It is axiomatic in dividend investing that the best dividend stocks score highly on dividend yield, consistency, and growth. When you are emphasizing dividends (rather than exclusively on price), you obviously want to own companies that have a good initial yield (more than a bank deposit),
pay their dividends without fail, and increase their dividends regularly.
Much like every kind of stock investing, all you need to take in selecting individual stocks is history and conjecture. Conjecture contains drawing reasonable inferences from the annals and current conditions.
Regarding history, you want 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 scoring 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 two things that you can reasonably project into the future. For instance, if a company has paid a dividend every quarter for ten straight years, and raised the dividend in seven of those years, that suggests that the organization is run in this way that dividend-paying is the norm. Management expects to keep to cover the dividend every quarter, ações 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 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 is risk in virtually any prediction, from weather forecasting, to picking your fantasy football team, to selecting the best stocks. Even if the “chances are with you,” or “all signs point in that direction,” there’s risk that any prediction will soon be wrong.
And so it’s with dividend stocks. Even if we take the most precautions to select only stocks with a great yield, great dividend history, and the strongest signs of continuing that history, we can be wrong.
The financial sector in the past 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 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 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 had a 6.6% yield, good valuation, and had raised its dividend for 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 share with perhaps 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 plenty of banks today, needs money. One way to get money, obviously, is 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 although 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 a few 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 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 they certainly were wrong, at least for this quarter.
I kept BAC on my Top 40 list, and it’s still there. I own shares. As it happens that when the market heard the recent news about BAC’s second-quarter results, it absolutely was so relieved that the stock jumped more than 70% in just a couple of days.
Other than the peril of the dividend being cut, BAC satisfies all my requirements for a premier dividend stock. Even at its recovering price (back going to where it absolutely was in mid-May), you could argue that this can be a once-in-a-lifetime opportunity to obtain a world-class company — that may now end up being the nation’s largest mortgage lender — at a yield that still exceeds 7%. Chances like that not show up often. Notice that if the dividend is not cut, that 7% yield to a fresh purchaser will never decrease in relation to the initial investment. Actually, it should go up if and when BAC increases its dividend.
Should BAC nevertheless be on my Top 40 list? Maybe. Do you imagine Lewis when he says the dividend is “safe”? What can you anticipate him to state? You think BAC will raise its dividend this year? I don’t, but that alone doesn’t disqualify the company. Do you imagine that at some point in the foreseeable future, the financial sector will recover, and stocks like BAC will go back to former prices? I actually do, though 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 plenty of government help and a number of bank failures. The same scenario is playing out today: Plenty of government help, alongside some failures.
Being an investor, you may make up your own mind about Bank of America. For my money, it seems like a great long-term investment. The chance of it failing is near zero. Its dividend is remarkably high for this kind of strong business. And I do believe it’s planning to weather this storm and continue re-appreciating in price.
I’m centered on the dividend, so I’m never as concerned with the length of time that takes as I would be with a “growth” stock. For the time being, I will happily collect my checks each quarter.