|
How
to Find the Best Dividend Stocks
With the market for tech and other growth stocks arguably in over-exuberant
territory, this may be a good time to consider dividend-paying stocks.
Since dividend stocks make regular cash payments to shareholders, you can
score a worthwhile return even if the overall market peters out. If the
market stays strong, you’ll probably enjoy share price appreciation plus the
steady dividend income.
Here’s a screen for finding relatively low-risk dividend payers (Screening
is a process for scanning the market for stocks meeting your specific
requirements). It uses the FINVIZ user-friendly free screener that I
introduced in my last column.
Find it from the FINVIZ homepage (finviz.com)
by selecting
Screener. FINVIZ calls its selection parameters “filters.” On the
Filters bar, select “All” so that you can see all of the available filters
at the same time. Use the associated dropdown menus to select the desired
filter values. Here are the details for my dividend stock screen.
Dividend Yield
Dividend yield is the next 12 month’s expected dividends divided by the
price you pay for the shares. For instance, the yield would be 10% if you
paid $10 per share for a stock expected to pay dividends totaling $1 over the
next 12-months. I required an “over 4%” yield, which is a lot higher than
banks are paying these days. Try raising that requirement to “over 5%” if
you want to restrict your list to higher yielding stocks.
Not Too Small
Generally, larger companies are safer bets than smaller firms because they
have the product diversity and experience to survive unexpected turns in the
economy. Market capitalization, which is how much you’d have to shell out to
buy all of a firm’s shares is the way most analysts measure company size.
Market-caps range from as low as $50 million to more than $150 billion for
the likes of Google. I specified “over $2 billion,” which limits the field
to “mid-cap” and larger stocks. Try cutting your minimum to “over $300
million if you want to see more stocks.
Profitable
Profitability measures how efficiently a company uses its assets to generate
earnings. Return on equity, the most widely used profitability gauge,
compares net income to shareholders equity (book value).
If we were looking for high-growth stocks, we’d want to see a minimum 15
percent ROE. However, dividend -paying stocks tend to be slower growers and
I only required “over 10%” for ROE. Try increasing your minimum to “over
15%” if you want to limit your results to the most profitable companies.
Low Debt
Given the problematic credit markets, low-debt firms are safer than
high-debt companies. That said, most dividend stocks are mature companies
that have built up some debt. Thus, requiring no-debt would rule out most
dividend payers.
The debt/equity ratio, which compares total debt to shareholders equity
(assets minus liabilities), is a widely-used debt measure. A zero ratio
indicates no debt, and the higher the ratio, the higher the debt. I required
an “under 0.5” ratio, which equates to moderate debt. Try cutting you
maximum to 0.3 or 0.4 if you want to limit your list to lower debt firms.
Smart Money
Thanks to the huge trading commissions that they generate, institutional
buyers such as mutual funds have more access to market moving information
than individual investors. Thus, if they don’t own a stock, you shouldn’t
either. Institutional ownership, the percentage of a
firm’s shares held by these big players, ranges from 40 percent on up for
in-favor stocks. I specified “over 40%” for institutional ownership.
Price Action
A stock’s recent share price action tells you a lot about how other
investors view its outlook. Given the recent strong market. The fact that a
stock has gone down instead of up signals added risk.
You can compare the current share price to its moving average (average
closing price of a specified period) to determine whether a stock has
generally been moving up (uptrend) or down. Stocks trading above their
moving average are said to be in uptrends. I used the 200-day (simple)
moving average and required passing stocks to be above the MA.
My screen turned up five stocks, all solid companies and major players in
their industries.
• Bristol-Meyers Squibb (BMY), a
pharmaceutical maker currently paying a 5.6% dividend yield.
• Genuine Parts (GPC), a replacement auto
parts distributor (4.1%).
• Mattel (MAT), a maker of toys and dolls
(4.2%)
• Microchip Technology (MCHP), a
semiconductor chipmaker (4.9%)
• Paychex (PAYX), a payroll service provider
(4.0%)
Be aware that all stock screeners sometimes turn up
erroneous dividend data. Verify everything. If you expand your search to include smaller market-cap stocks, you will
probably turn up stocks paying much higher yields. Keep in mind that yields
much above 8% signal high risk.
Consider the results of any screen, including this one, as candidates for
further research, not a buy list.
published 9/27/09 |
