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I tried to create a good-yielding stock portfolio that can outperform the market by a big margin, but at the same time, would have a very low risk. The following screen, which draws inspiration from the work of the well-known investor Ben Graham, shows such promise. This screen is available on Portfolio123's All-Stars list.

The screen's method 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. Current ratio is at least 1.50.
  4. Last 4 quarters of EPS above breakeven.
  5. Last 5 years of EPS above breakeven.
  6. Annual EPS grew over past year and past 5 years.
  7. Company has paid dividends within past year.
  8. The twenty 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, Yahoo Finance and finviz.com.

After running this screen on August 28, 2013, before the market open, I discovered the following twenty stocks:


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The table below presents the dividend yield, the payout ratio, the current ratio and the trailing P/E for the twenty companies.


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Terra Nitrogen Company, L.P. (NYSE:TNH)

Terra Nitrogen Company, L.P. engages in the production and sale of nitrogen fertilizer products.

Terra Nitrogen Company has no debt at all, and it has a very low trailing P/E of 11.78. The current ratio is very high at 5.48, and the price-to-cash ratio is at 22.99. The forward annual dividend yield is very high at 7.53%, and the payout ratio is at 92%. The annual rate of dividend growth over the past three years was very high at 23.64% and over the past five years was also high at 17.15%.

Terra Nitrogen 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 August 06, Terra Nitrogen reported its second-quarter results. The company reported net earnings of $149.3 million on sales of $215.4 million for the quarter ended June 30, 2013. This compares to net earnings of $154.8 million on sales of $195.6 million for the 2012 second quarter. Net income allocable to common units was $84.0 million ($4.54 per common unit) and $86.5 million ($4.67 per common unit) for the 2013 and 2012 second quarters, respectively.

Terra Nitrogen has recorded strong revenue, EPS and dividend growth, and considering its good valuation, TNH stock can move higher. Furthermore, the very rich dividend represents a gratifying income.

Since the company is profitable and quite rich in cash ($9.15 a share) and has no debt, there is a hardly risk that the company will cut its dividend payment.

Risks to the TNH stock include; the company's reliance on one production facility, the cyclical nature of its business, the global commodity nature of its fertilizer products, the impact of global supply and demand on its selling prices, and the intense global competition from other fertilizer producers.


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Chart: finviz.com

Sturm, Ruger & Co. Inc. (NYSE:RGR)

Sturm, Ruger & Company, Inc. engages in the design, manufacture, and sale of firearms in the United States.

Sturm, Ruger has no debt at all, and it has a very low trailing P/E of 10.98 and a low forward P/E of 14.95. The current ratio is at 1.78, and the price-to-cash ratio is at 15.61. The forward annual dividend yield is very high at 5.03%, and the payout ratio is at 127%. The annual rate of dividend growth over the past three years was very high at 61.93%.

The RGR stock price is 4.49% above its 50-day simple moving average and 5.20% above its 200-day simple moving average. That indicates a mid-term and long-term uptrend.

Sturm, Ruger 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 31, Sturm, Ruger reported its second-quarter financial results, which beat EPS expectations by $0.45 and beat on revenues. The company reported net sales of $179.5 million and fully diluted earnings of $1.63 per share, compared with net sales of $119.6 million and fully diluted earnings of 91¢ per share in the second quarter of 2012.

In the report, the company also announced that its Board of Directors declared a dividend of 65¢ per share for the second quarter, for shareholders of record as of August 16, 2013, payable on August 30, 2013. This dividend varies every quarter because the company pays a percent of earnings rather than a fixed amount per share. This dividend is approximately 40% of net income.

Sturm, Ruger has recorded strong revenue, EPS and dividend growth, and considering its very good valuation, RGR stock should move higher. Furthermore, the very rich dividend represents a nice income.

Although RGR's payout ratio was a one time high at 127%, there is hardly a risk that the company will cut its dividend payment. RGR is profitable and its policy is to distribute about 40% of its net income as dividends.

