Stock Quotes in this Article: MCY, T

 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 (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 rebalance date (generally around the fifth 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 Nov. 4 the portfolio is up 18.43% since its inception less than a year ago. For Nov. 4 the portfolio sold AT&T (T) due to its payout ratio exceeding the lowest of the Dividend Champion stocks. T was an original holding in the portfolio, first purchased on Dec.6, 2010. It was replaced by Mercury General (MCY). MCY engages in writing private passenger and commercial automobile insurance. At month-end its yield was 5.64% with a 70.72% payout ratio. It has a low debt/equity ratio of .14 and has a forward projected P/E of 16.08.

    Below are the top 17 Dividend Champions using the method detailed above,
    with the exception of the forward/earnings requirement. The top stock
    on the list, Universal (UVV), has no projected forward earnings, so it is not a holding in the portfolio.