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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, low-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 (the same as a trailing earnings/price ratio, or the inverse of the trailing P/E 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.

    As of Jan. 6, the portfolio is up 21.03% since its inception just over a year ago. For January 6th the portfolio sold MGE Energy (MGEE) due to its dividend yield dropping below the minimum threshold. The proceeds were used to purchase 269 shares of Emerson Electric (EMR). EMR currently yielded 3.43% at the beginning of January with a payout ratio of 48.8%.

    Below are the top 16 stocks for this month using the rating system highlighted in this article. Current holdings and returns can be viewed on the right hand side of Scott's Investments. Note that Universal (UVV) does not have a projected forward P/E but is included in the list below.

    I have also noticed at least one other website, who I know reads this site, closely duplicating this strategy and some of my other dividend ideas. Imitation is the sincerest form of flattery, but please cite your sources/influences going forward.

    Data is courtesy of DRIP Investing and based on Dec. 31, 2011, data:

    A return graph for the portfolio is shown below along with returns for each current and historical position: