In order to create a dividend stock portfolio that can outperform the market by a big margin, I have used the following screen. It is based on attempt to search for highly profitable companies that pay rich dividends and that have raised their payouts at a high rate for the last five years. Those stocks would also have to show a very low debt.
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 2.5%.
- The payout ratio is less than 50%.
- The annual rate of dividend growth over the past five years is greater than 5%.
- Total debt to equity is less than 0.50.
- Average annual earnings growth estimates for the next five years is greater than 5%.
- The fifteen stocks with the lowest payout ratio among all the stocks that complied with the first eight 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 Yahoo Finance, Portfolio123 and finviz.com.
After running this screen on October 12, 2013, before the market open, I discovered the following fifteen stocks:
The table below presents the dividend yield, the payout ratio, the forward P/E and the total debt to equity for the fifteen companies.
Horace Mann Educators Corp. (NYSE:HMN)
Horace Mann Educators Corporation, through its subsidiaries, operates as a multi-line insurance company in the United States.
Source: company presentation
Horace Mann Educators has a very low debt (total debt to equity is only 0.22), and it has a very low trailing P/E of 10.70 and a very low forward P/E of 12.60. The price-to-book value is low at 1.06, and the average annual earnings growth estimates for the next five years is at 8%. The forward annual dividend yield is at 2.78%, and the payout ratio is only 23.9%. The annual rate of dividend growth over the past three years was very high at 34.68% and over the past five years was at 13.22%.
Analysts recommend the stock. Among the two analysts covering the stock, one rates it as a strong buy and one rates it as a buy.
Horace Mann Educators has recorded strong EPS and dividend growth and moderate revenue growth during the last year, the last three years and the last five years, as shown in the table below.
On October 22, Horace Mann reported its third-quarter results. EPS came in at $0.59, in-line with analyst expectations. In the report, Horace Mann's President and CEO Marita Zuraitis said:
Horace Mann's third quarter operating income was $0.59 per share, a solid result across all three business segments of our multiline insurance platform. Compared to the third quarter and first nine months of 2012, property and casualty written premiums increased 4%, while the year-to-date combined ratio was in line with our expectations. In our annuity segment, assets under management increased 11% over prior year, and the interest spread remained just below 2%. In the life segment, third quarter sales of Horace Mann products increased significantly compared to a year earlier, with the growth in earnings reflecting better than anticipated mortality losses. Primarily due to stronger than anticipated earnings in our annuity and life segments and lower than expected third quarter catastrophe losses, we are revising our estimate of full-year 2013 operating income to between $1.95 and $2.05 per share.
Horace Mann Educators has recorded strong EPS and dividend growth, and considering its cheap valuation metrics and its solid earnings growth prospects, HMN stock can move higher. Furthermore, the rich growing 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 higher-than-anticipated level of catastrophe losses.
Schweitzer-Mauduit International Inc. (NYSE:SWM)
Schweitzer-Mauduit International, Inc. manufactures and sells paper and reconstituted tobacco products to the tobacco industry; and specialized paper products for use in various applications.
Source: company presentation
Schweitzer-Mauduit has a very low debt (total debt to equity is only 0.27), and it has a trailing P/E of 15.17 and a very low forward P/E of 12.94. The price to free cash flow for the trailing 12 months is very low at 12.21, and the average annual earnings growth estimates for the next five years is very high at 15%. The forward annual dividend yield is at 2.76%, and the payout ratio is only 30%. The annual rate of dividend growth over the past five years was very high at 31.71%.
Schweitzer-Mauduit has recorded strong EPS and dividend growth and moderate revenue growth during, the last three years and the last five years, as shown in the table below.
The tables below emphasize Schweitzer-Mauduit's superior margins and return on capital over the industry median and the sector median.
On November 06, Schweitzer-Mauduit reported its third-quarter financial results, which missed EPS expectations by $0.01 and missed on revenues.
Third quarter / Year-To-Date Financial Highlights:
- Third quarter net sales of $185.3 million decreased 5% versus the prior-year quarter; year-to-date net sales were $576.3 million
- Third quarter operating profit of $41.8 million decreased from $49.4 million in the prior-year quarter; $125.6 million year-to-date
- Third quarter Adjusted Operating Profit from Continuing Operations (see non-GAAP reconciliations) of $42.4 million decreased from $47.4 million in the prior-year quarter; $128.5 million year-to-date
- Net income of $29.1 million in the third quarter, an increase of $1.4 million from the prior-year quarter; year-to-date net income of $85.8 million
- Third quarter Adjusted Diluted Earnings Per Share from Continuing Operations (see non-GAAP reconciliations) was $0.95, and $2.91 year-to-date
Worldwide cigarette consumption is shifting from west to east; China alone is responsible to 39% of world production, as shown in the table below.
