Friday June 15, 2012
by Kelley Wright, editor IQ Trends
A cash dividend is the most fundamental measure of return on investment and it reveals several critically important attributes about a company.
First, a dividend tells us that the company has earnings; second, a rising dividend trend suggests the company’s earnings are increasing; next, dividend increases reflect management’s optimism about future earnings; and lastly, a long-term track record of consistent dividend increases is a predictor for a rising stock price.
Putting this all together we find that high-quality companies with long-term track records of dividends and dividend increases tend to fluctuate between two dividend yield areas; one where the price is low and the yield is high and the other where the price is high and the yield is low.
Our contention is that the high-yield/low-price area represents good historic value. This means that over long periods of time this is the dividend yield area where a price decline has stopped.
The ostensibly occurs because knowledgeable buyers believe the return on investment from the current cash dividend, which determines dividend yield, and the capital appreciation potential, are simply too attractive to pass up.
Does buying a stock at its historically repetitive area of undervalue guarantee the stock will not decline below that area? No, in the midst of a panic rational thought goes out the window, as do stock prices.
What buying at a historically repetitive area of undervalue provides an investor is a position in a really good company that has historically provided an excellent long-term total return from that
area; nothing more, nothing less.
Based on this strategy, The Timely Ten represents our top ten recommendations, made up of historically undervalued stocks that show exemplary long-term dividend growth.
These stocks also have a P/E ratio of 15 or less, a payout ratio of 50% or less, debt of 50% or less and technical characteristics that suggests the potential for imminent capital appreciation. The current Timely Ten are:
Eaton Corp. (ETN) -- yielding 3.5%
Chevron (CVX) -- yielding 3.7%
ExxonMobil (XOM) -- yielding 2.9%
Coca-Cola (KO) -- yielding 2.7%
Johnson & Johnson (JNJ) -- yielding 3.9%
Union Pacific (UNP) -- yielding 2.2%
Air Products & Chemicals (APD) -- yielding 3.2%
United Technologies (UTX) -- yielding 2.6%
Procter & Gamble (PG) -- yielding 3.6%
Occidental Petroleum (OXY) -- yielding 2.7%
Learn more about this financial newsletter at Kelley Wright's IQ Trends.