Rock Solid Yield: What others are suggesting for Solid Yielding Stocks.
By Ron Rutherford, courtesy of Sabrient
In my last post, I opened the Rock Solid Yield category and briefly introduced you to Sabrient’s upcoming Platinum level subscriber product. To further define the overall strategy, I will compare and contrast our approach to some worthy suggestions by others.
Perhaps Motley Fool might have some thoughts on the what are the Best Dividend Stocks for Beginners? The question they pose to the round table of contributors and associates is:
I’m just starting, know little, have about $500, and want a solid stock with dividends as my first position. What should I look for?
All the writers provided good suggestions and ideas but the best was provided by Dan Caplinger. For a small first time investor with very limited funds, ETFs could provide diversification and thus lower risks. The Motley Fool, as well as the Rock Solid Yield (”RSY”) portfolio, look for “solid fundamental stocks” which pay dividends for years to come and increase in value over that time. But from the list of stock suggestions, it became obvious that they were not picking stocks strictly based on dividend yield percentages, as most are under 5%, with only BP yielding a generous 9%. Motley Fool’s advertising even promotes these ideas as 6 Secrets to Finding Dividend “Money Machines”.
6 Secrets of Dividend Investing:
How You Can Earn Great Returns with Less RiskFinding the best dividend stocks takes some legwork and careful analysis. However, here is how you can find the best long-term performers:
1. Avoid the Highest Dividend Stocks — You can’t pick stocks by dividend yield alone. Above-normal dividends are often a red flag of a company in distress. Studies have consistently shown that you will earn higher long-term returns by avoiding risky stocks with overly high dividends.
All six points made by the panelists are important considerations in making a Rock Solid Yield portfolio but “avoid” might not be the best describer of how to search out the best performing stocks. I believe a more productive approach is to be even more cautious and careful about higher paying dividend stocks. The higher the dividend yield, the greater the scrutiny should be. The risks associated with BP stock from the oil spill are well documented by the media. However, the market may be underpricing BP now as fear rises concerning the many risks, not the least of which is the security of the dividend payout. Risks from damages they may be liable for can be estimated in broad terms but the damage to reputation and future customer reaction is uncertain. It is also important to consider other stakeholders, including the President and Congress, who could use moral persuasion and even laws to severely hamper BP’s ability to make a profit for their shareholders.
The RSY portfolio will be looking for good value stocks that have a Sabrient Rating of STRONGBUY or BUY, and begin with a starting position of $100,000. This will make it easy to scale the positions to match user size and provide the ability for suitable diversification. I will begin the process of wielding out the RSY portfolio by running Sabrient’s “MyStockFinder” (available in the Sabrient Gold Level subscription) questionnaire in search of a list of good candidates. So let us look at how Motley Fool’s choices, as well as a few other suggestions for a dividend portfolio, stack up based on Sabrient’s rating system:
This report was derived from Sabrient Ratings Reports (available to Silver Level Subscribers for $7.95/month). As it shows, most would not get into the pool of candidates except for maybe BP and GameStop (GME) because the have a HOLD rating from Sabrient. None on the list above appear on the top 50 of RSY MyStockFinder questionnaire run.
DuPont (DD) was a recommendation from Cramer’s ‘Mad Money’ Recap on May 12th. GME, MCK and TWC all came from Jack Hough’s article 3 Stocks Producing 10% Free Cash Yields. These provide us with added conviction of 1 STRONGBUY on our list and 2 BUY rated stocks out of the list of 10 for consideration. I believe strong Free Cash Flow is important. As Motley Fool stated:
3. Cash Is King — Free cash flow (FCF) is the true health of the business. Find the companies that generate tons of it. Even in the worst of times, those flush with greenbacks have options. Firms with cash can buy back their shares to raise stock prices, make their debt payments, increase dividends, and buy other profitable businesses. That’s why cash flow is the single most important factor that determines value in the marketplace.
What does this mean for the RSY portfolio?
While we may succumb to the cocktail party stock picking advise, it is better to have a systematic way of getting a list of candidates for the investment portfolio as well as selection of the individual stocks. None of the stocks listed above made it into to our RSY questionnaire results but also none were SELL or STRONGSELL and their rankings could change over time.
RSY will try to manage turnover in the portfolio. The exit strategy or portfolio re-allocations will be partially based on changes to Sabrient’s ratings on the individual holdings. For example, a Sabrient Rating on a stock from STRONGBUY to BUY may warrant a reduction in exposure but a drop to HOLD may indicate a need to liquidate the position-unless there is some compelling reason like a dividend payout coming up shortly.
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Full disclosure: The author does not personally hold any of the stocks mentioned.
