Building A High-Yielding Small Portfolio That Can Outperform The Market By A Big Margin

by: Arie Goren

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 are included in the Russell 3000 index that pay very rich dividends with a low payout ratio and positive dividend growth over the past five years. Those stocks also would have to show low debt.

Russell 3000 Index

Description from Russell Investments:

The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.

The screen's method requires all stocks to comply with all following demands:

  1. Dividend yield is greater than 5%.
  2. The payout ratio is less than 100%.
  3. The annual rate of dividend growth over the past five years is positive.
  4. Total debt-to-equity ratio is less than 1.0.
  5. The five stocks with the highest yield among all the stocks that complied with the first four 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 Portfolio123.

After running this screen on May 13, 2013, before the market open, I discovered the following five stocks: PennantPark Investment Corp (NASDAQ:PNNT), Terra Nitrogen Co LP (NYSE:TNH), Triangle Capital Corp (NYSE:TCAP), Baytex Energy Corp (NYSE:BTE) and Pioneer Southwest Energy Partners LP (PSE).

The table below presents the five companies, their last price, their market cap and their industry.

The table below presents the dividend yield, the payout ratio, the annual rate of dividend growth over the past five years, the Trailing P/E and the total debt-to-equity ratio for the five companies.

The tables below show the dividend rates and the dividend yield throughout the last five years.

PNNT Dividend Chart

PNNT Dividend data by YCharts

TNH Dividend Chart

TNH Dividend data by YCharts

TCAP Dividend Chart

BTE Dividend Chart

PSE Dividend Chart

PSE Dividend data by YCharts


In order to find out how such a screening formula would have performed during the last year, last five years and last 14 years, I ran the back-tests, which are available by 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

Just a matter of curiosity, the table below presents the five companies originated by the screen formula one year before, on May 12, 2012.

Five years back-test

The table below presents the five companies originated by the screen formula five years before, on May 12, 2008.

Fourteen years back-test

The table below presents the five companies originated by the screen formula 14 years and four months before, on January 02, 1999.


The high-yielding screen has given much better returns during the last year, the last five years and the last 14 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. The one-year return of the screen was at 37.61% while the return of the S&P 500 index during the same period was at 21.09%. The difference between the high-yielding screen to the S&P 500 benchmark was much more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 17.67% while the average annual return of the S&P 500 index during the same period was only 2.00%. Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.

BTE Dividend data by YCharts

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.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Problem with this article? Please tell us. Disagree with this article? .