Here is just some information to help you guys find and understand stocks with dividends.
Dividend stocks, if chosen carefully, have two advantages over other stocks in a weak market. If the share price goes nowhere for a few months, you still collect the dividend, so you get paid to wait. Also, if the stock drops, the dividend yield to new investors rises, attracting more buyers. Let me explain.
Dividend Math
The dividend yield is the next 12-months’ expected per-share dividends divided by the current share price. For example the yield would be 5 percent for a stock currently trading at $100 per share that is expected to pay $5 in dividends over the next year ($5 divided by $100).
If a market downdraft hits and the share price drops to $75 per share, the yield would increase to 6.7 percent ($5 divided by $75) to new buyers.
Use Screens
Screening is the best way to find dividend stocks. If you’re not familiar with the term, screening involves using special programs to scan the market for stocks that meet your selection criteria.
There are several free screening programs available on the Web including MSN Money’s Deluxe Screener (moneycentral.msn.com), and Reuters’ PowerScreenerLite (
www.investor.reuters.com).
I’ll use MSN Money’s Deluxe Screener to demonstrate the process. If you haven’t used it before, it may take you a couple of hours to learn how to use it. However, MSN’s screener is the most powerful free screener that I know of, so your time will be well spent.
Sample Dividend Screen
To help you get started, I’ll included in parenthesis, the screener instruction phrase needed to implement each search requirement. I’ll start the process with dividend yield.
Significant Yield
The dividend yield must be significant to provide the benefits I described earlier. What’s significant? That’s hard to quantify, but I’ve found that yields above 4.5 percent usually attract dividend-investors’ attention. So, I set my minimum acceptable dividend at 4.5 percent (current dividend yield >= 4.5).
Bigger is Safer
In weak markets, smaller companies usually get hit the hardest. So it pays to rule out very small companies.
Market capitalization (number of shares outstanding multiplied by the current share price) is the most widely used company size gauge. Stocks with market-caps below $1 billion are considered “small-caps” and are the riskiest. So, I set my minimum market-cap at $1 billion (market capitalization >= 1,000,000,000) to exclude small-caps.
Analysts’ Advice
Despite their tarnished reputations, in my view, it still pays to let analysts do the heavy lifting when it comes to figuring out a company’s future prospects. Analysts rate stocks they cover in varying degrees of buy, hold, or sell. Services such as Zacks Research and Reuters compile the individual ratings and group them into five categories: strong buy, buy, hold, sell, and strong sell. If anything, analysts tend to be too optimistic, so ‘sell’ or ‘strong sell’ ratings signal high risk. Thus, I require consensus ratings of ‘hold’ or better (mean recommendation >= hold).
Expected Earnings Growth
Stocks with declining earnings are usually bad news. For starters, over the long haul, stock prices tend to track earnings. So a drop in earnings will probably result in a drop in share price. Further, declining earnings could lead to a dividend cut, which would not only further pressure the share price, but would reduce your dividend yield.
By contrast, rising earnings are desirable because they tend to lift the share price and enable dividend increases. So I require a moderate five percent average annual earnings growth consensus forecast for the next five years (EPS growth next 5-years => 5).
So far, I’ve specified mid- or large-sized companies paying significant dividends and with moderate expected earnings growth. Further, I’ve ruled out stocks analysts are recommending selling. When I checked, nearly 100 stocks met those requirements. How do you pinpoint the best prospects from that list?
Buy Strong Stocks
Despite that age-old axiom advising us to “buy low and sell high,” I’ve found that stocks that are already moving up (in uptrends) are better prospects than those that have been mostly headed lower (downtrends). You can use moving averages to determine whether a stock is in an uptrend or downtrend.
A moving average is the average of a stock's closing prices over a specified number of market days. For instance, the 50-day moving average would be the average of the last 50 days closing prices. Generally, stocks trading above their moving averages are in uptrends, and those trading below are in downtrends.
The 50-day and 200-day moving averages are the most widely used. The 50-day MA measures the short-term action while the 200-day MA gauges the long-term trend.
The strongest candidates should be above both their 50- and 200-day MAs. You can specify that condition by requiring the last price to be above both MAs (last price >= 200-day moving average) and (last price >= 50-day moving average).
As is the case for any screen, consider the results a list of candidates for further research, not a buy list
(disclosure: I hold positions in Energy Transfer Partners,Wal-Mart, PFIZER and World Wrestling Entertainment).
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