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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

PDLI

PDL BioPharma

USA

32.7%

10.0%

USMO

USA Mobility

USA

-21.3%

6.5%

CHKE

Cherokee

USA

10.8%

5.6%

PETS

PetMed Express

USA

-0.9%

4.8%

DLX

Deluxe Corp.

USA

51.7%

4.5%

STRA

Strayer Education

USA

-11.9%

4.1%

MDP

Meredith Corp.

USA

51.0%

4.1%

HRB

H&R Block

USA

25.1%

4.0%

KLAC

KLA-Tencor Corporation

USA

57.2%

3.8%

NOC

Northrop Grumman Corporation

USA

37.5%

3.7%

CMTL

Comtech Telecommunications

USA

12.1%

3.6%

MSFT

Microsoft Corporation

USA

27.5%

2.4%

LPS

Lender Processing Services

USA

49.3%

2.3%

ENTR

Entropic Communications

USA

58.4%

0.0%

MDCO

Medicines

USA

89.3%

0.0%

MIPS

MIPS Technologies

USA

46.1%

0.0%

NEP

China North East Petroleum

China

-100.0%

0.0%

OSK

Oshkosh Corporation

USA

35.4%

0.0%

VG

Vonage Holdings Corporation

USA

-25.6%

0.0%

ACAD

ACADIA Pharmaceuticals

USA

24.6%

0.0%

AFAM

Almost Family

USA

25.7%

0.0%

AGX

Argan

USA

76.8%

0.0%

AMED

Amedisys

USA

-18.4%

0.0%

APOL

Apollo Group

USA

-39.4%

0.0%

CECO

Career Education Corp.

USA

-76.7%

0.0%

CPLA

Capella Education

USA

-0.9%

0.0%

CRAY

Cray

USA

118.4%

0.0%

DELL

Dell

USA

-15.8%

0.0%

DLB

Dolby Laboratories

USA

-0.9%

0.0%

EGY

Vaalco Energy

USA

37.7%

0.0%

ESI

ITT Educational Services

USA

-52.0%

0.0%

FRX

Forest Laboratories

USA

2.4%

0.0%

GTAT

GT Advanced Technologies

USA

-49.3%

0.0%

KFY

Korn/Ferry International

USA

-3.0%

0.0%

KLIC

Kulicke & Soffa Industries

USA

37.7%

0.0%

LMLP

LML Payment Systems

Canada

2.8%

0.0%

LTXC

LTX-Credence Corporation

USA

-1.2%

0.0%

MANT

ManTech International

USA

-35.3%

0.0%

NVMI

Nova Measuring Instruments

Israel

31.9%

0.0%

PRSC

Providence Service Corp.

USA

26.8%

0.0%

PRX

Par Pharmaceutical Companies

USA

79.3%

0.0%

PWER

Power-One

USA

-16.8%

0.0%

SNDK

SanDisk Corp.

USA

28.1%

0.0%

SUPG

SuperGen

USA

-100.0%

0.0%

TER

Teradyne

USA

36.2%

0.0%

TNAV

TeleNav

USA

-31.6%

0.0%

TSRA

Tessera Technologies

USA

11.8%

0.0%

UIS

Unisys Corporation

USA

25.2%

0.0%

VECO

Veeco Instruments

USA

6.6%

0.0%

VPHM

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

GNI

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

SAI

USA

0

4.1%

Seagate Technology PLC

STX

Ireland

4.95

4.0%

ManTech International

MANT

USA

6.94

3.9%

GameStop

GME

USA

6.64

3.8%

Raytheon Co.

RTN

USA

9.62

3.6%

j2 Global

JCOM

USA

12.19

3.0%

Nevsun Resources

NSU

Canada

4.2

2.7%

Microsoft Corporation

MSFT

USA

14.98

2.7%

Buckle

BKE

USA

11.45

2.1%

Cisco Systems

CSCO

USA

12.36

1.9%

Lender Processing Services

LPS

USA

22.4

1.6%

Nature's Sunshine Products

NATR

USA

0

1.3%

CF Industries Holdings

CF

USA

8.59

0.8%

Towers Watson & Co.

TW

USA

18.05

0.7%

Almost Family

AFAM

USA

10.52

0.0%

American Public Education

APEI

USA

11.66

0.0%

Apollo Group

APOL

USA

6.56

0.0%

Argan

AGX

USA

19.74

0.0%

Body Central

BODY

USA

7.26

0.0%

C&J Energy Services

CJES

USA

5.7

0.0%

Capella Education

CPLA

USA

9.45

0.0%

Columbia Laboratories

CBRX

USA

6.46

0.0%

Dell

DELL

USA

6.74

0.0%

Dice Holdings

DHX

USA

14.34

0.0%

Dolby Laboratories

DLB

USA

11.95

0.0%

Dynamics Research

DRCO

USA

5.55

0.0%

Express

EXPR

USA

9.59

0.0%

Gentiva Health Services

GTIV

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

COOL

USA

8.45

0.0%

Mediware Information Systems

MEDW

USA

15.65

0.0%

Metabolix

MBLX

USA

36.6

0.0%

POZEN

POZN

USA

4.87

0.0%

Progenics Pharmaceuticals

PGNX

USA

7.65

0.0%

RPX Corporation

RPXC

USA

8.4

0.0%

Spirit Airlines

SAVE

USA

13.5

0.0%

TeleNav

 

USA

7.84

0.0%

Travelzoo

TZOO

USA

15.26

0.0%

UTStarcom Holdings

UTSI

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.

Source: Magic Formula Dividend Stocks