It’s axiomatic in dividend investing that the 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 decent initial yield (more than the usual bank deposit),
pay their dividends without fail, and increase their dividends regularly.
As with every kind of stock investing, all you need to be on in selecting individual stocks is history and conjecture. Conjecture contains drawing reasonable inferences from the real history and current conditions.
Concerning history, you wish to find stocks which have a demonstrated record of paying dividends consistently (never missing a payment) and raising them often. In my e-book, “The Top 40 Dividend Stocks for 2008,” I present a rating system for rating stocks along these two scales (plus several others) that I call the Easy-Rate(TM) system.
A company’s history of dividend payments tells you a couple of things as possible reasonably project into the future. Like, if a company has paid a dividend every quarter for ten straight years, and raised the dividend in seven of those years, that implies that the organization is run in this way that dividend-paying is the norm. Management expects to continue to pay the dividend every quarter, and they manage their money accordingly calendário. 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 near 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 best stocks. Even when the “odds are with you,” or “all signs point in that direction,” there is risk that any prediction is going to be wrong.
And so it is with dividend stocks. Even when we take the most precautions to pick 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 now 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 more than 10,000 jobs. Countrywide Financial, the country’s largest mortgage issuer, nearly went of business, “saved” only by being purchased at a fire-sale price by Bank of America.
In my e-book, I selected Bank of America (BAC) as one of many Top 40 dividend stocks. It had 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 tell if the acquisition of Countrywide, even for a song, is good or bad in the short term. (It might be excellent in the long term.)
BAC, like lots of banks right now, needs money. One method to get money, needless to say, would be to cut its dividend. So BAC’s dividend is “at risk.” So far, 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 that is normally the quarterly payment where BAC increases its dividend each year. In its second quarter report a few days ago, CEO Ken Lewis stated that management has recommended to the board that the third-quarter payout proceed as scheduled. This really is in line 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 will have to cut its dividend, since it needed the money. Ends up they were wrong, at the very least for this quarter.
I kept BAC on my Top 40 list, and it is still there. I own shares. As it happens that after the market 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 couple of 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 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 do not arrive often. Notice when the dividend isn’t cut, that 7% yield to a fresh purchaser will never decrease in relation to the first investment. Actually, it should go up if and when BAC increases its dividend.
Should BAC still be on my Top 40 list? Maybe. Do you imagine Lewis when he says the dividend is “safe”? What would you anticipate him to express? Do you consider BAC will raise its dividend in 2010? I don’t, but that alone does not disqualify the company. Do you imagine that sooner or later in the future, the financial sector will recover, and stocks like BAC will return to former prices? I do, although it will probably take a few years. Remember the savings and loan crisis of the 1980’s and 1990’s? Banks recovered from that, albeit with lots of government help and several bank failures. The same scenario is playing out today: Lots of government help, alongside some failures.
As an investor, you possibly can make up your 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 kind of strong business. And I believe it’s planning to weather this storm and continue re-appreciating in price.
I’m dedicated to the dividend, so I’m much less focused on how long that takes as I could be with a “growth” stock. In the meantime, I will happily collect my checks each quarter.