It’s axiomatic in dividend investing that the very best dividend stocks score highly on dividend yield, consistency, and growth. When you’re focusing on dividends (rather than exclusively on price), you obviously want your can purchase companies which have a good initial yield (more when compared to a bank deposit),
pay their dividends without fail, and increase their dividends regularly.
Just like every form of stock investing, all you’ve got to be on in selecting individual stocks is history and conjecture. Conjecture contains drawing reasonable inferences from the history and current conditions.
As to history, you want to find stocks which have a demonstrated record of paying dividends consistently (never missing a payment) and raising them often. Within my e-book, “The Top 40 Dividend Stocks for 2008,” I present a scoring system for rating stocks along both of these scales (plus several others) that I call the Easy-Rate(TM) system.
A company’s history of dividend payments lets you know two things that you could reasonably project into the future calculadora. As an example, if your company has paid a dividend every quarter for ten straight years, and raised the dividend in seven of the years, that suggests that the company is run in this way that dividend-paying could be the norm. Management expects to continue to pay the dividend every quarter, and they manage the company’s money accordingly. They know they have a constituency of shareholders who expect that dividend and periodic increases, and they “play to” that constituency. Skipping a payment or cutting the dividend may possibly cause many shareholders to abandon the stock, bringing a disastrous fall in the stock’s price.
But any projection into the future is conjecture, isn’t it? There’s risk in just about any prediction, from weather forecasting, to picking your fantasy football team, to selecting the very best stocks. Even though the “chances are with you,” or “all signs point for the reason that direction,” there’s risk that any prediction will be wrong.
And so it’s with dividend stocks. Even when we take the utmost precautions to pick only stocks with a good yield, great dividend history, and the strongest signs of continuing that history, we could be wrong.
The financial sector before 12 months provides some vivid samples of such risk. Many retail banks, commercial banks, investment banks, and mortgage lenders have already been pummeled by the sub-prime mortgage crisis, which morphed into a full-blown credit crisis. The iconic Bear Stearns failed (it was bailed out by the government). The iconic Citigroup slashed its dividend along with increased than 10,000 jobs. Countrywide Financial, the country’s largest mortgage issuer, nearly went out of business, “saved” only by being purchased at a fire-sale price by Bank of America.
Within my e-book, I selected Bank of America (BAC) as among the Top 40 dividend stocks. It’d a 6.6% yield, good valuation, and had raised its dividend for significantly more than 25 straight years — a select club with only 59 members. But BAC has been hit hard by the credit crisis, and it is hard to inform if the acquisition of Countrywide, even for a tune, is good or bad in the short term. (It might be very good in the long term.)
BAC, like plenty of banks at this time, needs money. One method to get money, needless to say, would be to cut its dividend. So BAC’s dividend is “at risk.” Up to now, BAC has resisted that temptation. It paid its first-quarter dividend, even though the payout exceeded its profits. It paid its second-quarter dividend on June 4. Its next dividend (not yet declared) is scheduled for September 28 — and this is normally the quarterly payment in which BAC increases its dividend each year. In its second quarter report several days ago, CEO Ken Lewis stated that management has recommended to the board that the third-quarter payout proceed as scheduled. This is consistent with earlier statements from Lewis, who had said he “views the dividend as safe” (as reported by MarketWatch) shortly after the second-quarter payout in June.
Because of a significant price drop, BAC in June was yielding a sky-high 11.4%, and several analysts and pundits stated flatly that BAC would have to cut its dividend, because it needed the money. Turns out they were wrong, at the least for this quarter.
I kept BAC on my Top 40 list, and it is still there. I own shares. It turns out that whenever industry heard the recent news about BAC’s second-quarter results, it absolutely was so relieved that the stock jumped significantly more than 70% in just a few days.
Other compared to peril of the dividend being cut, BAC satisfies all my requirements for a high dividend stock. Even at its recovering price (back going to where it absolutely was in mid-May), one could argue that this is a once-in-a-lifetime opportunity to get a world-class company — that will now become the nation’s largest mortgage lender — at a yield that still exceeds 7%. Chances like that not come along often. Notice that if the dividend is not cut, that 7% yield to a brand new purchaser will never go down in terms of the original investment. Actually, it should go up if and when BAC increases its dividend.
Should BAC be on my Top 40 list? Maybe. Do you believe Lewis when he says the dividend is “safe”? What would you anticipate him to express? You think BAC will raise its dividend this season? I don’t, but that alone does not disqualify the company. Do you believe that sooner or later later on, the financial sector will recover, and stocks like BAC will come back to former prices? I do, although it will likely have a few years. Remember the savings and loan crisis of the 1980’s and 1990’s? Banks recovered from that, albeit with plenty of government help and numerous bank failures. The same scenario is playing out today: Plenty of government help, along side some failures.
As an investor, you may make up your personal mind about Bank of America. For my money, it seems like a good long-term investment. The possibility of it failing is near zero. Its dividend is remarkably high for this type of strong business. And I do believe it’s going to weather this storm and continue re-appreciating in price.
I’m focused on the dividend, so I am not as concerned with how long that takes as I will be with a “growth” stock. In the meantime, I will happily collect my checks each quarter.