Risks to the expected capital gain and to the high dividend payment include; a downturn in the U.S. economy and a change in the arms control policy.


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Chart: finviz.com

Maxim Integrated Products, Inc. (NASDAQ:MXIM)

Maxim Integrated Products, Inc. engages in designing, developing, manufacturing, and marketing various linear and mixed-signal integrated circuits worldwide.

Maxim Integrated Products has a very low debt (total debt to equity is only 0.20), and it has a trailing P/E of 18.16 and a low forward P/E of 13.95. The PEG ratio is at 1.51, and the price-to-cash ratio is at 6.67. The current ratio is very high at 4.79, and the average annual earnings growth estimates for the next five years is quite high at 12.04%. The forward annual dividend yield is quite high at 3.77%, and the payout ratio is at 62%. The annual rate of dividend growth over the past three years was at 6.27% and over the past five years was at 5.06%.

Maxim has recorded 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 25, Maxim reported its fiscal fourth-quarter 2013 results, which missed EPS expectations by $0.03 and missed on revenues.

Fourth-Quarter Fiscal 2013 Financial Highlights

  • Revenue: $608 million
  • Gross Margin: 61.1% GAAP (62.3% excluding special items)
  • EPS: $0.40 GAAP ($0.44 excluding special items)
  • Cash, cash equivalents, and short term investments: $1.20 billion
  • Fiscal first quarter revenue outlook: $570 million to $600 million
  • Quarterly dividend increased 8% to $0.26 per share
  • New $1.0 billion share repurchase program authorized

Although MXIM missed expectations in its latest quarter report, considering its historical strong EPS growth, and its strong earnings growth prospects, an investor in MXIM stock can expect a capital gain along the rich dividend.

Since the company is rich in cash ($4.12 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 electronics market.


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Chart: finviz.com

CVR Energy, Inc. (NYSE:CVI)

CVR Energy, Inc., through its subsidiaries, engages in petroleum refining and nitrogen fertilizer manufacturing activities in the United States.

CVR Energy has a very low trailing P/E of 6.47 and a low forward P/E of 12.07. The price-to-sales ratio is very low at 0.42, and the price-to-cash ratio is at 3.30. The current ratio is very high at 3.14. The forward annual dividend yield is very high at 6.74%, and the payout ratio is very high at 185%.

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

Source: Portfolio123

On August 01, CVR Energy reported its second-quarter financial results, which missed EPS expectations by $0.19. The company reported net income of $183.4 million, or $2.11 per diluted share, on net sales of $2,220.3 million, compared to net income of $154.7 million, or $1.75 cents per diluted share, on net sales of $2,308.3 million for the second quarter of 2012. Operating income for the second quarter of 2013 was $262.7 million compared to $235.8 million in the second quarter of 2012.

In the report, the company also announced a second quarter 2013 cash dividend of 75 cents per share. The dividend, as declared by CVR Energy's Board of Directors, will be paid on Aug. 19, 2013, to stockholders of record on Aug. 12, 2013. On May 24, 2013, CVR Energy declared a special dividend of $6.50 per share, which was paid on June 10, 2013, to stockholders of record on June 3, 2013.

CVR Energy has recorded strong revenue and EPS growth, and considering its good valuation, CVI stock can move higher. Furthermore, the very rich dividend represents a gratifying income.

Since the company is profitable and rich in cash ($13.07 a share), there is a hardly risk that the company will cut its dividend payment.

Risks to the CVI stock include; the global commodity nature of its fertilizer products, the impact of global supply and demand on its selling prices, and the intense global competition from other fertilizer producers.


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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.

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 good-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 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 high at 30.33%, while the return of the S&P 500 index during the same period was at 17.48% and that of the Russell 3000 index was at 19.58%.

The difference between the good-yielding 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 10.61%, 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 2.78%. The maximum drawdown of the screen was at 48.02%, 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 Good-Yielding, Winning Dividend Portfolio According To Graham Principles