I tried to create a high-yielding stock portfolio that can outperform the market by a big margin. The following screen shows such promise. I have searched for companies that pay very rich dividends with a low payout ratio, and that their last dividend declared is greater than the last dividend paid.
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 4.0%.
- The payout ratio is less than 100%.
- Last dividend declared is greater than the last dividend paid.
- The ten 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 March 12, 2014, before the market open, I discovered the ten best stocks, which are shown in the tables below. In this article, I describe the first stock in the list, Altisource Residential Corporation (NYSE:RESI).
The table below presents the dividend yield, the payout ratio, the forward P/E and the total debt to equity for the ten companies.
Altisource Residential Corporation
Altisource Residential Corporation is a Maryland corporation formed in 2012 that is organized and operated in a manner intended to qualify as a REIT. Residential is focused on acquiring, owning and managing single-family rental properties throughout the United States. The company acquires its single-family properties primarily through the acquisition of sub-performing and non-performing loan portfolios.
Latest Quarter Results
On February 20, Altisource Residential reported its fourth-quarter and full-year 2013 financial results, which beat EPS expectations for the fourth-quarter by $0.31 (163.20%). The Company's net income for the fourth quarter of 2013 totaled $21.6 million, or $0.50 per diluted share. Net income for the 2013 full year was $39.6 million, or $1.61 per diluted share. Taxable income for the 2013 full year was $17.7 million.
In the report, Chairman William Erbey stated:
In 2013, we successfully delivered on every critical aspect of our business model. We generated positive cash flow and achieved an average acquisition discount that we believe translates into significant embedded value in our portfolio. I am pleased with what we have been able to accomplish in our first full year of operations.
In the 4Q report, the Company also announced that its Board of Directors has declared a special cash dividend of $0.08 per share of common stock, or an aggregate of $4.5 million based on shares outstanding. This dividend is intended to satisfy its requirement as a REIT to distribute at least 90% of its annual REIT taxable income to its stockholders for the year ended December 31, 2013.
On March 06, the Company announced that its Board of Directors has declared a quarterly cash dividend of $0.40 per share of common stock. Residential will pay this quarterly dividend on March 24, 2014 to all stockholders of record as of the close of business on March 17, 2014. This dividend represents a $0.15 per share, or 60%, increase over the last quarterly dividend of $0.25 per share and reflects the second consecutive increase in Residential's quarterly dividend.
Most analysts recommend the stock. Among the five analysts covering the stock, four rate it as a buy and only one analyst rates it as a hold.
The year of 2013, the first full year of Residential's operations, was remarkably successful for the company. Residential succeeded in beating earnings estimates in each one of last year's quarters. Residential acquires its single-family rental properties primarily through the acquisition of sub-performing and non-performing loan portfolios, which is a differentiated approach that the company believes strategically positions it to take advantage of market opportunities better than market participants that are solely focused on real estate-owned. According to Residential, its nonperforming loans (NPL) acquisition strategy will continue to give it access to properties and healthy markets nationwide. The company bought 13,000 delinquent loans last year.
Now let's look at the numbers. According to Yahoo Finance, RESI's next financial year forward P/E is very low at 8.38 and the average annual earnings growth estimates for the next five years is very high at 20%. These give an exceptionally low PEG ratio of 0.42. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
The company is an early entrant in an emerging industry, and the long-term viability of its investment strategy on an institutional scale is unproven.
A significant portion of the residential mortgage loans that Residential acquires are, or may become, sub-performing or non-performing loans, which increases our risk of loss. In addition, Residential mortgage loan modification and refinance programs, future legislative action, and other actions and changes may materially and adversely affect the supply of, value of and the returns on sub-performing and non-performing loans.
Altisource Residential has compelling valuation metrics and very strong earnings growth prospects. The company has an exceptional low PEG ratio of 0.42, and it is increasing its dividend payment. The events affecting the housing and mortgage market in recent years have created a significant rental demand for single-family properties, and Residential has an opportunity to acquire single-family properties through the acquisition of sub-performing and non-performing loan portfolios at attractive valuations.
All these factors lead me to the conclusion that RESI stock has plenty of room to go up. Furthermore, the very rich growing 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 using 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.
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 the five years and the fifteen years tests.
One-year return of the screen was very high at 27.14%, while the return of the S&P 500 index during the same period was at 20.03%.
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 very high at 23.79%, while the average annual return of the S&P 500 index during the same period was only 2.79%. The maximum drawdown of the screen was at 50.36%, 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 have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.