Thursday September 20, 2012
by Kelley Wright, editor IQ Trends
With the 10-Year Treasury yielding 1.65% and the 5-Year and 2-Year yielding 0.69% and 0.32% respectively, investors are desperate for income.
Out of desperation or necessity then, investors are starting to catch on that some companies pay cash dividends and the really good ones, the best of the best, raise their dividends on a consistent basis.
The key with dividend paying companies though is having a value identification system to differentiate the good from the bad and the ugly.
Now the term “good” can mean different things to different people. For the inexperienced investor good generally refers to a high yield.
In fact, I had a discussion the other day with a new subscriber who asked why don’t you just rank all stocks by high-yield to low-yield and just buy all of the higher-yielding stocks.
On a certain level I understand this line of thinking but to paraphrase the Good Book, man doesn’t live on high-yield alone.
While yield is important, it is after all a measure of return on investment, it isn’t the end all be all of value identification, however. What we have found is the best of the best are businesses that offer products and services that consumers want and need.
They have management teams that demonstrate managerial competence over long periods of time. They have long-term track records of earnings and dividend improvements.
The percentage of earnings paid out in the form of dividends (the payout ratio) is sufficient to reward the shareholder while allowing the company flexibility to maintain and grow the business.
Debt is managed and as used as a tool rather than as a crutch or a mask to cover up deficiencies or mistakes. These companies are generally recognized as a leader in their field.
While buying a great company that is an easily recognized brand is important from the qualitative standpoint, your work as an analyst and investor is still only half done; the other half is the value proposition.
If you do everything right and then overpay for a stock you increase your downside risk and reduce your upside potential.
This is why it is critical to know the long-term repetitive dividend-yield patterns of great companies. Price is what you pay; value is what you receive.
Meanwhile, here's our latest Timely Ten list, which represents our top ten current recommendations. Each has exemplary long-term dividend growth, and a P/E ratio of 15 or less:
Chevron Corp. (CVX) -- yielding 3.2%
Eaton Corp. (ETN) -- yielding 3.4%
United Technologies (UTX) -- yielding 2.7%
CVS Caremark (CVS) -- yielding 1.4%
Occidental Petroleum (OXY) -- yielding 2.5%
Air Products & Chemicals (APD) -- yielding 3.1%
Coca-Cola (KO) -- yielding 2.7%
General Dynamics (GD) -- yielding 3.1%
Reliance Steel (RS) -- yielding 1.9%
ConocoPhillips (COP) -- yielding 4.7%
Learn more about this financial newsletter at Kelley Wright's IQ Trends.