I tried to create a good-yielding stock portfolio that can outperform the market by a big margin, but at the same time, would have a very low risk. The following screen shows such a promise. I have searched for profitable companies that pay solid dividends with a low payout ratio. Those stocks also would 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 2.0%.
- The payout ratio is less than 40%.
- Total debt to equity is less than 0.40.
- Average annual earnings growth estimates for the next five years is greater than 5%.
- 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 Yahoo Finance, Portfolio123 and finviz.com.
After running this screen on November 15, 2013, before the market open, I discovered the following twenty stocks:
The table below presents the dividend yield, the payout ratio, the forward P/E and the total debt to equity for the twenty companies.
Rocky Brands, Inc. (RCKY)
Rocky Brands, Inc. designs, manufactures, and markets footwear and apparel under the Rocky, Georgia Boot, Durango, Lehigh, Mossy Oak, and Michelin brand names.
Rocky Brands has a low debt (total debt to equity is only 0.33), and it has a very low trailing P/E of 11.56 and a very low forward P/E of 11.64. The price-to-book value is very low at 0.96, and the average annual earnings growth estimates for the next five years is quite high at 10%. The price-to-sales ratio is very low at 0.50, and the current ratio is high at 6.80. The forward annual dividend yield is at 2.45%, and the payout ratio is only 7.10%.
Rocky Brands has recorded strong EPS growth, during the last year, the last three years and the last five years, as shown in the table below.
Most of Rocky Brands' 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 30, Rocky Brands reported its third-quarter results. EPS came in at $0.39, $0.23 below analyst expectations. For the third quarter of 2013, net sales decreased 3.3% to $70.2 million versus net sales of $72.5 million for the third quarter of 2012. The Company reported net income of $2.9 million, or $0.39 per diluted share, for the third quarter of 2013, versus net income of $5.4 million, or $0.72 per diluted share, for the third quarter of 2012. In the report, David Sharp, President and Chief Executive Officer said:
While consumers continued to respond favorably to many of our new product innovations, particularly in our western business, sales of our branded work, outdoor and commercial military footwear proved to be more challenging than expected. We remain confident that our wholesale, retail, and military operating segment strategies have us well positioned for the future. That said, despite our execution the combination of macroeconomic headwinds and mild fall temperatures has created a difficult selling environment for areas of our business during the second half of 2013. Therefore we think it is prudent to adopt a more conservative sales outlook for the remainder of this year. As in the past, we will continue to rigorously managing expenses while investing strategically in functions critical to delivering long-term growth and profitability.
Although the latest financial results disappointed investors and the stock fell 22.6% the day after the report (it rose 7.5% since then), Rocky Brands has compelling valuation metrics and robust earnings growth prospects. In my opinion, RCKY stock can move higher. Furthermore, the rich dividend represents a nice income.
Evolution Petroleum Corp. (EPM)
Evolution Petroleum Corporation, an independent petroleum company, together with its subsidiaries, acquires, exploits, and develops properties for the production of crude oil and natural gas in the United States.
Source: company presentation
Evolution Petroleum has no debt at all, and it has very low forward P/E of 12.02. The price-to-cash ratio is at 13.62, and the current ratio is extremely high at 12.80. The forward annual dividend yield is at 3.23%, and the payout ratio is only 9.71%.
The EPM stock price is 0.46% above its 20-day simple moving average, 4.79% above its 50-day simple moving average and 12.89% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.
Analysts recommend the stock. Among the five analysts covering the stock, three rate it as a strong buy and two rate it as a buy.
Evolution Petroleum has recorded very strong EPS and 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 November 06, Evolution Petroleum reported its latest quarter financial results. Revenues in the current quarter were $4.6 million, a sequential decline from the previous quarter of 14% and an increase of 8% over the year-ago quarter. Net income to common shareholders was $1.3 million, or $0.04 per diluted share, an increase of 38% over the previous quarter's $0.9 million ($0.03 per diluted share) and an increase of 32% over the $1.0 million in the year-ago quarter ($0.03 per diluted share).
Evolution Petroleum has recorded very strong EPS and revenue growth, and considering its cheap valuation metrics and the fact that the stock is in an uptrend, EPM 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 decline in the price of oil and natural gas.
Provident Financial Holdings, Inc. (PROV)
Provident Financial Holdings, Inc. operates as the holding company for Provident Savings Bank, F.S.B. that provides community banking and mortgage banking services to consumers and small to mid-sized businesses in the Inland Empire region of Southern California.
Provident Financial Holdings has a very low debt (total debt to equity is only 0.36), and it has a very low trailing P/E of 11.87 and a forward P/E of 19.47. The price-to-cash ratio is very low at 0.86, and the price to book value is also very low at 0.94. The forward annual dividend yield is at 2.74%, and the payout ratio is only 19.47%.
Provident Financial Holdings has recorded strong revenue, EPS and dividend growth during the last three years, as shown in the table below.
On October 29, Provident Financial Holdings reported its first-quarter fiscal 2014 financial results. For the quarter ended September 30, 2013, the Company reported net income of $1.51 million, or $0.14 per diluted share (on 10.53 million average shares outstanding), compared to net income of $8.73 million, or $0.80 per diluted share (on 10.97 million average shares outstanding), in the comparable period a year ago. The decrease in net income for the first quarter of fiscal 2014 was primarily attributable to a $13.85 million decrease in the gain on sale of loans, partly offset by a $2.74 million decrease in salaries and employee benefits expense, a $1.48 million improvement in the provision for loan losses, and a decrease of $3.47 million in the provision for income taxes, compared to the same period one year ago.
In the report, Craig G. Blunden, Chairman and Chief Executive Officer of the Company said:
I am encouraged by our preferred loan origination volume this quarter which is the highest quarterly volume since December 2007. I am increasingly confident that general economic conditions have improved by such a degree that we can take advantage of expanded lending opportunities that meet our investment and credit criteria and increase our preferred loan portfolio. Therefore, we will be allocating more capital to our community banking business and increase our focus on growing net interest income as non-interest income returns to more normalized levels. Of course, this will take some time so we will continue to prudently manage capital levels while maintaining our share repurchases and cash dividends to shareholders.
Provident Financial Holdings has recorded strong revenue, EPS and dividend growth, and it is trading below book value. Although the company's last report disappointed investors and the PROV stock fell 15% since reporting, in my opinion, PROV stock can move higher. Furthermore, the rich dividend represents a nice income.
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 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. 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
DbtTot2EqQ < 0.4
One year back-test
Five years back-test
Fifteen years back-test
The low risk dividend 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. Furthermore, the maximum drawdown, which normally is much bigger in a small portfolio than in the benchmarks, was much smaller in all the three tests.
One-year return of the screen was very high at 59.9%, while the return of the S&P 500 index during the same period was at 32.13%.
The difference between the low risk dividend 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 20.61%, while the average annual return of the S&P 500 index during the same period was only 2.56%. The maximum drawdown of the screen was at 47.75%, 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.