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Arie Goren, Portfolio123 (475 clicks)
Long only, value, research analyst, dividend investing
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In order to create a long-term diversified dividend growth 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 with dividend yield and dividend growth rates greater than their industry averages. Those companies would also have to show good earnings growth prospects, and their last five years earnings growth should be greater than their industries' earnings growth.

In many of my previous screens, the demand was to rebalance the portfolio every four weeks and replace the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. Since most investors do not have the opportunity to rebalance the portfolio every four weeks, in the following screen the demand is to rebalance the portfolio only after every six months. Furthermore, in order to decrease the maximum expected drawdown to a lower level than that of the benchmarks I had to be satisfied with a bit lower return, but still much better than the benchmarks.

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. Market cap is greater than $100 million.
  3. Price is greater than 1.00.
  4. Dividend yield is greater than the dividend yield of the industry.
  5. The payout ratio is less than 100%.
  6. The annual rate of dividend growth over the past five years is greater than 5%.
  7. The annual rate of dividend growth over the past five years is greater than the dividend growth of the industry.
  8. Average annual earnings growth estimates for the next 5 years is greater than 5%.
  9. Average annual earnings growth for the past 5 years is greater than the average annual earnings growth of the industry.
  10. The 20 stocks with the lowest payout ratio among all the stocks that complied with the first nine 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 27, 2013, I discovered the following 20 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 20 companies.

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Inter Parfums Inc. (IPAR)

Inter Parfums, Inc., together with its subsidiaries, manufactures, markets, and distributes a range of fragrances and fragrance related products worldwide.

Inter Parfums has no debt at all, and it has a very low trailing P/E of 6.33 and a forward P/E of 27.35. The current ratio is very high at 4.50, and the average annual earnings growth estimates for the next five years is quite high at 12%. The forward annual dividend yield is at 1.61%, and the payout ratio is only 7.6%. The annual rate of dividend growth over the past three years was very high at 34.34%%, and over the past five years was also very high at 57.20%.

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

Inter Parfums 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 August 7, Inter Parfums reported its second-quarter financial results, which beat EPS expectations by $0.04, was in line on revenue and the company reaffirmed FY13 EPS guidance.

Second-Quarter 2013 Highlights

  • Net sales of ongoing brands (excluding Burberry brand sales) increased 17% to $96.8 million from $82.7 million;
  • Net sales including Burberry brand sales were down 19.3% to $117.5 million, compared to $145.6 million; at comparable foreign currency exchange rates, net sales declined 20.6%;
  • European-based operations generated sales of ongoing brands of $72.0 million, up 15.0% from $62.8 million; including Burberry brand sales, European-based sales were down 26.2%;
  • Sales by U.S.-based operations were $24.8 million, up 24.4% from $20.0 million;
  • Gross margin was 54.1% of net sales compared to 60.8%;
  • S, G & A expense as a percentage of net sales was 47.4% compared to 52.1%;
  • Operating margin was 6.7% of net sales compared to 8.7% of net sales;
  • Net income attributable to Inter Parfums, Inc. was $3.8 million compared to $6.0 million; and,
  • Basic and diluted earnings per share attributable to Inter Parfums, Inc. were $0.12 compared to $0.20.

Inter Parfums has recorded strong revenue, EPS and dividend growth, and considering its good earnings growth prospects, IPAR stock can move higher. Furthermore, the solid growing dividend represents a nice income.

Since the company is very rich in cash ($8.51 a share) and has no debt, there is hardly a risk that the company will reduce its dividend payment.

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Chart: finviz.com

Crane Co. (CR)

Crane Co. manufactures and sells engineered industrial products in the United States and internationally.

Crane Co. has a low debt (total debt to equity is only 0.41), and it has a trailing P/E of 16.94 and a low forward P/E of 13.46. The average annual earnings growth estimates for the next five years is at 10.20%. The forward annual dividend yield is at 1.92%, and the payout ratio is only 29.9%. The annual rate of dividend growth over the past three years was high at 10.52%%, and over the past five years was also high at 10.35%.

The CR stock price is 2.69% above its 20-day simple moving average, 1.87% above its 50-day simple moving average and 11.09% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

Crane Co. has recorded revenue, EPS and dividend growth, during the last three years, as shown in the charts below.

Source: Portfolio123

On July 22, Crane Co. reported its second-quarter financial results. which beat EPS expectations by $0.02. The company reported second-quarter 2013 earnings of $0.93 per diluted share, compared to $1.07 in the second quarter of 2012. Second-quarter 2013 sales of $648.7 million decreased $8.9 million, or 1.4%, compared to $657.7 million in the second quarter of 2012, resulting from a core sales decline of $5.9 million, or 0.9%, and unfavorable foreign exchange of $3.0 million, or 0.5%.

Crane Co. has recorded revenue, EPS and dividend growth, and considering its good earnings growth prospects, and the fact that the stock is in an uptrend, CR stock can move higher. Furthermore, the solid growing dividend represents a very nice income.

(click to enlarge)

Chart: finviz.com

AFLAC Inc (AFL)

Aflac Incorporated, through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products.

Aflac Incorporated has a low debt (total debt to equity is only 0.36), and it has a very low trailing P/E of 8.68 and a very low forward P/E of 9.60. The price to free cash flow for the trailing 12 months is extremely low at 2.27, and the average annual earnings growth estimates for the next five years is at 5.75%. The forward annual dividend yield is at 2.24%, and the payout ratio is only 18.4%. The annual rate of dividend growth over the past three years was very high at 16.84% and over the past five years was also very high at 16.85%.

The AFL stock price is 2.92% above its 20-day simple moving average, 2.91% above its 50-day simple moving average and 13.58% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

Aflac 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 30, Aflac reported its second-quarter financial results, which beat EPS expectations by $0.11 and beat on revenues. Total revenues rose 2.4% to $6.0 billion during the second quarter of 2013, compared with $5.9 billion in the second quarter of 2012. Net earnings were $889 million, or $1.90 per diluted share, compared with $483 million, or $1.03 per share, a year ago.

Aflac has recorded very strong revenue, EPS and dividend growth, and considering its compelling valuation metrics and its solid earnings growth prospects, AFL stock can move higher. Furthermore, the rich dividend represents a nice income.

Since a significant portion of Aflac's business is in Japan, where the functional currency is the yen, the impact from translating yen into dollars might reduce Aflac's operating earnings, in case of decrease in the exchange rate of the yen.

(click to enlarge)

Chart: finviz.com

Back-testing

In order to find out how such a screening formula would have performed during the last year, last five 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 six months 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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1-year back-test

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5-year back-test

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14-year back-test

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Summary

The 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 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 all the three tests.

One-year return of the screen was high at 31.02%, while the return of the S&P 500 index during the same period was at 18.52%.

The difference between the dividend growth 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 11.66%, 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 57.24%, 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.

Source: A Winning Long-Term Diversified Dividend Growth Portfolio