It is axiomatic in dividend investing that the best dividend stocks score highly on dividend yield, consistency, and growth. If you are concentrating on dividends (rather than exclusively on price), you obviously want to possess companies that have a significant initial yield (more when compared to a bank deposit),
pay their dividends without fail, and increase their dividends regularly.
Just like every type of stock investing, all you have to be on in selecting individual stocks is history and conjecture. Conjecture consists of drawing reasonable inferences from the real history and current conditions.
Concerning history, you intend to find stocks that have a demonstrated record of paying dividends consistently (never missing a payment) and raising them often. In my own e-book, “The Top 40 Dividend Stocks for 2008,” I present a rating 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 informs you a few things as possible reasonably project to the future. As an example, in case a company has paid a dividend every quarter for ten straight years, and raised the dividend in seven of the years, that suggests that the organization is run in such a way that dividend-paying could be the norm simulador. Management expects to continue to pay for the dividend every quarter, and they manage the business’s money accordingly. They know they’ve a constituency of shareholders who expect that dividend and periodic increases, and they “play to” that constituency. Skipping a payment or cutting the dividend would probably cause many shareholders to abandon the stock, bringing a disastrous fall in the stock’s price.
But any projection into the long run is conjecture, isn’t it? There’s risk in virtually any prediction, from weather forecasting, to picking your fantasy football team, to selecting the best stocks. Even if the “odds are with you,” or “all signs point for the reason that direction,” there is risk that any prediction is going to be wrong.
And so it is with dividend stocks. Even if we take the utmost precautions to select only stocks with an excellent yield, great dividend history, and the strongest signs of continuing that history, we could be wrong.
The financial sector previously 12 months provides some vivid examples of such risk. Many retail banks, commercial banks, investment banks, and mortgage lenders have been pummeled by the sub-prime mortgage crisis, which morphed right 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.
In my own e-book, I selected Bank of America (BAC) as one of many Top 40 dividend stocks. It’d a 6.6% yield, good valuation, and had raised its dividend for a lot more than 25 straight years — a select club with only 59 members. But BAC has been hit hard by the credit crisis, and it’s hard to inform whether the acquisition of Countrywide, even for a song, is good or bad in the short term. (It is probably excellent in the long term.)
BAC, like plenty of banks today, needs money. One way to get money, obviously, is always to cut its dividend. So BAC’s dividend is “at risk.” To date, BAC has resisted that temptation. It paid its first-quarter dividend, even although 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 in line with earlier statements from Lewis, who’d said he “views the dividend as safe” (as reported by MarketWatch) shortly following 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, as it needed the money. Works out these were wrong, at least with this quarter.
I kept BAC on my Top 40 list, and it’s still there. I own shares. It turns out that when industry heard the recent news about BAC’s second-quarter results, it had been so relieved that the stock jumped a lot more than 70% in just a few days.
Other compared to the peril of the dividend being cut, BAC satisfies all my requirements for a top dividend stock. Even at its recovering price (back going to where it had been in mid-May), one could argue that this can be a once-in-a-lifetime opportunity to get a world-class company — that may now become the nation’s largest mortgage lender — at a yield that also exceeds 7%. Chances like that do not come along often. Notice that when the dividend is not cut, that 7% yield to a brand new purchaser will never decrease in terms of the initial investment. Actually, it will go up if and when BAC increases its dividend.
Should BAC be on my Top 40 list? Maybe. Do you imagine Lewis when he says the dividend is “safe”? What can you anticipate him to say? You think BAC will raise its dividend this season? I don’t, but that alone doesn’t disqualify the company. Do you imagine that sooner or later as time goes by, the financial sector will recover, and stocks like BAC will come back to former prices? I do, though 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 several bank failures. A similar scenario is playing out today: A lot of government help, alongside some failures.
As an investor, you may make up your own personal mind about Bank of America. For my money, it seems like an excellent long-term investment. The opportunity of it failing is near zero. Its dividend is remarkably high for this type of strong business. And I believe it’s going to weather this storm and continue re-appreciating in price.
I’m centered on the dividend, so I’m not as concerned with just how long that takes as I would be with a “growth” stock. In the meantime, I’ll happily collect my checks each quarter.