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 an attempt to search for very profitable companies that pay rich dividends and that have raised their payouts at a high rate for the last five years. Furthermore, in order to decrease the maximum expected drawdown to a lower level than that of the benchmark I had to be satisfied with a bit lower return, but still much better than the benchmark.
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).
- Market cap is greater than $100 million.
- Price is greater than 1.00
- Dividend yield is greater than 2.0%.
- 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 0.40.
- 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 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 November 19, 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.
Helmerich & Payne Inc. (HP)
Helmerich & Payne, Inc. engages in the contract drilling of oil and gas wells.
See my article from November 15, 2013.
Delek US Holdings Inc (DK)
Delek US Holdings, Inc. operates as an integrated downstream energy company that operates in petroleum refining, logistics, and convenience store retailing businesses.
Delek US Holdings has a low debt (total debt to equity is only 0.39), and it has a very low trailing P/E of 5.50 and a low forward P/E of 14.03. The price-to-sales ratio is very low at 0.17, and the price to book value is at 1.59. The price to free cash flow for the trailing 12 months is very low at 12.12, and the price-to-cash ratio is also low at 3.41. The forward annual dividend yield is at 2.31%, and the payout ratio is only 18.7%.
The DK stock price is 1.90% above its 20-day simple moving average and 10.96% above its 50-day simple moving average. That indicates a short-term and a mid-term uptrend.
Delek US Holdings has recorded revenue, EPS and dividend strong growth, during the last year, the last three years and the last five years, as shown in the table below.
Delek US Holdings' return on capital has been much better than that of the industry median, the sector median and the S&P 500 median, as shown in the table below.
Most of Delek US Holdings' 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, Delek US reported its third-quarter financial results. EPS came in at $0.04 a $0.02 below analyst expectations. In the report, Uzi Yemin, Chairman, President and Chief Executive Officer of Delek US said:
While the refining environment was challenging in the third quarter, our refining segment did increase throughput levels compared to the prior year period. In addition our logistics segment performed well and we continued to unlock value with the first drop down to Delek Logistics in July. The retail segment also showed solid year-over-year improvement during the quarter. As we have entered the fourth quarter, market conditions have improved through October. Crude oil prices have declined to below $100 per barrel and the discount between WTI Midland and WTI Cushing has widened. Our refineries are well positioned to benefit from pipeline access to Midland sourced crude, which accounts for approximately 87,000 barrels per day out of our 140,000 barrels per day crude capacity. In addition, we have experienced an improvement in wholesale margins in our refining system. Finally, our balance sheet remains strong and provides flexibility to continue investing in our businesses and growing through acquisitions, while continuing to return value to our shareholders.
Delek US Holdings has recorded strong revenue, EPS and dividend growth, and considering its compelling valuation metrics, DK 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 lower refining margins.
ACE Limited (ACE)
ACE Limited, through its subsidiaries, provides a range of insurance and reinsurance products to insured worldwide. The company was founded in 1985 and is headquartered in Zurich, Switzerland.
ACE Limited has a very low debt (total debt to equity is only 0.21), and it has a very low trailing P/E of 9.60 and a very low forward P/E of 11.75. The price to free cash flow is very low at 11.07, and the average annual earnings growth estimates for the next five years is at 7.37%. The forward annual dividend yield is at 2.07%, and the payout ratio is only 20.6%.
The ACE stock price is 1.48% above its 20-day simple moving average, 3.74% above its 50-day simple moving average and 8.97% 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 25 analysts covering the stock, five rate it as a strong buy, fifteen rate it as a buy, and five rate it as a hold.
ACE Limited has recorded moderate revenue and EPS growth and strong dividend growth, during the last year, the last three years and the last five years, as shown in the table below.
On October 22, ACE Limited reported its latest quarter financial results, which beat EPS expectations by $0.26. The company reported net income for the quarter ended September 30, 2013, of $2.66 per share, compared with $1.86 per share for the same quarter last year. Operating income was $2.49 per share, compared with $2.01 per share for the same quarter last year. Book value and tangible book value per share increased 3.4% and 3.9%, respectively, from June 30, 2013. Book value and tangible book value per share now stand at $82.98 and $66.91, respectively. Operating return on equity for the quarter was 13.0%. The property and casualty combined ratio for the quarter was 86.5%.
ACE Limited has recorded revenue, EPS and dividend growth, and considering its cheap valuation metrics, its solid earnings growth prospects, and the fact that the stock is in an uptrend, ACE stock can move higher. Furthermore, the rich growing dividend represents a nice income.
AFLAC Inc (AFL)
Aflac Incorporated, through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products.
See my article from November 07, 2013.
Canadian Natural Resources Limited (CNQ)
Canadian Natural Resources Limited engages in the exploration, development, production and marketing of crude oil, natural gas liquids, and natural gas.
Canadian Natural Resources has a low debt (total debt to equity is only 0.37), and it has a trailing P/E of 26.20 and a very low forward P/E of 11.42. The PEG ratio is very low at 0.70, and the average annual earnings growth estimates for the next five years is very high at 20.90%. The forward annual dividend yield is at 2.38%, and the payout ratio is only 22.7%.
The CNQ stock price is 2.21% above its 20-day simple moving average, 1.92% above its 50-day simple moving average and 5.49% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.
Canadian Natural Resources has recorded revenue, EPS and dividend growth, during the last three years, as shown in the table below.
Canadian Natural Resources' margins have been much better than that of the industry median, the sector median and the S&P 500 median, as shown in the table below.
Most of Canadian Natural Resources' 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 07, Canadian Natural Resources reported its third-quarter financial results, which beat EPS expectations by $0.02 and beat on revenues. In the report, Steve Laut, President of Canadian Natural stated:
We achieved excellent results this quarter both operationally and financially, which demonstrates our ability to execute on our strategy to deliver premium value and defined growth. Our experienced team, together with our strong and diverse asset base, continues to maximize shareholder value in the near-, mid- and long-term. As a result of this continued strength in the Company's results and successful execution to date on the Horizon project expansion, the Company's Board of Directors have increased, commencing with Q4/13, the quarterly dividend to $0.20 per share, an increase of 60% over the previous quarterly dividend, to $0.80 per share per year.
Canadian Natural Resources has recorded revenue, EPS and dividend growth, and considering its cheap valuation metrics, its strong earnings growth prospects, and the fact that the stock is in an uptrend, CNQ stock can move higher. Furthermore, the rich growing dividend represents a nice income.
Risks to the expected capital gain and to the solid dividend payment include; a downturn in the U.S. economy, and a decline in the price of oil and natural gas.
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
Div5YCGr% > 5
DbtTot2EqQ < 0.4
LTGrthMean > 5
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 benchmark, was much smaller in the one year and the fifteen years tests.
One-year return of the screen was very high at 49.21%, while the return of the S&P 500 index during the same period was at 31.77%.
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 15.73%, 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 45.41%, 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.