Now that rates are going up, will folks abandon the dividend and income strategy? I doubt it. In picking dividend stocks, I use two services. I am associated with combining both fundamentals and technicals. One service has a definite fundamental bias. The other is more balanced and may tilt a little more to factors other than fundamentals. There are several free scanning services on the web, so you can compare your results with mine.
Many years ago, one of my clients was in the top tier mutual funds for dividend and income. They had an elegant buy and sell discipline that did much more than just a linear buy and sell discipline. It was simple. If the stock dividend yield went above a certain rate, they would buy, and if it went below a certain rate, they would sell. All stocks were pre-selected for excellent fundamentals and put on the approved list. Their portfolio managers could then select from that list and compete with one another for performance. The elegance of the buy/sell discipline was that if dividend yield was high, the price was probably low, and they would buy on weakness automatically. Likewise for sells; as yield dropped, the price was probably going up, and they could easily sell into strength. Another by-product of this elegant system was they were always in undervalued stocks, and many would be acquired at a nice premium for big gains on a lowly dividend play.
With the above strategy in mind, I decided to scan 8,000 stocks for dividends above 3%, my sell line in the sand. I would select stocks above 3.5% yield. I would demand good fundamentals and forecast data. I would look for 10 stocks above 3.5% to buy and hold and would sell any stocks dropping below 3% in the future and replace them with others. The hurdle rates of 3% and 3.5% could be tweaked depending on market conditions. With interest rates going up and folks bailing out of dividend stocks, it may be easy to move these decision making yields higher for future stock selections.
My StockPickerUSA.com system came up with 52 stocks yielding 3% or more. All of the stocks were in the undervalued column, as opposed to the fairly valued and overvalued columns on the valuation grid. No surprise here, as I had opted for stocks with good fundamental and forecast data. Now I had to reduce that number to 10, so I put them through my second system ChaikinAnalytics.com. It came up with 2 out of 52 in the green, an oil company, Conoco Phillips COP, and a utility, Northeast, NU. I needed 8 more.
I checked the latest daily update, and it gave me another in the green. (You can obtain these signals free on your mobile phone to check me.) Another utility, Xcel Energy, XEL popped up on an improved rating. Also Tal Intl, TAL a leasing/rental company had a buy signal. The other 4 stocks, although neutral rated had strong technicals and were buy rated by StockPickerUSA. They were Intel, INTC in technology, Freeport McMoran, FCX in metals, Lockheed Martin, LMT in aerospace, and NY Community, NYCB savings and loan. The final two I picked on name recognition, Merck, MRK in drugs and AT&T T in telecom.
Thus we have set up our model portfolio for dividends and we will follow the 3% rule for the time being. Of course, we can sell before it drops below 3% if we want to rotate into a better candidate. Now let's look at some comparative fundamental metrics for these stocks picked by two computer programs just to make sure the fundamentals are good.
Explanation: COP has a book "bok" value of $39, an average "avg" analyst target of $67, an analyst high target "hi tgt" of $81, a StockPickerUSA.com "usa" score of 6 out of 30 where 3 is best and 30 is worst, and a ChaikinAnalytics.com rating of very bullish "VBULL". In addition Tal Intl has a Chaikin rating of neutral with strong technicals "neut/st".
Disclaimer: Nothing in this article recommends the buying of any stock. Every person must do their own due diligence on these stocks selected by computer. Computer selections, analyst targets and technical signals can be wrong. Consult a professional financial adviser if necessary.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.