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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 good-yielding dividend portfolio that can outperform the market by a big margin, I have used the following screen. It is based on an attempt to search for profitable companies with a generous dividend yield and with a last dividend declared greater than the last dividend paid. Those companies would also have to show a low debt.

In most 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, I have introduced also screens where the demand was to rebalance the portfolio only once a year. In many comments, readers asked what would be the return for different rebalancing periods. In this article, I show back-testing results for rebalancing periods of; 4 weeks, 3 months, 6 months and one year. The back-testing result of the 4 weeks rebalancing period was by far much better than those of the longer periods. Of course, rebalancing every 4 weeks will cause much higher costs (commission, slippage), but the back-testing calculation takes these costs into account.

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. Price is greater than 1.00.
  3. Market cap is greater than $100 million.
  4. Dividend yield is greater than 3.5%.
  5. The payout ratio is less than 100%.
  6. Last dividend declared is greater than the last dividend paid.
  7. Total debt to equity is less than 1.0.
  8. The 20 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 October 16, 2013, before the market open, I discovered the following 20 stocks:

Rank

Ticker

Name

Last Price

Market Cap $million

Industry

1

(AGU)

Agrium Inc.

83.50

12,358

Chemicals

2

(NTE)

Nam Tai Electronics Inc

7.95

360

Electronic Equipment, Instruments & Components

3

(IDA)

IDACORP Inc.

49.11

2,467

Electric Utilities

4

(PBA)

Pembina Pipeline Corp

31.92

9,878

Oil, Gas & Consumable Fuels

5

(COP)

ConocoPhillips

71.89

87,922

Oil, Gas & Consumable Fuels

6

(SLF)

Sun Life Financial Inc

32.61

19,755

Insurance

7

(INTC)

Intel Corp

23.39

116,506

Semiconductors & Semiconductor Equipment

8

(DCM)

Ntt Docomo Inc

15.88

65,851

Wireless Telecommunication Services

9

(UVE)

Universal Insurance Holdings

6.81

240

Insurance

10

(GRP.U)

Granite Real Estate Investment Trust

35.17

1,651

Real Estate Investment Trusts (REITs)

11

(NJR)

New Jersey Resources Corp

42.87

1,774

Gas Utilities

12

(SXL)

Sunoco Logistics Partners LP

66.50

6,903

Oil, Gas & Consumable Fuels

13

(AROW)

Arrow Financial Corp

25.73

316

Commercial Banks

14

(MAIN)

Main Street Capital Corp

30.03

1,051

Capital Markets

15

(MXIM)

Maxim Integrated Products

29.69

8,539

Semiconductors & Semiconductor Equipment

16

(LEG)

Leggett & Platt Inc

29.18

4,141

Household Durables

17

(ITRN)

Ituran Location and Control

18.48

387

Communications Equipment

18

(GRMN)

Garmin Ltd

47.22

9,223

Household Durables

19

(DGAS)

Delta Natural Gas Co Inc

20.91

144

Gas Utilities

20

(AZN)

Astrazeneca PLC

50.63

63,389

Pharmaceuticals

The table below presents the dividend yield, the payout ratio, the last dividend declared, and the debt to equity for the 20 companies.

(click to enlarge)

Back-testing

In order to find out how such a screening formula would have performed during the last year, last five years and last 15 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, three months, six months and one year, 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.

(click to enlarge)

(click to enlarge)

One-year back-test

(click to enlarge)

(click to enlarge)

For one year back-test, the return, when rebalancing the screen every four weeks, was high at 31.53%, while the return of the screen when rebalancing once a year was at 20.39%, and the return of the S&P 500 index during the same period was at 17.91%.

Five-year back-test

(click to enlarge)

(click to enlarge)

For five-year back-test, the average annual return, when rebalancing the screen every four weeks, was high at 26.61%, while the return of the screen when rebalancing once a year was at 22.86%, and the return of the S&P 500 index during the same period was at 13.24%.

15-year back-test

(click to enlarge)

(click to enlarge)

For 15-year back-test, the average annual return, when rebalancing the screen every four weeks, was high at 21.50%, while the return of the screen when rebalancing once a year was at 16.47%, and the return of the S&P 500 index during the same period was only 2.21%.

Summary

The good-yielding screen has given much better returns during the last year, the last five years and the last 15 years than the S&P 500 benchmark, in all the four different rebalancing periods. The four-week rebalancing period has given the best returns. The Sharpe ratio, which measures the ratio of reward to risk, was also much better for the good-yielding screen 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 five-year and the 15-year tests.

Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.

Source: Rebalancing Period Influence On A Good-Yielding Dividend Portfolio