Source: company presentation
Schweitzer-Mauduit has recorded good revenue, EPS and dividend growth, and it has compelling valuation metrics and strong earnings growth prospects. Although the company's last report disappointed investors and the SWM stock fell 15% the day after, in my opinion, the reaction was exaggerated, and SWM stock can move higher. Furthermore, the rich dividend represents a nice income.
Since the company is rich in cash ($6.84 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.
Risks to the expected capital gain and to the dividend payment include decline in the worldwide cigarette consumption due to new anti-smoking regulation.
Exxon Mobil Corporation (NYSE:XOM)
Exxon Mobil Corporation engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products.
PartnerRe Ltd. (NYSE:PRE)
PartnerRe Ltd., through its subsidiaries, provides reinsurance services worldwide.
PartnerRe Ltd. has a very low debt (total debt to equity is only 0.13), and it has a low trailing P/E of 13.26 and a very low forward P/E of 10.80. The price to free cash flow for the trailing 12 months is very low at 8.94, and the average annual earnings growth estimates for the next five years is at 1.65%. The price-to-sales ratio is low at 1.03, and the price-to-book-value is also very low at 0.82. The forward annual dividend yield is at 2.55%, and the payout ratio is only 32%. The annual rate of dividend growth over the past three years was quite high at 8.60%, and over the past five years was at 6.84%.
The PRE stock price is 3.59% above its 20-day simple moving average, 8.03% above its 50-day simple moving average and 11.44% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.
PartnerRe Ltd. has recorded revenue, EPS and dividend growth, during the last five years, as shown in the table below.
Most of PartnerRe's stock valuation parameters have been better than its industry median, sector median and the S&P 500 median, as shown in the table below.
On October 28, PartnerRe reported its third-quarter results, which beat EPS expectations by a big margin of $3.23.
- Third Quarter Operating Earnings per share of $5.70; Net Income per share of $5.84
- Third Quarter Annualized Operating ROE of 22.6%; Annualized Net Income ROE of 23.2%
- Nine Month Operating Earnings per share of $9.86; Net Income per share of $5.93
- Nine Month Annualized Operating ROE of 13.0%; Annualized Net Income ROE of 7.8%
- Book Value of $105.53 per share, up 5.9% for the quarter and up 4.7% year-to-date
- Tangible Book Value of $94.86 per share, up 6.5% for the quarter and up 4.4% year-to-date
PartnerRe Ltd. has compelling valuation metrics, and considering the fact that the stock is trading way below book value and it is in an uptrend, PRE stock still has room to go up. Furthermore, the rich growing dividend represents a nice income.
Risks to the expected capital gain and to the dividend payment include: a downturn in the U.S. economy, above average catastrophes and other large loss activity.
Ensco plc (NYSE:ESV)
Ensco plc provides offshore contract drilling services to the oil and gas industry worldwide.
Coach, Inc. (NYSE:COH)
Coach, Inc. designs and markets bags, accessories, business cases, footwear, wearables, jewelry, sunwear, travel bags, watches, and fragrances for women and men in the United States and internationally.
Microsoft Corporation (NASDAQ:MSFT)
ConocoPhillips explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis.
Houston Wire & Cable Company (NASDAQ:HWCC)
Houston Wire & Cable Company, through its subsidiaries, provides wire and cable, hardware, and related services in the United States.
In order to find out how such a screening formula would have performed during the last year, last 5 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 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. I am also giving a table which readers can use to copy and paste codes directly into the Portfolio123's screener.
MktCap > 100
Yield > 2.5
Div5YCGr% > 5
DbtTot2EqQ < 0.5
LTGrthMean > 5
One year back-test
Five years back-test
Fifteen years back-test
The strong dividend growth screen has given much better returns during the last year, the last five years and the last fifteen 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.
One-year return of the screen was high at 48.76%, while the return of the S&P 500 index during the same period was at 28.43%.
The difference between the strong dividend growth screen to the benchmark was even more noticeable in the 15 years back-test. The 15-year average annual return of the screen was at 14.65%, while the average annual return of the S&P 500 index during the same period was only 2.49%. The maximum drawdown of the screen was at 60.48%, while that of the S&P 500 was at 57%.
Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.
Disclosure: I am long ESV, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.