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Dividends Better Than Banks
Depending on when you turn on the TV,
you’ll hear that the market is headed up, headed down, or in a trading
range. In fact, probably nobody knows.
Given the uncertainty, it’s tempting to
just park your money in an insured bank account. That’s certainly the
safest approach. But with many banks paying less than 3% on CDs, judging
by my mail, many investors are seeking another alternative.
With that goal in mind, I devised a
strategy for finding relatively safe stocks paying dividends equating to
higher yields than you can get from a bank. Yes, these stocks would
probably drop if the economy dives or if the credit markets do another
somersault. But, if your investing timeframe is long enough to outwait
such events, say a year or so, these stocks would probably be trading
higher, plus you would have been enjoying better than bank rate returns
while you were waiting.
Screen For Candidates
I used a stock screener to find stocks that, in theory at least,
would do the job. Stock screeners are programs available on financial
sites that you can use to search the entire market for stocks meeting
your specific requirements. A few years ago, there were many free stock
screeners that could do this job. But, alas, most have disappeared. I
know of only one remaining free screener, MSN Money’s Deluxe Screener
that is up to the task (disclosure: I also write for MSN Money).
Find the screener from MSN Money’s homepage
(moneycentral.msn.com)
by selecting
Investing and then
Stock Screener. If you’re a first-time user, you’ll have to download
free special software. The screener only works with Microsoft’s Internet
Explorer browser.
If you are a first time user, plan on
spending some time learning how to use the screener. But stick with it.
Once you get the hang of it, the screener will be your best friend.
Next, I’ll describe how my screen works.
Since the specified screening parameters can be difficult to find when
setting up your screen, I’ll note the corresponding parameter category
in parenthesis.
Yield
Better Than Banks
Since, beating bank CD rates is the main idea, I’ll start with dividend
yield (estimated next 12-months’ dividends divided by the current share
price). I required a minimum 4% yield, which
should be enough above bank rates to make it worth the effort. The
screening term looks like this: Current Dividend Yield >= 4
(Category: Dividends). You would read this term as meaning that the
current dividend yield must be equal to, or greater than
4%.
Bigger is Safer
Safety is just as important as dividend yield, and when it comes to
safety, size matters. Large firms are more likely to survive economic
ups and downs unscathed than smaller ones. Big companies usually offer
more diversified product lines, have stronger balance sheets, and have
probably already survived just about every type of economic twist and
turn.
Market capitalization is a popular size
gauge. It’s how much you’d have to pay to buy all of a firm’s shares.
Market-caps below $1 billion define small-caps, and firms with
market-caps above $10 billion are large caps. Those in-between are
termed mid-caps. To minimize risk, I limit the field to large-cap
stocks. Screening term: Market Capitalization >= 10,000,000,000
(Company Basics).
Profitability Counts
To state the obvious, consistently profitable companies are safer than
cash burners. Return on assets (12-months’ net income divided by total
assets) is a widely used profitability gauge. Positive values identify
profitable companies. Normally, we’d want to see values above five, and
higher is better. However, the recent topsy-turvy credit markets, along
with the resulting economic slowdown have sunk many firms’ profits. So,
rather than looking at the past 12-month’s results, I consider the past
five-years and cut them a little slack, requiring only a value of four
for ROA. Screening term: ROA: 5-year Average >= 4 (Investment
Return).
Follow Smart Money
Institutional buyers such as mutual funds and pension plans employ
squads of analysts, plus, by virtue of the big commissions that they
generate, are more tuned into the market than individual investors. So,
rather than analyzing financial statements and market outlooks on my
own, I’ll piggyback on the efforts of these in-the-know players, and
stick with stocks that they like.
Institutional ownership, the percentage of
a company’s shares owned by institutional investors, range from 40%
to 95% for stocks in favor with the
smart money. Screening term: % Institutional Ownership >= 40
(Trading & Volume).
Analysts Can Help
It’s also worth paying attention to how analysts view a stock. While
they are far from perfect, if anything, analysts are usually too
optimistic about a stock’s outlook. So, it’s worth paying attention when
they do advise selling. MSN Money compiles analyst buy/sell ratings for
each stock into the following categories: strong buy, buy, hold,
moderate sell and strong sell. I require a “hold” or better rating.
Screening term: Mean Recommendation >= Hold (Analyst
Projections).
Follow the
Trend
Finally, a stock’s recent price action can tell you a lot about the
future. Stocks that have been trending up are said to be in “uptrends”
and those going the other way are in “downtrends.” In my experience,
uptrending stocks are usually your best bets. You can tell which way a
stock is trending by comparing its current price to its moving average,
which is its average closing price over a specified number of market
days. Stocks trading above their moving averages are in uptrends and
vice versa.
I use the 50-day moving average and require
passing stocks to be at, or above that level. Screening term: Last
Price >- 50-Day Moving Average (Trading & Volume).
My screen turned up five stocks, with two,
AT&T (ticker symbol T) and Telus (TU) in the same industry. I’m sure
you’re familiar with AT&T. Telus is Canada’s second largest telecom
company. The remaining three stocks include pharmaceutical maker Bristol
Myers Squibb (BMY), diversified chemical maker Dow Chemical (DOW), and
electric utility Southern Company (SO). (Disclosure: I own shares of
AT&T). Here's a
link to the screen so you can see what it turns up today.
Keep in mind that the results
of any screen should be considered as research candidates, not a buy
list. The more you know about your stocks, the better your results.
published 5/11/08 & 5/18/08 |
