It’s axiomatic in dividend investing that the very 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 kind of stock investing, all you have to take in selecting individual stocks is history and conjecture. Conjecture contains drawing reasonable inferences from the annals and current conditions.
Regarding history, you wish to find stocks that have a demonstrated record of paying dividends consistently (never missing a payment) and raising them often. Within my 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 lets you know two things that you could reasonably project into the future dividendos. Like, 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 could be the norm. Management expects to carry on to pay 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 could 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’s risk in any prediction, from weather forecasting, to picking your fantasy football team, to selecting the very best stocks. Even when the “odds are with you,” or “all signs point in that direction,” there is risk that any prediction is likely to be wrong.
And so it’s with dividend stocks. Even when we take the most precautions to pick only stocks with a good yield, great dividend history, and the strongest signs of continuing that history, we could be wrong.
The financial sector before 12 months provides some vivid samples 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 in to 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 sought out of business, “saved” only by being purchased at a fire-sale price by Bank of America.
Within my 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 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’s hard to tell if the acquisition of Countrywide, even for a song, is good or bad in the short term. (It might be very good 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 really 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 really 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 will have to cut its dividend, because it needed the money. Ends up these were wrong, at least because of 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 had been so relieved that the stock jumped significantly more than 70% in just a couple of days.
Other compared to peril of the dividend being cut, BAC satisfies all my requirements for a top dividend stock. Even at its recovering price (back planning to where it had been in mid-May), you can argue that this is a once-in-a-lifetime opportunity to acquire a world-class company — which will now become the nation’s largest mortgage lender — at a yield that still exceeds 7%. Chances like that not arrive often. Notice that when the dividend is not cut, that 7% yield to a brand new purchaser will never decrease with regards to the original investment. In fact, it will 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 expect him to state? Do you think BAC will raise its dividend in 2010? 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 go back to former prices? I actually do, though it will most 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. The same scenario is playing out today: A lot of government help, along with some failures.
As an investor, you possibly can make up your 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 do believe it’s going to weather this storm and continue re-appreciating in price.
I’m focused on the dividend, so I’m not as concerned with how long that takes as I would be with a “growth” stock. In the meantime, I’ll happily collect my checks each quarter.