I keep trying to find new screening formulas in order to build a winning portfolio for dividend investors. The following screen shows such promise. In this screen, I modified an older screen I published on August 07. Since there are 4,716 stocks in the Portfolio123's database after omitting stocks that do not trade over-the-counter (OTC), and 2,140 of them pay a dividend, any small change in the screen criteria make a significant change in the results. In the following screen, I changed the dividend yield criteria from greater than 4% to greater than 3.5%. This change allowed me to increase the portfolio size to 20 stocks instead of only 10 stocks in the previous screen, and by this decreasing the maximum drawdown significantly.
The screen's method that I use to build this portfolio requires all stocks to comply with all following demands:
- The stock does not trade over-the-counter (OTC).
- Price is greater than 1.00.
- Market cap is greater than $100 million.
- Dividend yield is greater than 3.5%.
- The payout ratio is less than 100%.
- Last dividend declared is greater than the last dividend paid.
- Total debt to equity is less than 1.0.
- The twenty stocks with the lowest payout ratio 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 September 17, 2013, I discovered the following twenty stocks:
The table below presents the dividend yield, the payout ratio, the last dividend declared, and the debt to equity for the twenty companies.
Financial Institutions Inc. (FISI)
Financial Institutions, Inc. operates as the holding company for Five Star Bank that provides various banking and financial services to individuals, municipalities, and businesses.
Financial Institutions has a very low trailing P/E of 12.17 and a very low forward P/E of 10.20. The price to free cash flow for the trailing 12 months is very low at 11.91, and the average annual earnings growth estimates for the next five years is at 8%. The forward annual dividend yield is at 3.88%, and the payout ratio is only 42.3%. The annual rate of dividend growth over the past three years was quite high at 12.53% and over the past five years was at 4.38%.
Financial Institutions has recorded strong revenue and dividend growth, and mild revenue growth during the last three years, as shown in the table below.
On July 24 Financial Institutions reported its second-quarter financial results, which beat EPS expectations by $0.01.
Second Quarter Highlights
- Diluted EPS of $0.47 per share, up 12% from first quarter 2013
- Return on average assets of 0.99%, return on average common equity of 10.86% and return on average tangible common equity of 13.74%
- Service charges on deposits increased $427 thousand or 20% compared to the previous quarter
- Provision for loan losses of $1.2 million, a $1.5 million decrease from the previous quarter
- Total loans grew $26.1 million during the second quarter
- Capital ratios remain strong with total risk-based capital of 12.21%
Financial Institutions has recorded good EPS and dividend growth, and considering its compelling valuation metrics and its solid earnings growth prospects, FISI stock can move higher. Furthermore, the rich dividend represents a nice income.
Risks to the expected capital gain and to the dividend payment include a downturn in the U.S. economy, and a decrease in its interest margin of 3.63%.
Maxim Integrated Products, Inc. (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 19.28 and a low forward P/E of 14.77. The PEG ratio is at 1.60, and the price-to-cash ratio is at 7.06. The current ratio is very high at 4.80, 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 3.57%, 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.
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.
Universal Insurance Holdings Inc. (UVE)
Universal Insurance Holdings, Inc., through its subsidiaries, operates as a property and casualty insurance company performing various aspects of insurance underwriting, distribution, and claims.
Universal Insurance Holdings has a very low debt (total debt to equity is only 0.40), and it has a very low trailing P/E of 7.01. The price to free cash flow for the trailing 12 months is extremely low at 1.48, and the price-to-cash ratio is also very low at 1.48. The forward annual dividend yield is quite high at 4.62%, and the payout ratio is at 49.9%. The annual rate of dividend growth over the past five years was quite high at 7.21%.
Universal Insurance Holdings has recorded strong revenue growth during the last year, the last three years and the last five years, as shown in the table below.
On August 14, Universal Insurance Holdings announced that it has repurchased 241,933 shares of the company's common stock in a privately negotiated transaction with Norman Meier, the former Secretary and a former director of the company, at $7.57 per share. The repurchase price represents a discount of 10.4% from yesterday's closing price of the company's common stock.
Universal Insurance Holdings has recorded good revenue and dividend growth, and considering its compelling valuation metrics and the fact that the company is repurchasing its own shares, UVE stock can move higher. Furthermore, the rich dividend represents a gratifying income.
Since the company is rich in cash ($4.97 a share) and has a low debt and its payout ratio is very low, there is hardly a risk that the company will reduce its dividend payment.
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.
One year back-test
Five years back-test
Fourteen years back-test
The good-yielding 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 much better in all the three tests. Furthermore, the maximum drawdown, which normally is much bigger in a small portfolio than in the benchmark, was smaller in the three years and the five years tests.
One-year return of the screen was high at 29.63%, while the return of the S&P 500 index during the same period was at 16.16%.
The difference between the good-yielding screen to the benchmark was even more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 21.37%, while the average annual return of the S&P 500 index during the same period was only 2.22%. The maximum drawdown of the screen was at 49.79%, 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.