Tuesday, June 22, 2010

RSY III| Sisyphus could have used a backstop like Dividend Stocks.

Anytime is a good time to consider adding dividend paying stocks to a portfolio and especially now with the market not picking a direction and trending with it. This means less returns derived from capital gains. So instead of feeling like Sisyphus and breaking through the DOW 10,000 mark {How many times?}, it might help to use dividends to lock in gains through accumulation of cash.

Reshma Kapadia and Elizabeth O'Brien point out some positive news about dividend investors prospects at Investments That Crank Out Cash.
Notwithstanding BP’s recent decision to suspend its payout, dividend-hunting investors are generally seeing some encouraging signs. Companies like mining giant Freeport-McMoRan Copper & Gold and cruise line Carnival have reinstated dividends they suspended during the crash; in all, 157 companies increased their dividends in 2009, and at least 108 more have already done so this year, according to Standard & Poor’s. That could mean executives believe their companies are getting their mojo back, says Henry Sanders, manager of the Aston/River Road Dividend All-Cap Value fund: “Dividend increases are the best legal source of insider information.” {Page 5}

BP was and is under extreme political pressure, but not sure that suspending dividends was in the best interest of their shareholders and investors in general. Other than that, this is positive news and knowing what insiders are thinking is always good news. Kapadia and Brien point out two other investment vehicles that pay substantial dividend yields through master limited partnerships (MLPs), and real estate investment trusts (REITs). They mention Annaly Capital (NLY) as an extremely high paying dividend REIT and is one that I have held in varying amounts for 2 years. Since before July 2007 it has always maintained a Buy or Strongbuy rating from Sabrient and is currently a buy with a Sabrient Analysis of:
Sabrient rates NLY a Buy. The stock boasts a winning combination of attributes that
are being rewarded in today's market.
• Value: A Sabrient Value Score of 68.7 indicates that NLY may be somewhat
undervalued at its current price. Historically, stocks with similar value scores have
modestly outperformed the market.
• Momentum: The stock has average momentum based on its Sabrient Momentum
Score of 62.6. The score reflects price, earnings and group momentum.
• Growth: NLY scores 49.4 for the Sabrient Growth Score. This suggests the stock
has below-average growth potential.
• Timeliness: This stock has a Sabrient Timeliness Score of 78.8. This is a composite
measure of short-term and long-term price performance and long-term group

This is from our Smartstock reports that all Silver Members and above subscriptions have access to on over 5600 stocks. The Smartstock report also gives a score of 100 in balance sheet and 98.5 in fundamentals. All in all a good stock we should at the very least add to our stock watch list and more than likely we would want to add to our portfolio at some time. Since REITs can dominate the extremely high dividend yield results, we will need to be careful in our selection so as to maintain balance between sectors of the economy.

Fool's Advice.
Morgan Housel provides a list of 5 dividend paying stocks at 5 Dividend Monsters to Buy After the Crash. I am not sure if he is suggesting that we buy them now as the mega title of the page is "Good Dividend Stocks Now" and thus by deduction we have already "crashed". Sabrient provides the following information on his selections.

Respectively, Sabrient gives a composite score of 72, 30, 27, 33, and 21 on the above chart. Not a lot of good choices in the Fool's advice, at least based on Sabrient's fundamental scoring system. They are not ones that would make it into the portfolio-at least at present time. But we also need to try to maintain diversity across market-caps and we will need to look for Large-cap choices to add to our portfolio. One that has been coming on the radar for "Rock Solid Yields" results has been Best Buy (BBY). Although the dividend yield is low at only 1.64% it would allow diversity across sectors especially with regards to retail.

One more piece of advice during this crazy market volatility and that is to Ignore the Panic, [and] Focus on Value.
Definitely some sound advice from Brett Arends. Rebecca L. McClay talks about "six myths about investing in stocks that pay" at Don't dismiss dividend-paying stocks. Let us go through her six myths or straw-men.
Myth 1: Avoid dividend-paying stocks in volatile markets

Certainly one that we have talked about and stands to reason to pick dividend paying strong value stocks in volatile markets as this should provide reasonable assurances against downside market volatility.
Myth 2: Dividend-paying stocks will give your wallet a quick boost

It seems an obvious point when looking at dividend yields. Even at the high rates offered by NLY, it would still take a few years to make substantial gains.
Myth 3: Companies that pay dividends will limit their growth

It could limit their growth especially if they are paying out more than 50% of their free cash flows. We also have to recognize that in fact dividend paying companies will be more concentrated in "mature industries" and sectors of the economy least able to incorporate new technologies or have already incorporated the latest technologies. But the RSY will be looking strongbuys which will indicate they do have potential for growth according to Sabrient's ratings. Hopefully we will pick growing companies that still provide a solid foundation based on strong fundamentals.
Myth 4: You should always invest in high-yield stocks

As my posts point out, it is not the highest that necessarily are the best to add to any individual's portfolio. Many factors should be considered including diversity and risk.
Myth 5: Dividend increases will not keep up with inflation

It almost seems ridiculous as any positive is better than nothing, that is above zero. Currently, there seems a chance of deflation or continued very low inflation rates for quite some time and thus nearly any rates of return will be above the inflation rates.
Myth 6: Dividend investing is for retirees

There may be a need for retirees to allocate more into dividend paying stocks, especially if they want that to live on. But for most investors dividend paying value stocks can diversify risks and add returns especially in volatile markets. So nearly everyone should consider these types of stocks.

Earn Higher Returns on These 5 Stocks

Keep your distance from market volatility Chuck Jaffe - MarketWatch

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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

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

Oil is Still a Buy

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

Roundtable: Best Dividend Stocks for Beginners



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