A Dividend Portfolio With A Very Low Risk That Has Outperformed The Market

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 |  Includes: EQU, GLNG, HCC, HP, PROV
by: Arie Goren

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 highly 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:

  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 2.0%.
  5. The payout ratio is less than 40%.
  6. Total debt to equity is less than 0.40.
  7. 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 December 12, 2013, before the market open, I discovered the following twenty stocks:

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The table below presents the dividend yield, the payout ratio, the forward P/E and the total debt to equity for the twenty companies.

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Helmerich & Payne Inc. (NYSE:HP)

Helmerich & Payne, Inc. engages in the contract drilling of oil and gas wells.

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Source: Bank of America Merrill Lynch Energy Conference

Helmerich & Payne has a very low debt (total debt to equity is only 0.04), and it has a very low trailing P/E of 11.79 and a low forward P/E of 12.85. The price-to-book value is at 1.88, and the average annual earnings growth estimates for the next five years is at 7.5%. The forward annual dividend yield is at 3.19%, and the payout ratio is only 12.9%.

The HP stock price is 2.61% above its 50-day simple moving average and 18.34% above its 200-day simple moving average. That indicates a mid-term and a long-term uptrend.

Helmerich & Payne has recorded strong revenue, EPS and dividend growth, during the last year, the last three years and the last five years, as shown in the table below.

The tables below emphasize the Helmerich & Payne's superior margins and return on capital parameters over the industry median, the sector median and the S&P 500 median.

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Source: Portfolio123

Helmerich & Payne has increased its market share by an impressive rate, as shown in the chart below.

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Source: Bank of America Merrill Lynch Energy Conference

On November 14, Helmerich & Payne reported its fourth-quarter fiscal 2013 financial results, which beat EPS expectations by $0.06 and was in-line on revenues. The company reported record income from continuing operations of $721.5 million ($6.65 per diluted share) and record operating revenues of $3.4 billion for its fiscal year ended September 30, 2013, compared to income from continuing operations of $573.6 million ($5.27 per diluted share) from operating revenues of $3.2 billion during the prior fiscal year ended September 30, 2012.

Helmerich & Payne has recorded strong revenue, EPS and dividend growth, and it continues to capture market share. Considering its good valuation metrics, HP 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 oil and natural gas prices.

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Chart: finviz.com

Golar LNG Ltd (NASDAQ:GLNG)

Golar LNG Limited, a midstream liquefied natural gas (NYSEMKT:LNG) company, engages in the transportation, regasification and liquefaction, and trading of LNG.

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Golar LNG Ltd has a very low debt (total debt to equity is only 0.22), and it has a very low trailing P/E of 2.90 and a forward P/E of 24.40. The current ratio is very high at 5.60, and the price-to-cash ratio is at 12.92. The forward annual dividend yield is very high at 5.31%, and the payout ratio is only 14%.

Golar LNG Limited has recorded strong revenue and EPS growth during the last three years and the last five years, as shown in the table below.

The tables below emphasize the Golar's superior margins and return on capital parameters over the industry median, the sector median and the S&P 500 median.

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On November 29, Golar LNG Limited reported its third-quarter financial results.

Third-Quarter Highlights

  • Golar LNG reports third quarter 2013 net loss of $13.1 million (including a non-cash loss of $8.2 million on interest rate swaps).
  • EBITDA generated in the quarter amounts to a loss of $3.3 million.
  • Golar concludes $1.1 billion funding facility for eight of its thirteen newbuilds.
  • Ten year FSRU time charter for the Golar Eskimo concluded with the Hashemite Kingdom of Jordan.
  • Five year FSRU time charter for the Golar Igloo concluded with the Kuwait National Petroleum Company.
  • Golar Tundra shipbuilding contract amended to include FSRU capability with a revised delivery date of November 2015.
  • Spot charter rates hold firm however market remains volatile and inefficient - Gimi and Golar Viking experience prolonged periods of offhire.
  • Board maintains dividend at $0.45 for the quarter.

