Tuesday, May 18, 2010

Rock Solid Yield...

In my last post of the Rock Solid Yield category, I briefly introduced our newest upcoming Platinum level subscriber product. To further define the overall strategy I will compare and contrast our approach to some worthy suggestions by others writers.

Since the portfolio is just starting out then maybe the Motley Fool might have some thoughts on the what are Best Dividend Stocks for Beginners? The question they pose the roundtable of contributors and associates is:
I'm just starting, know little, have about $500, and want a solid stock with dividends as my first. What should I look for?

All the writers provide good suggestions and ideas but the best was provided by Dan Caplinger. For a small first time investor with very limited funds, then ETFs could provide the needed diversification and thus lower risks of losing the principle. The Motley Fool as well as the Rock Solid Yield (RSY) portfolio will be looking for those "solid stocks" to pay dividends for years to come and increase in value over that time. From the list of stock suggestions, it becomes obvious that they are not picking stocks strictly on dividend yield percentages as most are around or under 5% with only BP being at 9%. Motley Fool's advertising even promotes these ideas at 6 Secrets to Finding Dividend "Money Machines".
6 Secrets of Dividend Investing:
How You Can Earn Great Returns with Less Risk

Finding the best dividend stocks takes some legwork and careful analysis. But here's how you can find the best long-term winners:

1. Avoid the Highest Dividend Stocks -- You can't pick stocks by dividend yield alone. Above-normal dividends are often a red flag for a company in distress. Studies have consistently shown that you will earn higher long-term returns by avoiding risky stocks with overly high dividends.

All six points they make are important considerations in making a good dividend paying portfolio but "avoid" might not be the best describer of how to search out the best performing stocks. A better way may be to be even more cautious and careful about higher paying dividend stocks. The higher the dividend yield the greater the scrutiny should be. We all by now know the risks associated with BP stock from the oil spill, but the market may be underpricing it now as the uncertainty of the future of BP may be in question or at least that dividend payout. The risks from damages they are liable for can be calculated to in broad terms but the damage to reputation and customer base is uncertain. Also other stakeholders including the President and Congress could use moral persuasion and even laws to severely hamper their ability to make a profit {and distribute it} for their shareholders.

RSY portfolio will be looking for good value stocks that are rated as a Strongbuy or Buy {if the stock has some compelling reason to include it} and starting with an imaginary fund of $100,000. This should be large enough to diversify but we also want to make it scalable for even portfolios as small as $20,000. We will start with the "MyStockFinder" questionnaire to get a pool of good candidates. So let us look at how Motley Fool's choices as well as a few other suggestions for a dividend portfolio stack up based on Sabrient's rating system:

As it clearly shows, most would not even get into the pool of candidates except for maybe BP and GameStop (GME). They did not show up on the top 50 of RSY questionnaire as well as the two buy recommended stocks.

DuPont (DD) was a recommendation from Cramer's 'Mad Money' Recap on May 12th. GME, MCK and TWC all came from Jack Hough from the article 3 Stocks Producing 10% Free Cash Yields. Which provided us with one strongbuy out of the two and both of the two buys out of our list of 10. Surely, strong free cash flow is as important as Hough addresses and maybe Motley Fool should have taken their advice a little more studiously as they stated:
3. Cash Is King -- Free cash flow (FCF) is the true health of the business. Find the companies that generate tons of it. Even in the worst of times, those flush with greenbacks have options. Firms with cash can buy back their shares to raise stock prices, make their debt payments, increase dividends, and buy other profitable businesses. That's why cash flow is the single most important factor that determines value in the marketplace.

What does this mean for the RSY portfolio?
While we can all succumb to the cocktail party stock picking advise, it is better to have systematic way of getting a list of candidates for the investment portfolio as well as selection of the individual stocks. None of the stocks listed above made it into to our RSY questionnaire results but also none were sell of strongsell and their rankings could easily change over time.

RSY will try to maintain less turnover of the portfolio. The exit strategy or portfolio reallocations will be partially based on changes to Sabrient's ratings on the individual holdings. For example if a stock changes from Strongbuy to Buy may warrant just less exposure but two drops to Hold may indicate a need to sell off the position-unless there is some compelling reason like a dividend payout coming up shortly.

Full disclosure: The author does not personally hold any of the stocks mentioned in this edition of Rock Solid Yield.

Disclaimer: This 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.

Roth Conversion: Savers Say 'No Thanks'

Income Investor [Fool.com: Income Stock Research]

Bear Rebuttal: The Market Is Pricier Than You Think

Misc. Links:
3 Stocks Producing 10% Free Cash Yields - Investing - Stocks - SmartMoney.com

Keep your distance from market volatility Chuck Jaffe - MarketWatch

Ignore the Panic, Focus on Value - MarketWatch

Roundtable: Best Dividend Stocks for Beginners

Oil Spill Ripples Reach...Norway? - MoneyShow.com
Sabrient Results_1276020132944DD

Why You Shouldn't Convert to a Roth IRA

Is a Roth IRA Safe From Taxes? - MarketWatch
Duplicate: Is a Roth IRA Safe From Taxes? - Personal Finance - Taxes - SmartMoney.com

Don't dismiss dividend-paying stocks Six myths about investing in stocks that pay

Portfolio rebalancing: How to do it right New study finds that using a time and target strategy may work best


Friday, May 07, 2010

May 6, The Night They Drove Ole Dixie Down

As a small investor myself, one of my first reactions to the wild swings in the market of May 6 was to start singing the song, The Night They Drove Ole Dixie Down
Virgil Caine is the name and I served on the Denver train
Stoneman's cavalry came and tore up the tracks again
In the winter of '65 we was hungry, just barely alive
By May 10, Richmond had fell, it was a time I remember, oh so well

The night they drove ole Dixie down, all the bells were ringing
The night they drove ole Dixie down, all the people were singing
Na, na na na na na na, na na na na na na, na na na na na na

It's May 10th and "Richmond" in this case did not fall but it most definitely is a time to take stock of the situation and see if any lessons may be learned.

