In yesterday's recipe I mentioned that using Mergent's Dividend Achievers book and/or one of their premade indexes would help you identify good, undervalued stocks with currently high dividend yields. The theory is that you start buying these stocks (especially in your retirement account) while you can still lock in these high yields. Another way is to use the above screener as an identification tool.
The screener is a powerful tool with about as many inputs as an investor could want. Unfortunately though, it can't access data any further back than five years unlike the Mergent book which includes relevant data for up to 50 years. Notwithstanding, one can still use the screener to find some good stocks.
Initializing your search
What you need to do is just play around with the input parameters. There are a lot of them, but don't get discouraged. Once you get the hang of it, it's really pretty easy. Here's a few parameters you might want to use as your foundation screen:
Dividend Growth
This parameter is the one that should be on all of your screens. Companies with strong historical growth rates are usually committed to continuing it. You can vary the growth rate, but I like to start with a growth rate >= 10. If you don't get many at this level, try lowering it.
- Growth Rates: 5-year dividend growth >= 10
Current Dividend Yield
Since we're looking for beaten down stocks to lock in a high dividend yield, we should set our parameter to choose those stocks with DY's greater than our minimum acceptable level. Mine is 5.
- Dividends: Current Dividend Yield >=5
Since dividends come from earnings, we want some sort of industry consensus that the company will be able to at least pay its dividend in the coming years. A 10% minimum average annual earnings growth over the next five years will weed out the shaky companies (think GM and many financial stocks).
- Analyst Projections: EPS Growth Next 5 Yrs >=5
These are the basic parameters. Here are some you can use as a springboard to refine your search even further.
Refining your search
We're looking for undervalued companies with steady cash flow. Parameters such as a low PEG (Price/Earnings ratio to Growth) will find undervalued stocks while those involving low debt/equity ratios will find companies who will stand a better chance of being able to service pay their dividend instead of servicing their debt.
- Advisor FYI: Price Ratios: PEG Ratio Below 1 = True Now
- Advisor FYI: Financial Condition: Debt to Equity Decreased = Since (Last year or last quarter)
Some evaluation of the condition of the company can be had by using the Analyst Projections: Mean Recommendation >= Hold. I know I've mentioned my skepticism when it comes to analysts, but if you think a company looks rosy but all of Wall Street is screaming "Sell!", there just may be something wrong with it.
Simulation resultsUsing all of the above parameters (with Debt/Equity Decreased Since Last Quarter) yielded four stocks: Sasol LTD (SSL), New York Community Bancorp (NYB), CNOOC LTD (CEO), and Preferred Bank (PFBC). They all have DYs ranging from 5-8%, and all are heading downwards following the overall market. I prefer the first two because of their lower price (compared with CEO) and their higher liquidity (PFBC average daily volume is 86k).
A nifty way to get into either SSL or NYB would be to write cash-secured puts. I'd recommend the Nov 22.5 puts or the Nov 20 puts (more conservative) for SSL, and the Nov 12.5 put for NYB. Remember that selling put premium is tantamount to lowering your cost basis. (Cost basis = strike price - premium)
Summary
I do hope you try this screener or something like it. (I know Zack's has one but I don't think the free version offers as many features as the MSN screening tool.) Now's a good time to make your holiday dividend paying shopping list. Hey, a good dividend paying stock would also make a lovely addition to a young relative's tax-deferred college fund. (Check with your accountant first.)
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