Golar LNG Limited has recorded strong revenue and EPS and growth, and considering its cheap valuation metrics, GLNG 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 decline in the price of natural gas.

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Chart: finviz.com

Equal Energy Ltd. (NYSE:EQU)

Equal Energy Ltd. engages in the acquisition, exploration, development, and production of petroleum and natural gas properties in Canada.

Equal Energy has a very low debt (total debt to equity is only 0.27), and it has a very low trailing P/E of 8.09 and a low forward P/E of 13.85. The price-to-cash ratio is at 9.23, and the price to book value is at 1.21. The forward annual dividend yield is quite high at 3.75%, and the payout ratio is only 15.37%.

The EQU stock price is 8.12% above its 20-day simple moving average, 12.15% above its 50-day simple moving average and 29.95% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

Equal Energy has recorded strong EPS growth, during the last year, the last three years and the last five years, as shown in the table below.

On December 09, Equal Energy announced that the Company has entered into a definitive agreement with Petroflow Energy Corporation and Petroflow Canada Acquisition Corp. for the cash purchase of all of the issued and outstanding common shares of Equal at a price of US$5.43 per share, on a fully-diluted basis.

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Chart: finviz.com

Provident Financial Holdings, Inc. (NASDAQ: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 8.51 and a forward P/E of 19.51. The price-to-cash ratio is very low at 0.89, and the price to book value is also very low at 0.96. The forward annual dividend yield is at 2.73%, and the payout ratio is only 16.30%.

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.

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Chart: finviz.com

HCC Insurance Holdings Inc. (NYSE:HCC)

HCC Insurance Holdings, Inc. underwrites non-correlated specialty insurance products worldwide.

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Source: Q3 2013 Investor Presentation

HCC Insurance has a very low debt (total debt to equity is only 0.18), and it has a very low trailing P/E of 9.93 and a very low forward P/E of 12.26. The price to free cash flow for the trailing 12 months is very low at 12.00, and the average annual earnings growth estimates for the next five years is at 7.0%. The forward annual dividend yield is at 2.00%, and the payout ratio is only 16.6%. The annual rate of dividend growth over the past three years was at 9.41% and over the past five years was at 9.62%.

The HCC stock price is 0.04% above its 50-day simple moving average and 4.17% above its 200-day simple moving average. That indicates a mid-term and a long-term uptrend.

HCC Insurance has recorded solid revenue, EPS and dividend growth during the last year, the last three years and the last five years, as shown in the table below.

On October 29, HCC Insurance reported its third-quarter financial results, which beat EPS expectations by $0.12.

Third Quarter 2013 Highlights and Updated 2013 Guidance:

  • Net earnings of $98.2 million, or $0.98 per diluted share
  • GAAP combined ratio of 83.5%
  • Pretax net catastrophe losses of $17.9 million
  • Annualized return on equity of 11.1%
  • Annualized operating return on equity of 10.8%
  • Updated net earnings guidance for 2013 of $3.70 to $3.80 per diluted share

HCC Insurance has recorded solid revenue, EPS and dividend growth, and considering its cheap valuation metrics and its good earnings growth prospects, HCC stock still has room to go up. Furthermore, the solid 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 large catastrophe losses.

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Chart: finviz.com

Back-testing

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.

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Universe(NOOTC)=TRUE

Close(0)> 1

MktCap > 100

Yield > 2

Between(PayRatioTTM,1,40)

DbtTot2EqQ < 0.4

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One year back-test

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Five years back-test

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Fifteen years back-test

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Summary

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 the one-year and the 15-year tests.

One-year return of the screen was very high at 44.84%, while the return of the S&P 500 index during the same period was at 24.84%.

The difference between the low risk dividend screen to the benchmark was even more noticeable in the 15 years back-test. The 15-years average annual return of the screen was at 20.68%, while the average annual return of the S&P 500 index during the same period was only 2.52%. 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.

Disclosure: I am long HP. 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.