Tuesday, September 8, 2015
How to Spot Sustainable Dividends
Prices go down for different reasons. If a company does not demonstrate earnings growth, the value of the company does not increase, and hence the stock price should not naturally go up. But price is the perception of a company's value. So if there are rumors or an executive change, that could lead to uncertainty, some investors might not like that and sell the stock. If there are more sellers than buyers, the price goes down.
When the broader market is in a sell-off, we see many stocks lose value. This is no reflection on how well the business is run, or if it's making money. If we truly based stock price on a company's earnings, we should only trade the few days following their earning announcement, when we have real data to work with. Everything else is speculation.
What we do have is historical performance. We can look at how companies performed throughout the ups and downs in the market, even through recessions. You'll find that the stock market goes through stretches of increases and decreases, or bull and bear markets. If you're a value investor this will make you nervous as you'll need to time exactly where the market is in its cycle. This is of course impossible to know. As a dividend investor, it is much easier to pick a time to buy - each and every day! Dividend stocks go up and down just like everything else. But companies with a solid dividend strategy tend to manage well through good economic times and bad.
In our screener we use several historic data points to see how companies did in the past. This includes years dividends were paid out, if there were cuts or raises, if dividend growth was consistent, and the dividend growth rate. If you select companies that perform well against these criteria, you can pick up shares at a discount in a down market. You'll get a better yield for a high quality stock. And you'll still get the comfort of knowing that even if a bear market is about to set in for several years, that your purchase will keep paying out, and that eventually even the price will recover. This is what we call sustainable dividend stocks.
On my short list for further research today: CFR, EMR, AEP, CTWS, JNJ, LNT, MDP, MGEE, NEE, SON, VVC. I own JNJ and I'm looking to possibly add to my position this month.