Thursday, August 26, 2010

RSY-V: Dividend Growth Stocks-Large Cap/StrongBuys


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 our management of the RSY portfolio.
Large-company stocks pay as much current income today as safe bonds. The Dow Jones Industrial Average, 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 in this space, I've listed plenty of shares with safe-looking yields of 3% and higher. However, stock buyers shouldn't necessarily snub companies with modest yields.

For overall balance of the RSY portfolio, we certainly would not turn away 2-3% dividend yield stocks from possible selection but we would want to balance that with higher yielding stocks to get closer to our goal of 5-6% dividend yields. 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 do better than fixed income streams especially under low interest rates as 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 mentioned too. A couple of things worth noticing is 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.

It certainly is important that rock solid companies increase their dividend payouts over the long term. This is needed just to keep up with rising prices due to 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 dividend payouts are increased systematically.


Possible Picks for RSY Portfolio:

The above chart contains a selection of stock choices from MyStockFinder and then narrowing it down to just largecap stocks that rate as strongbuy from 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 since 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 an life insurance stock in our selection. It 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 diversify 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, analyst expectations for revenue and earnings growth is good. Everything looks good except for the charts. 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}.

Suggested to add to watch list: BBY and PRU. And in a couple of months we could revisit: LLL and WHR.




This Is the Best Dividend Play in the Market (CIM, MO, NLY, PM, WIN)

This Is Easily the Most Popular Dividend Stock (CIM, EPD, GIS, KMP, NLY, PG)

The 7 Biggest, Baddest Dividend Stocks Out There (CINF, CTL, ED, LEG, LLY, PBI, TEG)

Today's Buy Opportunity: Annaly Capital (ACAS, AGNC, BAC, GS, JPM, MS, NLY)

Q&A: Dividends: Is Bigger Better? - Fama/French Forum

Misc. Links {RSY V}:
The Dividend Play for a Lifetime (BWLD, CMG, FTR, MCD, NLY, PG, YUM)

Dividends Are Back - Investing - Stocks - SmartMoney.com

Are You Missing Out on Dividends? (IBM, KMB, KO, PCG, PG, PSA, SBUX)

Going down with the ship Commentary: Investment business is losing a generation of investors

Is This Really the Best Dividend Stock?

Strategies - Head for the Hills? No Way, Says Jeremy J. Siegel - NYTimes.com

Dividend Report Card: Coca-Cola (KO)

Think Twice Before Diving for Dividends (WY)

Dividend Report Card: Microsoft

This Stock Is Completely Worthless (CLF, CRM, CTL, SNDK, TTM, WPZ)

Misc. Links {Depression 2.0}:
A Quick Look at the Most and Least Correlated Stocks in the Dow

Peter Schiff: "We're in the Early Stages of a Depression"

The Depression Outlook, Revisited

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