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I have created a good-yielding blue chip stocks portfolio that can outperform the market by a big margin. For this portfolio, I have searched for companies that are included in the Russell 1000 Index that pay rich dividends with a low payout ratio and good dividend growth over the past five years. Those stocks also would have to show a very low debt.

In most of my previous screens, the demand was to rebalance the portfolio every four weeks and replace the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. Since many investors do not have the opportunity to rebalance the portfolio every four weeks, in this portfolio the demand is to rebalance every three months. 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:

  1. The stock does not trade over-the-counter (OTC).
  2. Market cap is greater than $500 million.
  3. Price is greater than 5.00.
  4. Average daily total amount traded for the past 10 days is greater than $1,000,000.
  5. Dividend yield is greater than 2.0%.
  6. The annual rate of dividend growth over the past five years is positive.
  7. The payout ratio is less than 100%.
  8. Forward P/E is less than 15.
  9. PEG ratio is less than 1.50.
  10. Total debt to equity is less than 0.50.
  11. The fourteen stocks with the lowest payout ratio among all the stocks that complied with the first ten 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 January 01, 2014, I discovered the following fourteen 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 fourteen companies.


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The Gap, Inc. (GPS)

The Gap, Inc. operates as an apparel retail company.

The Gap has a low debt (total debt to equity is 0.42), and it has a low trailing P/E of 13.96 and a low forward P/E of 12.99. The PEG ratio is low at 1.03, and the average annual earnings growth estimates for the next five years is high at 13.57%. The forward annual dividend yield is at 2.05%, and the payout ratio is only 21.9%. The annual rate of dividend growth over the past five years was at 12%.

The Gap has recorded strong EPS and dividend growth and moderate revenue growth during the last three years, as shown in the table below.

The Gap's margins and return on capital have been much better than its industry median and the sector median, as shown in the tables below.


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On November 21, The Gap reported its third-quarter financial results.

Third-Quarter Highlights

  • Third Quarter Earnings Per Share of $0.72, a 14 Percent Increase over Last Year
  • Net Sales Up 3 Percent in the Third Quarter; Up 5 Percent on a Constant Currency Basis
  • Comparable Sales Up 1 Percent for the Third Quarter Versus a 6 Percent Increase Last Year
  • Reaffirmed Full Year Earnings Per Share Guidance of $2.57 to $2.65
  • Distributed $882 Million to Shareholders in the Quarter through Share Repurchase and Dividends; Announced New $1 Billion Share Repurchase Authorization

The Gap has recorded revenue, EPS and dividend growth, and considering its compelling valuation metrics, its strong earnings growth prospects, and the fact that the company is returning value to shareholders through share repurchase and dividends, GPS stock can move higher. Furthermore, the rich growing dividend represents a nice income.


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Chart: finviz.com

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 17.81 and a very low forward P/E of 11.97. The PEG ratio is very low at 0.85, 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 2.27%, and the payout ratio is only 22.7%. The annual rate of dividend growth over the past three years was very high at 20.89% and over the past five years was also very high at 19.97%.

The CNQ stock price is 3.74% above its 20-day simple moving average, 5.41% above its 50-day simple moving average and 10.14% 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.


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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.


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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.


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Chart: finviz.com

Travelers Companies Inc. (TRV)

The Travelers Companies, Inc., through its subsidiaries, provides various commercial and personal property and casualty insurance products and services to businesses, government units, associations, and individuals primarily in the United States.


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Source: Q3 2013 Presentation

The Travelers has a very low debt (total debt to equity is only 0.26), and it has a very low trailing P/E of 11.56 and a very low forward P/E of 11.11. The price to free cash flow for the trailing 12 months is low at 12.70, and the average annual earnings growth estimates for the next five years is at 8.27%. The forward annual dividend yield is at 2.21%, and the payout ratio is only 24.2%. The annual rate of dividend growth over the past five years was quite high at 10.77%.

The TRV stock price is 2.47% above its 20-day simple moving average, 3.18% above its 50-day simple moving average and 8.14% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

On October 22, The Travelers reported its third-quarter financial results, which beat EPS expectations by $0.30 and was in-line on revenues.

Third-Quarter Highlights

  • Record Quarterly Operating Income per Diluted Share of $2.35, Up 6% from Prior Year Quarter.
  • Return on Equity and Operating Return on Equity of 13.9% and 15.2%, Respectively.
  • Strong net and operating income of $864 million and $883 million, respectively, generally consistent with the prior year quarter.
  • Continued improvement in underlying underwriting margins.
  • Written rate gains continued to exceed expected loss cost trends in all segments.
  • Total capital returned to shareholders of $985 million in the quarter, including $800 million in share repurchases. Year-to-date total capital returned to shareholders of $1.952 billion.
  • Board of Directors authorizes an additional $5.0 billion of share repurchases.
  • Increase in book value per share of 1% to $68.15 and increase in adjusted book value per share of 8% to $63.87 from year-end 2012.

The Travelers has compelling valuation metrics and good earnings growth prospects, and considering its good latest quarter financial results, and the fact that the stock is in an uptrend, TRV 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 extreme weather events.


