Stock Quotes in this Article: BKH, RPM

 The following commentary comes from an independent investor or market observer as part of TheStreet’s guest contributor program, which is separate from the company’s news coverage. The opinions expressed are those of the author and do not represent the views of TheStreet or its management.

NEW YORK (Scott's Investments) -- In December 2010, I created a screen/hypothetical portfolio called the High-Yield Dividend Champion Portfolio. The screen is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott's Investments (see the right-hand column for a link to the spreadsheet).

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    Like many of the screens, strategies and portfolios I track and prefer, this strategy takes a small number of historically relevant ideas to create a simple yet powerful action plan for the individual investor. As I have previously detailed, some studies have shown that the highest-yielding, lower-payout stocks perform better over time than stocks with higher payouts and lower yields.

    This portfolio attempts to capture the best high-yield, low-payout stocks with a history of raising dividends. There are numerous ways to gauge the "best" high-yield/low payout stocks. The list starts with the "Dividend Champions" as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years.

    As I previously detailed in-depth, in May I transitioned to a slightly different ranking methodology. The Dividend Champions are still the starting point and we still begin by ranking the top third-highest-yielding champions. With the remaining high-yielding stocks, we will eliminate 50% with the highest payout ratio. The remaining stocks are assigned a rank based on the ratio of their dividend-yield-to-payout ratio. Stocks must also have a positive forward projected P/E, to eliminate stocks with no projected earnings for the next year.

    The top 10 stocks based on this ratio make the portfolio. Stocks will be sold at the re-balance date (generally around the 5th of the month) when they drop out of the top 12 (to limit turnover) and are replaced with the next highest rated stock.

    I began tracking the portfolio in December, and as of Sept. 2 it is up 7.39%, including dividends. Starting in August, I use closing prices to calculate buy/sells in order to simplify the portfolio tracking process.

    As of Sept. 6, the portfolio is selling Cincinnati Financial (CINF) and WGL Holdings (WGL). The proceeds will be used to purchase RPM International (RPM) and Black Hills (BKH).

    RPM International is a chemicals company with a current yield of 4.51% and a payout ratio of 57.93%. The stock was downgraded on September 1st by Oppenheimer to Underperform. It has a 4.9% and 6.2% dividend growth rate over the past three and five years. For those interested in adding extra income to an RPM position, the Oct. 20 calls had a bid of 40 cents on Friday, providing an additional 2.1% of downside protection.

    Black Hills is an electric utility currently yielding 4.83% and a payout ratio of 71.22%. The stock has shown low volatility and also low historical dividend growth. It has averaged dividend growth of 1.7% and 2.4% over the past three and five years.

    Below are the top 12 Dividend Champions using the ranking methodology detailed above, using month-end data.

    Scott's Investments focuses on consolidating and tracking free online investment resources for the public with an emphasis on ETFs, portfolio/trading strategies and macroeconomics. Follow Scott's Investments on Stocktwits Twitter.