Monday, May 4, 2009

Time to add dividend stocks to your portfolio

If you believe that we've already seen the bottom of the market and it has no where but to go up (or sideways at the worst), then you might be thinking that now would be a good time to start lining your larder with some high dividend-paying stocks. Why would you want to do this? For the following reasons:

1. Dividends account for most of the wealth accumulated in the stock market. And don't believe that dividend stocks are for income generation only—au contraire mon ami! In fact, if you're a young person just beginning to save for retirement (which you should be doing!!!!), adding some high-quality dividend-paying stocks to your portfolio is one of the wisest things you can do. Especially if you elect to re-invest your dividends into buying shares of your stock. This is a form of compounding, one of the most powerful methods of generating long-term wealth.

2. Buying dividend-paying stocks at depressed prices boosts your dividend yield because of the low cost basis.

3. Buying dividend stocks at depressed prices also gives you the added benefit of price appreciation.

To find stocks that have high dividends and with a good fundamentals, I ran a stock screen on the MSN Money Central Stock Screener (which is free to all and with whom I have no affiliation) according to the following criteria:

* Average daily volume greater than 100,000 shares. This ensures liquidity and a narrower bid/ask spread.

* Last price greater than $2. In bullish environments, this criteria could be raised, but I chose this value since many issues are so undervalued.

* Current dividend yield = As high as possible

* Stock Scouter rating greater than or equal to 7. This is an attempt to capture the higher quality issues.

I screened the top 50 stocks according to the bullish strength in their charts. (I know this is subjective but judging from today's action, this group is up on average over 3.5% as of this writing.) The following twenty-two stocks are my top picks. The stocks highlighted in rose are those that have broken out today.

The table is divided into three groups: the top seventeen stocks are drawn from the energy, financial, real-estate, and utility sectors—exactly where you'd expect to find the high-dividend payers. The next three are from other sectors that are trending up. The last two are currently in a holding pattern after an initial run up. [Click on the chart to enlarge.]

So, how should you play these?
I know you've heard that stocks that pay a high dividend should be avoided because there's a usually a reason for the high payments. But in many of these cases, I think that the reason is just that they've been way oversold. Some of these stocks are as much as 75% off their highs. However, that doesn't mean you should neglect your due diligence!

I grouped the table according to sector because it's important to diversify your holdings. You don't want your nest eggs to all come from the same basket as doing so increases the risk to your portfolio. Remember, it's not only profits that count, but also the amount of risk that goes into getting that return.

If you don't like my picks, try modifying the screening parameters to reflect your investment taste, but don't waste too much time. I think that now is THE time to begin stocking up on dividend-paying stocks. Go gettem'!

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