I tried to create a high-yielding stock portfolio that can outperform the market by a big margin. The following strategy shows such promise. The method I used for this strategy is to screen all the stocks which are trading in the U.S. markets (except over-the-counter) according to certain criteria, and to choose the best 20 stocks. This procedure should be repeated each 4 weeks, and the demand is to replace the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The current portfolio is biased to Real Estate Investment Trusts (REITs), but since the demand is to rebalance the portfolio every four weeks, in other periods other industries dominate the portfolio. For example, one year before the screen offered only two REITs.
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 5%.
- The payout ratio is less than 100%.
- Trailing P/E is less than 20.
- The twenty 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 Portfolio123 and finviz.com.
After running this screen on September 24, 2013, before the market open, I discovered the following twenty stocks:
The table below presents the dividend yield, the payout ratio, and the trailing P/E for the twenty companies.
KKR Financial Holdings LLC (KFN)
KKR Financial Holdings LLC, together with its subsidiaries, operates as a specialty finance company with expertise in a range of asset classes.
KKR Financial Holdings has no long-term debt at all, and it has a very low trailing P/E of 5.48 and a very low forward P/E of 6.56. The PEG ratio is very low at 0.55, and the average annual earnings growth estimates for the next five years is quite high at 10%. The price-to-cash ratio is low at 4.10, and the price-to-book-value ratio is very low at 0.84. The forward annual dividend yield is very high at 8.24%, and the payout ratio is only 46%.
Analysts recommend the stock. Among the six analysts covering the stock, four rate it as a strong buy, one rates it as a buy, and one rates it as a hold.
KKR Financial Holdings has recorded strong revenue, EPS and dividend growth during the last year and the last three years, as shown in the table below.
On July 23, KKR Financial Holdings reported its second-quarter financial results, which beat EPS expectations by $0.03 and missed on revenues.
Second Quarter 2013 Highlights
- Net income available to common shareholders totaled $79.2 million, an increase of 11% from the same period of 2012.
- Net income per diluted common share totaled $0.39, compared with $0.39 for the comparable prior-year period.
- A quarterly cash distribution of $0.21 per common share was declared for the second quarter of 2013.
- Book value per common share was $10.41 as of June 30, 2013 as compared to book value per common share of $10.16 as of March 31, 2013.
KKR Financial Holdings has recorded strong revenue, EPS and dividend growth, and considering its compelling valuation metrics, its solid earnings growth prospects, and the fact that the stock is trading way below book value, KFN stock can move higher. Furthermore, the very rich dividend represents a gratifying income.
Six Flags Entertainment Corporation (SIX)
Six Flags Entertainment Corporation owns and operates regional theme, water, and zoological parks.
Six Flags Entertainment has a very low trailing P/E of 10.62 and a forward P/E of 24.54. The average annual earnings growth estimates for the next five years is at 10%. The forward annual dividend yield is high at 5.12%, and the payout ratio is only 45.9%.
The SIX stock price is 2.87% above its 20-day simple moving average, 0.35% above its 50-day simple moving average and 2.83% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.
Analysts recommend the stock. Among the eight analysts covering the stock, two rate it as a strong buy, four rate it as a buy, and two rate it as a hold.
Six Flags Entertainment has recorded strong EPS growth, and mild revenue growth during the last year, the last three years and the last five years, as shown in the charts below.
Source: company presentation
On July 22, Six Flags Entertainment reported its second-quarter financial results. EPS came in at $0.47 a $0.06 below expectations.
In the report, the company said that during the first six months of 2013 the company invested $72 million in new capital and also paid dividends of $88 million, or $0.45 per common share per quarter, and repurchased $404 million or 12.2 million shares of its common stock, both after adjusting for the June 26, 2013 two-for-one stock split.
Six Flags Entertainment has recorded strong EPS growth, and considering its solid earnings growth prospects, and the fact that the stock is in an uptrend, SIX stock can move higher. Furthermore, the very rich dividend represents a very nice income.
Risks to the expected capital gain and to the dividend payment include a downturn in the U.S. economy, adverse weather conditions, and the company big debt of $1.40 billion.
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 5.04. The PEG ratio is exceptionally low at 0.40, 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 5.50, and the price-to-book-value ratio is at 1.08. The price-to-sales ratio is very low at 0.31, and the price-to-cash ratio is extremely low at 1.64. The forward annual dividend yield is very high at 7.26%, and the payout ratio is only 26.6%.
The NTE stock price is 1.49% above its 20-day simple moving average and 6.52% above its 50-day simple moving average. That indicates a short-term and mid-term uptrend.
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.
Although Nam Tai's valuation metrics are excellent, and it is rich in cash ($4.95 a share) and has no debt, NTE stock is very volatile and quite dangerous.
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 high-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 29.25%, while the return of the S&P 500 index during the same period was at 18.01%.
The difference between the high-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 18.95%, while the average annual return of the S&P 500 index during the same period was only 2.32%. The maximum drawdown of the screen was at 62.89%, while that of the S&P 500 was at 65.01%.
Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.