I tried to create a high-yielding stock portfolio that can outperform the market by a big margin. The following screen shows such a promise. I have searched for companies that pay very rich dividends with a low payout ratio. Those stocks also would have to show a 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 5.0%.
- The payout ratio is less than 100%.
- Total debt to equity is less than 1.00.
- 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 Yahoo Finance, Portfolio123 and finviz.com.
After running this screen on November 17, 2013, 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.
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 4.74. The PEG ratio is exceptionally low at 0.38, and the average annual earnings growth estimates for the next five years are quite high at 12.50%. The price to free cash flow for the trailing 12 months is very low at 5.27, and the price-to-book-value ratio is at 1.04. The price-to-sales ratio is very low at 0.30, and the price-to-cash ratio is extremely low at 1.57. The forward annual dividend yield is very high at 7.71%, and the payout ratio is at 57.1%.
Nam Tai Electronics has recorded strong revenue, EPS and dividend growth, during the last year and the last three years, as shown in the table below.
On November 5, Nam Tai Electronics reported its third-quarter results. The company reported net sales in the third quarter of 2013 were $284.2 million, an increase of 61.5%, compared to the net sales of $176.0 million, excluding the discontinued operations, for the same quarter of 2012. Gross profit in the third quarter of 2013 was $23.4 million, an increase of 17.3%, compared to $19.9 million in the third quarter of last year. Gross profit margin for the third quarter of 2013 was 8.2%, a decrease of 3.1%, compared to 11.3% in the third quarter of last year. Operating income for the third quarter of 2013 was $19.3 million, an increase of 35.5%, compared to $14.3 million in the third quarter of last year. After considering the income from discontinued operations, net income in the third quarter of 2013 was $18.0 million or $0.40 per diluted share, a decrease of 26.7%, compared to net income of $24.6 million or $0.54 per diluted share, in the third quarter of last year.
Nam Tai Electronics has recorded very strong EPS and revenue growth, and considering its compelling valuation metrics its good earnings growth prospects, NTE stock can move higher. Furthermore, the very rich dividend represents a gratifying income.
Risks to the expected capital gain include a downturn in the U.S. economy, and weakness in the consumer electronics market.
Redwood Trust, Inc. (RWT)
Redwood Trust, Inc. engages in investing, financing, and managing real estate-related assets.
Redwood Trust has a very low trailing P/E of 8.13 and a very low forward P/E of 12.34. The price-to-cash ratio is at 7.65, and the average annual earnings growth estimates for the next five years are at 3.50%. The forward annual dividend yield is very high at 5.79%, and the payout ratio is only 42.6%.
The RWT stock price is 7.42% above its 20-day simple moving average, 4.81% above its 50-day simple moving average and 1.91% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.
Redwood Trust 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 Redwood Trust'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 November 06, Redwood Trust reported its third-quarter financial results, which beat EPS expectations by $0.06. The company reported net income for the third quarter of 2013 of $22 million, or $0.25 per fully diluted share. This compares to net income of $66 million, or $0.71 per fully diluted share, for the second quarter of 2013, and net income of $40 million, or $0.48 per fully diluted share, for the third quarter of 2012.
Redwood Trust has recorded strong EPS growth, and considering its cheap valuation metrics and the fact that the stock is in an uptrend, RWT stock can move higher. Furthermore, the very rich dividend represents a gratifying income.
Risks to the expected capital gain and to the dividend payment include; a downturn in the U.S. economy, and downturns in the residential mortgage business.
Star Gas Partners LP (SGU)
Star Gas Partners, L.P., through its subsidiary, Petro Holdings, Inc., operates as a home heating oil and propane distributor and services provider in the United States.
Star Gas Partners has a low debt (total long-term debt to equity is 0.45), and it has a trailing P/E of 19.86. The price-to-sales ratio is very low at 0.277, and the price-to-book-value is also low at 1.19. The forward annual dividend yield is very high at 5.94%, and the payout ratio is at 58%.
The SGU stock price is 2.11% above its 20-day simple moving average, 8.48% above its 50-day simple moving average and 17.27% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.
Star Gas Partners will report its latest quarterly financial results on December 09, 2013.
On August 7, Star Gas Partners LP reported its third-quarter fiscal 2013 financial results. The company reported a 12.9 percent increase in total revenue to $262.5 million, compared with $232.5 million in the prior-year period. The higher revenue was primarily due to an increase in home heating oil and propane volume, which rose by 7.6 million gallons, or 21.7 percent, to 42.7 million gallons, as the impact of colder temperatures and the additional volume provided by acquisitions more than offset the impact of net customer attrition, conservation and other factors. Temperatures in Star's geographic areas of operation for the fiscal 2013 third quarter were 27.4 percent colder than the fiscal 2012 third quarter and 4.1 percent warmer than normal, as reported by the National Oceanic and Atmospheric Administration. During the fiscal 2013 third quarter, Star's net loss decreased by $4.2 million to $7.6 million largely due to the impact of a favorable change in the fair value of derivative instruments.
Star Gas Partners has low multiples, and considering the fact that the stock is in an uptrend, SGU stock can move higher. Furthermore, the very rich dividend represents a gratifying 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 > 5
DbtTot2EqQ < 1
One year back-test
Five years back-test
Fifteen years back-test
The high yielding 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 39.09%, while the return of the S&P 500 index during the same period was at 32.69%.
The difference between the high yielding 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 16.52%, while the average annual return of the S&P 500 index during the same period was only 2.59%. The maximum drawdown of the screen was at 61.46%, 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.