Should the Magic Formula be used to select dividend paying stocks? Based on almost one year of returns, the answer appears to be yes. The Magic Formula does not seem to suffer from limiting picks to dividend-paying stocks.
What is the Magic Formula?
Joel Greenblatt has proposed a stock screen for which he has reported enviable results. He reported an annual 30.8% return for his "Magic Formula" in his book, "The Little Book that Beats the Market." Since publishing his book, his strategy has performed well, though many analysts who have followed the "Magic Formula" have not seen 30.8% annual returns, but have seen outperformance from this strategy. His results are particularly interesting because his picks are not subjective: they are based on a simple ranking of earnings yield (EBIT/EV) and return on capital.
Magic Formula stocks have historically outperformed the market with a total portfolio which is a blend of value and growth which has a beta of roughly 1 (1.05). Since there is no value tilt, a portfolio based on the "Magic Formula" has the potential to be an investor's core holding.
Past Performance: Dividend vs. Non-Dividend Stocks
The performance of Magic Formula stocks and their historical dividend yield and price-to-earnings metrics are presented below:
Ticker | Company | Country | Return | Div Yield |
PDL BioPharma | USA | 32.7% | 10.0% | |
USA Mobility | USA | -21.3% | 6.5% | |
Cherokee | USA | 10.8% | 5.6% | |
PetMed Express | USA | -0.9% | 4.8% | |
Deluxe Corp. | USA | 51.7% | 4.5% | |
Strayer Education | USA | -11.9% | 4.1% | |
Meredith Corp. | USA | 51.0% | 4.1% | |
H&R Block | USA | 25.1% | 4.0% | |
KLA-Tencor Corporation | USA | 57.2% | 3.8% | |
Northrop Grumman Corporation | USA | 37.5% | 3.7% | |
Comtech Telecommunications | USA | 12.1% | 3.6% | |
Microsoft Corporation | USA | 27.5% | 2.4% | |
Lender Processing Services | USA | 49.3% | 2.3% | |
Entropic Communications | USA | 58.4% | 0.0% | |
Medicines | USA | 89.3% | 0.0% | |
MIPS Technologies | USA | 46.1% | 0.0% | |
NEP | China North East Petroleum | China | -100.0% | 0.0% |
Oshkosh Corporation | USA | 35.4% | 0.0% | |
Vonage Holdings Corporation | USA | -25.6% | 0.0% | |
ACADIA Pharmaceuticals | USA | 24.6% | 0.0% | |
Almost Family | USA | 25.7% | 0.0% | |
Argan | USA | 76.8% | 0.0% | |
Amedisys | USA | -18.4% | 0.0% | |
Apollo Group | USA | -39.4% | 0.0% | |
Career Education Corp. | USA | -76.7% | 0.0% | |
Capella Education | USA | -0.9% | 0.0% | |
Cray | USA | 118.4% | 0.0% | |
Dell | USA | -15.8% | 0.0% | |
Dolby Laboratories | USA | -0.9% | 0.0% | |
Vaalco Energy | USA | 37.7% | 0.0% | |
ITT Educational Services | USA | -52.0% | 0.0% | |
Forest Laboratories | USA | 2.4% | 0.0% | |
GT Advanced Technologies | USA | -49.3% | 0.0% | |
Korn/Ferry International | USA | -3.0% | 0.0% | |
Kulicke & Soffa Industries | USA | 37.7% | 0.0% | |
LML Payment Systems | Canada | 2.8% | 0.0% | |
LTX-Credence Corporation | USA | -1.2% | 0.0% | |
ManTech International | USA | -35.3% | 0.0% | |
Nova Measuring Instruments | Israel | 31.9% | 0.0% | |
Providence Service Corp. | USA | 26.8% | 0.0% | |
Par Pharmaceutical Companies | USA | 79.3% | 0.0% | |
Power-One | USA | -16.8% | 0.0% | |
SanDisk Corp. | USA | 28.1% | 0.0% | |
SUPG | SuperGen | USA | -100.0% | 0.0% |
Teradyne | USA | 36.2% | 0.0% | |
TeleNav | USA | -31.6% | 0.0% | |
Tessera Technologies | USA | 11.8% | 0.0% | |
Unisys Corporation | USA | 25.2% | 0.0% | |
Veeco Instruments | USA | 6.6% | 0.0% | |
ViroPharma | USA | 32.0% | 0.0% |
*For conservatism delisted stock returns are assigned -100%.
