It’s axiomatic in dividend investing that the very best dividend stocks score highly on dividend yield, consistency, and growth. When you are concentrating on dividends (rather than exclusively on price), you obviously want to own companies that have a significant initial yield (more than the usual bank deposit),
pay their dividends without fail, and increase their dividends regularly.
As with every type of stock investing, all you’ve got to take in selecting individual stocks is history and conjecture. Conjecture includes drawing reasonable inferences from the real history and current conditions.
Concerning history, you wish 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 these two scales (plus several others) that I call the Easy-Rate(TM) system.
A company’s history of dividend payments tells you a few things that you could reasonably project into the future. For instance, in case a company has paid a dividend every quarter for ten straight years, and raised the dividend in seven of the years, that implies that the organization is run in such a way that dividend-paying may be the norm. Management expects to continue to cover the dividend every quarter, and they manage their money accordingly. They know they’ve a constituency of shareholders who expect that dividend and periodic increases, and they “play to” that constituency ações. 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 long run is conjecture, isn’t it? There is risk in any prediction, from weather forecasting, to picking your fantasy football team, to selecting the very best stocks. Even though the “chances are with you,” or “all signs point for the reason that direction,” there is risk that any prediction will be wrong.
And so it’s with dividend stocks. Even when we take the utmost precautions to select only stocks with a good yield, great dividend history, and the strongest signs of continuing that history, we could be wrong.
The financial sector in the past 12 months provides some vivid types of such risk. Many retail banks, commercial banks, investment banks, and mortgage lenders have already 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 an increase of 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 among the Top 40 dividend stocks. It’d 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 is hard to tell perhaps the acquisition of Countrywide, even for a tune, is good or bad in the short term. (It might be great in the long term.)
BAC, like plenty of banks right now, needs money. One way to get money, needless to say, is always 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 where 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. That is consistent 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.
As a result of 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. Works out these 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 whenever the market heard the recent news about BAC’s second-quarter results, it was so relieved that the stock jumped more than 70% in just a few days.
Other than the peril of the dividend being cut, BAC satisfies all my requirements for a high dividend stock. Even at its recovering price (back about to where it was in mid-May), you can argue that this is a once-in-a-lifetime opportunity to get a world-class company — that will 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 isn’t cut, that 7% yield to a new purchaser won’t drop in relation to the first investment. In reality, it should go up if and when BAC increases its dividend.
Should BAC nevertheless be on my Top 40 list? Maybe. Do you believe Lewis when he says the dividend is “safe”? What might you anticipate him to say? Do you consider BAC will raise its dividend this year? I don’t, but that alone does not disqualify the company. Do you believe that at some point later on, the financial sector will recover, and stocks like BAC will return to former prices? I actually 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 numerous bank failures. An identical scenario is playing out today: Lots of government help, along with some failures.
As an investor, you may make up your own personal mind about Bank of America. For my money, it appears like a good long-term investment. The chance of it failing is near zero. Its dividend is remarkably high for this kind of strong business. And I think it’s going to weather this storm and continue re-appreciating in price.
I’m centered on the dividend, so I am never as concerned with the length of time that takes as I will be with a “growth” stock. For the time being, I’ll happily collect my checks each quarter.