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Source: Q3 2013 Presentation


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Chart: finviz.com

AXIS Capital Holdings Limited (AXS)

AXIS Capital Holdings Limited provides specialty lines insurance and treaty reinsurance products worldwide.

AXIS Capital has a very low debt (total debt to equity is only 0.19) and it has a very low trailing P/E of 11.25 and a very low forward P/E of 10.09. The price to free cash flow for the trailing 12 months is very low at 5.44, and the average annual earnings growth estimates for the next five years is at 5.02%. The price-to-cash ratio is low at 5.06, and the price-to-book-value is also low at 1.03. The forward annual dividend yield is at 2.27%, and the payout ratio is only 29.2%. The annual rate of dividend growth over the past five years was at 6.20%.

The AXS stock price is 0.96% above its 20-day simple moving average, 0.08% above its 50-day simple moving average and 7.12% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

AXIS Capital Holdings has recorded good revenue, EPS and dividend growth, during the last three years, as shown in the table below.

Most of AXIS Capital 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.


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On October 30, AXIS Capital reported its third-quarter financial results. EPS came in at $1.74 a $0.53 better than analyst expectations.

Third-Quarter Highlights

  • Gross premiums written increased 7% to $905 million, with growth of 9% in our insurance segment and 4% in our reinsurance segment;
  • Net premiums written increased 10% to $716 million;
  • Net premiums earned increased 10% to $945 million;
  • Combined ratio of 86.3%, compared to 85.3%;
  • Current accident year loss ratio of 61.5%, compared to 58.3%;
  • Estimated natural catastrophe and weather-related pre-tax net losses (net of reinstatement premiums) of $51 million;
  • Net favorable prior year reserve development of $80 million (benefiting the combined ratio by 8.4 points), compared with $60 million (benefiting the combined ratio by 7.0 points);
  • Net investment income was comparable at $103 million;
  • Pre-tax total return on cash and investments of 1.4%, compared to 2.1%;
  • Net income available to common shareholders of $137 million, compared to $223 million;
  • Operating income of $197 million, compared to $201 million;
  • Net cash flows from operations of $432 million, compared to $424 million;
  • No share repurchases during the quarter;
  • Diluted book value per common share of $44.60, a 5% increase during the quarter and a 2% increase over the last 12 months; and
  • A.M. Best upgraded the financial strength rating of each of our operating (re)insurance subsidiaries to a financial strength rating of A+ (Superior) in September 2013.

AXIS Capital has recorded good revenue, EPS and dividend growth, and considering its compelling valuation metrics, its solid earnings growth prospects, and the fact that the stock is in an uptrend, AXS 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 large catastrophic and weather events around the globe.


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Chart: finviz.com

Corning Inc. (GLW)

Corning Incorporated produces and sells specialty glasses, ceramics, and related materials worldwide.

Corning has a very low debt (total debt to equity is only 0.13), and it has a low trailing P/E of 14.37 and a very low forward P/E of 12.13. The PEG ratio is very low at 0.82, and the average annual earnings growth estimates for the next five years is high at 17.60%. The price-to cash ratio is low at 4.76, and the price to book value is also low at 1.19. The forward annual dividend yield is at 2.24%, and the payout ratio is only 30.6%. The annual rate of dividend growth over the past three years was very high at 23.80% and over the past five years was at 13.69%.

The GLW stock price is 3.47% above its 20-day simple moving average, 5.20% above its 50-day simple moving average and 18.76% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

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

Most of Corning's margins, return on capital and stock valuation parameters have been much better than that of the industry median, the sector median and the S&P 500 median, as shown in the tables below.


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On October 30, Corning reported its third-quarter results, which beat EPS expectations by $0.01.

Third-quarter performance highlights

  • Core sales were $2.1 billion, an increase of 10% over the comparable period last year. Net sales (GAAP) were $2.1 billion.
  • Core earnings per share were $0.33, demonstrating the fourth consecutive quarter of year-over-year core earnings-per-share growth, and an increase of 18% over a year ago. GAAP earnings per share were $0.28.
  • In the Display Technologies segment, LCD glass sequential price declines continue to be moderate, as expected. Combined sequential LCD glass volume was up slightly.
  • In the Telecommunications segment, sales increased 24% and core net income increased 86%* on a year-over-year basis. GAAP earnings increased 77% for the same period.
  • Core gross margin was 44%, up nearly two percentage points year over year and up slightly sequentially.

Corning has innovating products and it has compelling valuation metrics and strong earnings growth prospects, In my opinion, GLW stock still has room to go up. Furthermore, the rich growing dividend represents a nice income.

Since the company is rich in cash ($3.75 a share) and has very 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; a downturn in the U.S. economy and a significant decline in LCD glass price.


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Chart: finviz.com

Exxon Mobil Corporation (XOM)

Exxon Mobil Corporation engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products.

Exxon Mobil has a very low debt (total debt to equity is only 0.13) and it has a very low trailing P/E of 13.23 and a very low forward P/E of 12.86. The price-to-sales ratio is low at 1.05. The forward annual dividend yield is at 2.49%, and the payout ratio is only 31.4%. The annual rate of dividend growth over the past five years was quite high at 9.87%.

