Rock Solid Yields: Dividend Growth Stocks and Some for the Stock Watch.
Tue, Aug 31, 6:36 PM ET, by Ron Rutherford, Sabrient.com
One of our readers sent in the following link to discuss: 3 Stocks Poised for Dividend Growth. The article starts with a few pertinent facts that relate to Sabrient’s principle guidelines in establishing the RSY virtual portfolio.
Large-cap stocks yield as much current income today as Treasury bonds. The Dow Jones Industrial Average (DJIA), which tracks shares of 30 household names like McDonald’s (MCD~) and Caterpillar (CAT~), has a dividend yield of 2.8%. The 10-year U.S. Treasury bond yields just under 2.7%. A typical five-year bond issued by a company of good-not-great creditworthiness yields about 2.8%. Many investors have taken this unusual condition to mean that bonds are overpriced, or that stocks are a good deal, or both. In recent weeks, I’ve highlighted plenty of stocks with secure yields of 3%+. However, investors shouldn’t necessarily avoid companies with modest yields.
To achieve the RSY portfolio goal of 5-6% yields, we will likely include 2-3% dividend yield stocks and balance that with higher yielding stocks. It certainly is true that many investment choices now currently yield very low rates of return like US Treasuries but the decision on what is overpriced is of little concern to us here. We consider equities as the surest way to long term wealth growth. The RSY portfolio is designed to out perform fixed income portfolios, especially in the low interest rate envioronment we have now.
{For larger, clearer image click on picture.}
The above chart is from Sabrient’s Smartlink Pro which shows us the scores and the ratings of the stocks mentioned in the above article for dividend growth stocks. I also included Apple and Wal-Mart in the list as they were also mentioned. A couple of things worth noticing are that the only stock mentioned as a STRONGBUY is AAPL, which provides no dividend as of yet, and that the only BUY from the list is Target. There is a good argument to be made that we look for companies who increase their dividends over the long term. This is needed just to keep up with inflation. But from looking at a variety of stocks that have increased dividend yields over time, it does not have much ability to forecast increased equity value. Overall it is more important that dividend payouts are stable than the dividends are increased systematically. Possible Picks for RSY Portfolio:
The above chart contains a selection of stock choices from MyStockFinder which I have narrowed down to just Large-cap stocks that are rated as STRONGBUY by Sabrient. Even here, I want to be highly selective in my choices. Let me go through them and see if any meet our high standards. AVIVA PLC {AV} is an ADR and thus no options are available and because it is in the life insurance industry, I think we should pass on it. While it might be good to get more international exposure to our portfolio, I think we should avoid them in this portfolio as information is less available and we do already have a life insurance stock in our portfolio. AV also has no track record on dividend payouts aside from one in March 2010. We want to see long term consistent payouts. Best Buy Co., Inc. {BBY} is one I have been watching closely for some time. Although the dividend yield is on the low end of the range at less than two percent, it would provide diversity into the retail sector and the market cap of Large-cap stocks. There are lots of things to like about BBY, including good insider buying recently, the forensic accounting score is looking good, and analyst expectations for revenue and earnings growth are good. Everything looks good except for the chart. The ex-dividend date for the next dividend is on October 1st which gives us some more time to consider this choice. Capital One Financial Corporation {COF} is one we will pass on because of the “very aggressive” forensic accounting score, recent insider selling, and the fact it just had an ex-dividend date of August 9th of a paltry 5 cents, making the dividend yield around a half a percent. Computer Sciences Corporation {CSC} has overall low scores in both forensic accounting score and Sabrient’s composite score. It has a dividend coming up shortly at an ex-dividend date of 9/7/2010 but this will be only its second time at paying dividends. We can look for longer term candidates to add to our portfolio considering overall lackluster appearance. L-3 Communications Holdings, Inc. {LLL} is fine in most categories but since the ex-dividend date just passed on August 13 and the chart also looks bad, we will pass on it for now. Prudential Financial, Inc. {Prudential Financial} has an ugly chart also including a bad indicator on the MACD chart. Although Prudential is in the life insurance sector also, we still may want to visit it as we get closer to the ex-dividend date of November 20th. It should be noted that the dividends are paid yearly around November each year. Whirlpool Corporation {WHR} is another stock with an awful looking stock chart. The most recent ex-dividend date just passed at August 25th. What does all this mean?
We are not adding any new positions at this present time but we certainly are looking for opportunities to add when the time looks good. Although we rejected some of the choices based on timing of the ex-dividend dates and the charting pattern, this is not to indicate that we are using those as our primary tools. It has more to do with why go against the grain of the market when we can wait until the time is more to our advantage. That is especially true when we get closer to the cheese distribution dates {ex-dividend dates}. Watch list suggestions: BBY and PRU. And in a couple of months we could revisit: LLL and WHR. Full disclosure: The author does not personally hold any of the stocks mentioned in this edition of Rock Solid Yields. Disclaimer: The Rock Solid Yield portfolio newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
SDI Glossary: "ADR" Definition
SDI Glossary: "CD" Definition
SDI Glossary: "price" Definition
SDI Glossary: "Dividend" Definition
SDI Glossary: "MACD" Definition
SDI Glossary: "Stock" Definition
SDI Glossary: "Yield" Definition
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