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The market is proving to be a patience-testing exercise as the door to the bull market is opened followed by the welcome mat being pulled out from under our feet...over and over again. While these are exactly the type of markets some short-term traders have been dreaming about, it is frustrating for investors.

  • "Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves." -- Peter Lynch

If the above quote reflects your view of market timing, you may be interested in the following system that takes some of the inspiration from value investor Benjamin Graham. We will look for strong value stocks paying dividends in all markets. There will be no consideration as to bull or bear - only regular re-balancing once a year.

Value Investing Stock Screen

The following strategy will find stocks with enough liquidity to pay their short-term liabilities twice over and have less long-term debt than working capital. The last 4 quarters and 5 years will have positive earnings. Annual earnings will have grown over the past 5 years. The companies will be US based and paying dividends. We will use a Graham-ranking system (compliments of Portfolio123) that will target stocks with lower ratios as regards P/E, price-to-book, price-to-tangible book, deviation of earnings, and higher 5 year annual growth rates.

Testing the Theory

The goal is to find value stocks in a strong financial position that can more readily weather a downturn while being well positioned for capital gains in an upturn. Next we back-test. From March 31st, 2011 we re-balance our portfolio annually to pick the best 15 stocks (according to the Portfolio Graham ranking system). The diagram below (click to enlarge) outlines one example of a portfolio made and re-balanced using this strategy:

To ensure this isn’t some 'never to be repeated' result of entering the market during a fluke week, we perform this test over 500 additional times using different entry weeks over the past 10.5 years. The average annual gain sits at 17.36% - which is 14.28% higher than the market (NYSEARCA:SPY). This strategy flies twice as high during up markets and falls only one-third as far during down markets (when testing 12 month holding periods). This is a robust strategy.

What gains or losses have been experienced over the past 12 months while keeping in mind that the S&P 500 rose a mere 5% from November 15th 2010 to November 15th 2011?

*All figures and data are derived from Portfolio123 and are assumed to be correct

Ticker

Name

Gain/Loss&%

MktCap

Yield

(NYSE:RGR)

Sturm, Ruger & Company

108.78

293.63

2

(NYSE:NEU)

NewMarket Corporation

60.81

1716.22

1.47

(NYSE:AEA)

Advance America, Cash Advance Center

51.47

348.71

4.46

(NASDAQ:AMAC)

American Medical Alert

50.35

54.33

NA

(NASDAQ:ATRI)

Atrion Corporation

45.5

317.82

1.06

(NYSE:BKE)

The Buckle, Inc.

26.43

1586.58

2.35

(NASDAQ:PLPC)

Preformed Line Products Company

21.75

237.77

1.77

(NYSE:SCL)

Stepan Company

14.12

735.52

1.42

(NYSE:ALG)

Alamo Group, Inc.

7.44

291.46

0.97

(NYSEMKT:ESP)

Espey Manufacturing & Electronics

2.62

55.21

3.79

(NASDAQ:QCCO)

QC Holdings, Inc.

-0.73

69.01

5

(WWVY)

Warwick Valley Telephone Company

-8.54

80.35

6.47

(NYSE:AVX)

AVX Corporation

-10.39

2498.87

1.22

(NYSEMKT:DIT)

AMCON Distributing Co.

-10.45

40.12

1.04

(NYSEMKT:CCF)

Chase Corporation

-17.24

140.32

2.2

The average capital gain is 22.8% (not factoring dividends) – which is an annual excess gain of 17.8% over the S&P 500.

Dividend-Paying Value Stocks for Purchase Now

Which picks are topping our list right now?

Ticker

Name

MktCap (mil)

Industry

Yield

AVX

AVX Corporation

2155.59

Electronic Instr. & Controls

2.36

LPHI

Life Partners Holdings, Inc.

109.25

Insurance (Miscellaneous)

13.65

SVT

Servotronics, Inc.

19.93

Electronic Instr. & Controls

3.37

EEI

Ecology and Environment

67.7

Business Services

2.96

GES

Guess?, Inc.

2602.41

Retail (Apparel)

2.85

GLW

Corning Incorporated

23573.69

Electronic Instr. & Controls

2

CCF

Chase Corporation

111.92

Electronic Instr. & Controls

2.8

LXK

Lexmark International, Inc.

2515.46

Computer Peripherals

2.99

SGC

Superior Uniform Group, Inc.

73

Apparel/Accessories

4.43

KWR

Quaker Chemical Corp

473.16

Chemical Manufacturing

2.61

FRD

Friedman Industries

69.83

Iron & Steel

5.06

WMK

Weis Markets, Inc.

1056.84

Retail (Grocery)

3.05

SEB

Seaboard Corporation

2560.37

Food Processing

0.14

FSTR

L.B. Foster Company

285.56

Misc. Fabricated Products

0.35

RSH

RadioShack Corporation

1204.04

Retail (Technology)

4.15

As you examine the lists, you might notice that some of these may not be exactly what Graham had in mind - or what he would have picked - but by following some of his ideals that target value dividend-paying stocks with strong financial muscles, we can apply his methods to a wider range of companies.

Warren Buffet is buying tech stocks now and I am sure Benjamin Graham would be casting broader nets as well. But as always, do your own due diligence - this is a list generated from numerical filters but no decent value investor would drop a dime before throughly investing the prospects of each and every stock on the list. Many of these may very well be unsuitable for some qualitative reason - you need to find out.

As a side note, if you had decided to re-balance every three months (instead of annually), the average annual gains would have reached up to over 20% when testing for robustness.

During these tempestuous times, buying value stocks with solid fundamental ratios can be an excellent way to position yourself bullishly while anticipating the potential of more market mayhem.

Source: Check Out These 15 Value Stocks Paying Dividends For Market Safety