No matter what the dramatic swings, in the markets at around 2:45 to 3:00 pm, was caused by, that is: automatic trading programs, E-Minis Trade Snafu, Trading glitches, market manipulators or some cyber-attack, the fact remains that market participants can be adversely affected by market gyrations especially if they do lose their cool and react against sound trading strategies.

What way forward?
With so many computer generated orders in the market, it is easy to see why someone would question the efficient market theories as Dan Caplinger does in his Motley Fool piece titled What You Should Learn From Yesterday's Crash. Some of those generated orders come from market participants entering in stop loss orders. Under normal times this creates a market order and gets executed within a fairly narrow range. But if the momentum is such then there is no market below the stop and will drop until it finds someone willing to buy at that exact moment.

This can create a vicious cycle in the short term as stop loss orders get in the queue which drives prices down which then in turn creates more stop loss orders until you get equities trading at pennies. According to TradeStation, the Claymore/Sabrient Insider ETF (AMEX: NFO) which tracks our The Sabrient Insider Sentiment Index (AMEX: SBRIN) dropped to at least 11 cents before rebounding to the normal market price of around $27.80. Also, "iShares Russell 1000 Value Index Fund (IWD), which dropped from close to $60.00 to 7.5 cents." Of course the underlying securities did not drop that low on either case so it was mathematically incorrect. Not to say that no stock also took the rocket nose dive as Accenture went to a penny.

Caplinger does advise to use stop limit orders if your broker offers them as a way to avoid these problems. Overall, limit orders are a better way to ensure the price you want is what you get even if it is below the bid price to ensure your order gets executed. But stop limit orders does pose another question as to what price to set on the limit. It can even be set up above the stop price but this is wishful thinking that the dead cat bounce provides some relief from the falling prices. The possible scenarios for a stop limit order on May 6 would be either the limit was sufficiently below the stop so that the market caught it on the way down or that shortly after the market regained consciousness it trades at the limit. Either case it would be reasonable to expect it to execute at the limit price if it all. Trailing stop orders provide another way of ratcheting up profits as a stock increases in value, but again this will generate a market order that may be "chasing the rocket" to who knows where?

Another important piece of advice that Caplinger provides is to take advantage of volatility and market gyrations like what happened on May 6th. Quoting that portion:
Better yet, a limit order can help you take advantage of situations like this. If you enter an order well below the market, you may get a chance on days like this to buy shares on the cheap -- and you don't even have to be at your computer. Most of the time, those orders will never execute -- but when they do, they can be extremely lucrative.

Yes indeed, every one of my limit orders that executed on May 6th are above what I paid for them or I took some shot term profits from the swings at the time. But this also needs to be taken with caution because if something that changes the direction of the economy, can most certainly leave you in a bad situation. Take for example after 9-11 as the prices of everything was dropping like a rock and no white knight was going to change the market sentiment.

On May 6th the only news that could affect the market as drastically as what happened was about the PIIGS that I already looked at and found no reason that the market would react to problems in Greece even if CNBC was covering it in depth. Thus I was happy with the limit orders as a way to pick up on the dips (or some dives in this case).

What does this mean to Sabrient?

In the near future, we at Sabrient plan to launch another portfolio for our Platinum Subscribers based on the MyStockFinder search tool of "Rock Solid Yields". Be sure to watch this blog category for more information about this exciting new product. This category is to give some insights into how the portfolio will be directed and what strategies we plan to use to achieve high rates of return while generating a cash flow through dividend paying stocks.

We at Sabrient believe that equity markets will provide the best returns on your investment over the long run. While it may seem the market is not nice to the small investor, the small investor can beat the market especially when others (or computers) lose their cool. So we reject Jim Cramer's advice that small investors should stay out of the market on days like May 6th. They just need to have a solid trading strategy and take advantages when opportunities present themselves.

Assessing the May 6 Fallout on the 5 Cross-Market ETFs

What the Heck Just Happened?

Nasdaq cancels trades made over 20-min. period


The Night They Drove Old Dixie Down - Wikipedia, the free encyclopedia

House panel to hold hearing on stock market plunge

3 Reasons Dividend Stocks Are a "Must-Own"

Japan's Nikkei down more than 3% in early trade

SEC agrees to framework to boost circuit breakers

Small investors spooked by market swings With nowhere else to go, many are 'hanging in there'

5 Reasons to Sell a Dividend Stock

6 Secrets to Finding Dividend Money Machines That Keep Your Portfolio Growing In Any Type of Market

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