high at 38.67% and over the past five years was also very high at 21.67%.

KLA-Tencor has recorded strong revenue, EPS and dividend growth during the last three years and the last five years, as shown in the table below.

Source: Portfolio123

On July 25, KLA-Tencor reported its fourth-quarter fiscal year 2013 financial results, which beat EPS expectations by $0.03 and beat on revenues. The company reported GAAP net income of $135 million and GAAP earnings per diluted share of $0.80 on revenues of $720 million for the fourth quarter of fiscal year 2013. For the year ended June 30, 2013, the company reported GAAP net income of $543 million and GAAP earnings per diluted share of $3.21 on revenues of $2.8 billion.

KLA-Tencor has recorded strong revenue, EPS and dividend growth, and its earnings growth prospects are remarkably good. Considering KLAC's very good valuation, KLAC stock should move higher. Furthermore, the rich dividend represents a nice income.

Since the company is rich in cash ($17.62 a share) and has a low debt and its payout ratio is low, there is a hardly risk that the company will reduce its dividend payment. Risks to the expected capital gain include a downturn in the U.S. economy, and weakness in the consumer electronics market.


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Chart: finviz.com

RPC Inc. (NYSE:RES)

RPC, Inc. provides oilfield services and equipment for oil and gas companies engaged in the exploration, production, and development of oil and gas properties in the United States, Canada, Eastern Europe, Latin America, Africa, the Middle East, China, New Zealand.

RPC Inc. has a very low debt (total debt to equity is only 0.07), and it has a trailing P/E of 16.09 and a low forward P/E of 14.68. The PEG ratio is quite low at 1.07, and the average annual earnings growth estimates for the next five years is quite high at 15%. The forward annual dividend yield is at 2.74%, and the payout ratio is at 62.5%. The annual rate of dividend growth over the past three years was very high at 48.47% and over the past five years was also very high at 29.20%.

The RES stock price is 0.99% above its 20-day simple moving average, 2.56% above its 50-day simple moving average and 6.46% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

RPC Inc. has recorded strong revenue, EPS and dividend growth during the last three years and the last five years, as shown in the table below.

Source: Portfolio123

On July 24, RPC, Inc. reported its second-quarter results, which was in-line on EPS and beat on revenues. For the quarter ended June 30, 2013, revenues decreased 8.5 percent to $457.6 million compared to $500.1 million in the second quarter of last year. Revenues decreased compared to the prior year primarily due to lower pricing coupled with lower activity levels in most of our service lines. Operating profit for the quarter was $67.9 million compared to operating profit of $119.9 million in the prior year. Net income was $40.4 million or $0.19 diluted earnings per share, compared to $72.3 million or $0.33 diluted earnings per share last year. Earnings before interest, taxes, depreciation and amortization (EBITDA) decreased by 30.4 percent to $120.4 million compared to $172.9 million in the prior year.

RPC Inc. has recorded strong revenue, EPS and dividend growth, and its earnings growth prospects are very good. Considering RES's very good valuation, RES stock should move higher. Furthermore, the solid dividend represents a nice income.

Since the company is profitable and has a low debt and its payout ratio is low, there is a hardly risk that the company will reduce its dividend payment. Risks to the expected capital gain include a downturn in the U.S. economy, and decline in the price of oil.


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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

The strong dividend growth 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 very high at 37.92%, while the return of the S&P 500 index during the same period was at 17.43% and that of the Russell 3000 index was at 19.41%.

The difference between the dividend growth 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 14.76%, while the average annual return of the S&P 500 index during the same period was only 2.06% and that of the Russell 3000 index was at 2.77%. The maximum drawdown of the screen was at 59.90%, 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.

Source: Building A Strong Dividend Growth Portfolio