Dividend-paying stocks chosen by the screen outperformed non-dividend paying stocks over the last 11 months. This is evident even if two delisted stocks are removed from the list of non-dividend stocks:
Category | Mean Total Return |
Div Stocks | 24.7% |
Non-Div Stocks | 7.2% |
Non-Div Stocks ex-Delisted | 13.3% |
Based on this performance the Magic Formula seems compatible with the selection of dividend-paying stocks.
Today's Dividend Yielding Magic Formula Stocks
Consider the current top 50 Magic Formula Picks above $50 million in market capitalization:
Company | Ticker | Country | P/E | Div Yield |
Great Northern Iron Ore Properties | USA | 4.03 | 18.1% | |
PDL BioPharma | PDLI | USA | 5.22 | 8.7% |
PetMed Express | PETS | USA | 12.36 | 6.2% |
Strayer Education | STRA | USA | 9.7 | 5.6% |
H&R Block | HRB | USA | 13.28 | 5.0% |
SAIC | USA | 0 | 4.1% | |
Seagate Technology PLC | Ireland | 4.95 | 4.0% | |
ManTech International | MANT | USA | 6.94 | 3.9% |
GameStop | USA | 6.64 | 3.8% | |
Raytheon Co. | USA | 9.62 | 3.6% | |
j2 Global | USA | 12.19 | 3.0% | |
Nevsun Resources | Canada | 4.2 | 2.7% | |
Microsoft Corporation | MSFT | USA | 14.98 | 2.7% |
Buckle | USA | 11.45 | 2.1% | |
Cisco Systems | USA | 12.36 | 1.9% | |
Lender Processing Services | LPS | USA | 22.4 | 1.6% |
Nature's Sunshine Products | USA | 0 | 1.3% | |
CF Industries Holdings | USA | 8.59 | 0.8% | |
Towers Watson & Co. | USA | 18.05 | 0.7% | |
Almost Family | AFAM | USA | 10.52 | 0.0% |
American Public Education | USA | 11.66 | 0.0% | |
Apollo Group | APOL | USA | 6.56 | 0.0% |
Argan | AGX | USA | 19.74 | 0.0% |
Body Central | USA | 7.26 | 0.0% | |
C&J Energy Services | USA | 5.7 | 0.0% | |
Capella Education | CPLA | USA | 9.45 | 0.0% |
Columbia Laboratories | USA | 6.46 | 0.0% | |
Dell | DELL | USA | 6.74 | 0.0% |
Dice Holdings | USA | 14.34 | 0.0% | |
Dolby Laboratories | DLB | USA | 11.95 | 0.0% |
Dynamics Research | USA | 5.55 | 0.0% | |
Express | USA | 9.59 | 0.0% | |
Gentiva Health Services | USA | 0 | 0.0% | |
GT Advanced Technologies | GTAT | USA | 4.3 | 0.0% |
ITT Educational Services | ESI | USA | 3.45 | 0.0% |
Korn/Ferry International | KFY | USA | 12.01 | 0.0% |
Kulicke & Soffa Industries | KLIC | USA | 8.87 | 0.0% |
LML Payment Systems | LMLP | Canada | 9.61 | 0.0% |
Majesco Entertainment | USA | 8.45 | 0.0% | |
Mediware Information Systems | USA | 15.65 | 0.0% | |
Metabolix | USA | 36.6 | 0.0% | |
POZEN | USA | 4.87 | 0.0% | |
Progenics Pharmaceuticals | USA | 7.65 | 0.0% | |
RPX Corporation | USA | 8.4 | 0.0% | |
Spirit Airlines | USA | 13.5 | 0.0% | |
TeleNav | USA | 7.84 | 0.0% | |
Travelzoo | USA | 15.26 | 0.0% | |
UTStarcom Holdings | China | 8.08 | 0.0% | |
Vaalco Energy | USA | 14.42 | 0.0% | |
ViroPharma | USA | 14.81 | 0.0% |
Nineteen of these stocks pay dividends and fourteen of them pay dividends in excess of the SPDR S&P 500 (SPY) ETF 1.98% yield or the 10-year treasury yield.
Conclusion
Greenblatt's Magic Formula did not lose its mojo when used to pick dividend yielding stocks, and this screen continues to identify dividend-paying stocks for investors today. Do-it-yourself investors should construct income portfolios by purchasing a handful of dividend stocks from the Magic Formula stock screen periodically and adding them to the portfolio.
Disclaimer: This article was written to provide investor information and education, and should not be construed as investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