The XOM stock price is 4.28% above its 20-day simple moving average, 8.00% above its 50-day simple moving average and 12.62% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

Exxon Mobil has recorded good revenue, EPS and dividend growth, during the last three years, and the last five years, as shown in the table below.

Most of Exxon Mobil's return on capital and stock valuation parameters have been better than its industry median, sector median and the S&P 500 median, as shown in the tables below.


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On October 31, Exxon Mobil reported its third-quarter financial results, which beat EPS expectations by $0.02.

Third-Quarter Highlights

  • Earnings of $7,870 million decreased $1,700 million or 18% from the third quarter of 2012.
  • Earnings per share (assuming dilution) were $1.79, a decrease of 14% from the third quarter of 2012.
  • Capital and exploration expenditures were $10.5 billion, up 15% from the third quarter of 2012, in line with anticipated spending plans.
  • Oil-equivalent production increased 1.5% from the third quarter of 2012. Excluding the impacts of entitlement volumes, OPEC quota effects and divestments, production increased 2.7%, with liquids volumes up 5.3%.
  • Cash flow from operations and asset sales was $13.6 billion, including proceeds associated with asset sales of $0.2 billion.
  • Share purchases to reduce shares outstanding were $3 billion.
  • Dividends per share of $0.63 increased 11% compared to the third quarter of 2012.
  • The Esso Australia Pty Ltd operated Kipper Tuna Turrum project commenced natural gas production from the Tuna field and oil production from the Turrum field. The project is the largest domestic oil and gas development on Australia's eastern seaboard and will help secure Australia's energy future.
  • As announced on August 8, 2013, Imperial Oil Limited and ExxonMobil Canada Ltd. have acquired ConocoPhillips' interest in the Clyden oil sands lease, approximately 95 miles south of Fort McMurray, Alberta. The Clyden lease contains 226,000 gross acres and is a high-quality addition to Imperial's portfolio of oil sands in-situ opportunities.

Exxon Mobil has recorded good revenue, EPS and dividend growth, and considering its compelling valuation metrics and the fact that the stock is in an uptrend, XOM 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.


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Chart: finviz.com

Archer Daniels Midland Company (ADM)

Archer-Daniels-Midland Company manufactures and sells protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients; and processes oilseeds, corn, wheat, cocoa, and other agricultural commodities.

Archer-Daniels-Midland has a very low debt (total debt to equity is only 0.35) and it has a trailing P/E of 19.46 and a very low forward P/E of 13.33. The price to free cash flow for the trailing 12 months is very low at 5.36, and the average annual earnings growth estimates for the next five years is high at 13%. The price-to-sales ratio is very low at 0.32, and the price-to-book-value is at 1.47. The forward annual dividend yield is at 2.21%, and the payout ratio is only 33.2%. The annual rate of dividend growth over the past five years was at 8.08%.

The ADM stock price is 2.79% above its 20-day simple moving average, 5.26% above its 50-day simple moving average and 19.70% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

Archer-Daniels-Midland has recorded good revenue and dividend growth and negative EPS growth, during the last three years, and the last five years, as shown in the table below.

All of Archer-Daniels-Midland'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.


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On October 29, Archer-Daniels-Midland reported its third-quarter financial results, which missed EPS expectations by $0.01. The company reported adjusted earnings per share of $0.46, down from $0.53 in the same period last year. Net earnings for the quarter were $476 million, or $0.72 per share, up from $0.28 per share in the same period one year earlier. Segment operating profit was $606 million, down six percent when excluding an impairment charge from the year-ago quarter.

Third Quarter 2013 Highlights

  • Adjusted EPS of $0.46 excludes approximately $298 million in pretax LIFO credits, or $0.28 per share, and other items totaling ($0.02) cents per share.
  • Oilseeds Processing profit increased $25 million as North American operations effectively managed through the transition between old and new crop.
  • Corn Processing profit increased $91 million on improved results from ethanol.
  • Agricultural Services profit declined $122 million when adjusting for impairment charges in the year-ago quarter. Current-period performance was impacted by low U.S. exports and weak international merchandising results.
  • ADM's net debt continued to fall, reflecting strong cash flows from lower commodity prices and a focus on cash generation. Net debt reached $3.4 billion, down from $8.8 billion a year ago.

Archer-Daniels-Midland has compelling valuation metrics and strong earnings growth prospects, and considering the fact that the stock is in an uptrend, ADM 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, and a decline in the price of agriculture products.


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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 three 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.


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Universe(NOOTC)=TRUE

MktCap > 500

Close(0) > 5

AvgDailyTot(10)> 1000000

Yield > 2

Div5YCGr% > 0

Between(PayRatioTTM,1,100)

ProjPENextFY < 15

PEGLT<1.5

DbtTot2EqQ < 0.5

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 good-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. 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 high at 40.57%, while the return of the S&P 500 index during the same period was at 29.62%.

The difference between the good-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 14.67%, while the average annual return of the S&P 500 index during the same period was only 2.76%. The maximum drawdown of the screen was at 52.23%, 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.

Source: Good-Yielding Blue Chips Portfolio That Can Outperform By A Big Margin