Clarity About Goals
It is important for an investor to be clear about his or her goals. Much of the financial press focuses on momentum and short term trades.
Dividend investors have a different perspective and a different time horizon. The goal is to focus on dividend growth. Price is important, but primarily as an entry point (or a point to add more shares).
Much of the market's headlines are driven by the broad averages. But within those broad market movements are numerous mini-movements. Due to fears regarding the future of interest rates, REITs and Utility stocks have been pushed down from their Spring highs.
Sector rotation is a friend to dividend investors. Here is an example of five stocks in my Retirement Income Portfolio. Consider the prices and yields on April 30, 2013:
Genuine Parts (NYSE:GPC) $76.33, 2.8%
Realty Income (NYSE:O) $50.97, 4.3%
WP Carey (NYSE:WPC) $70.52, 4.7%
Southern Company (NYSE:SO) $48.23, 4.2%
Eaton (NYSE:ETN) $61.41, 2.7%.
Compare that snapshot in time with the prices and yields on November 27, 2013:
GPC $81.84, 2.6%
O $38.33, 5.7%
WPC $63.48, 5.5%
SO $40.68, 5.0%
ETN $72.85, 2.6%.
Holding for the Long Term
With the benefit of hindsight, short term traders would have been wise to buy GPC and ETN on April 30th. Not counting dividends, they could have sold on November 27 with profits of 7.2% and 18.6%, respectively. As a long-term investor, I have not been tempted to sell GPC or ETN. While there has been significant price appreciation in both stocks, the relative yields have not changed that much because both companies raised their dividends.
Current Buying Opportunity in REITs and UTEs
The current buying opportunity in REITs and UTEs is reflected in the prices of two REITs, Realty Income and WP Carey. Not counting dividends, O is down 24.8% and WPC is down 9.9%. The "taper" driven swoon is evident in utility Southern Company's 15.65% decline.
Completing a Stock Selection Guide on Realty Income
The Stock Selection Guide, developed by the National Association of Investment Clubs many years ago, is a tool for estimating a potential high price and a potential low price for a stock for the next 5 years. NAIC now does business as Better Investing. For information about their tools such as the Stock Selection Guide, visit www.betterinvesting.org.
I've estimated an average FFO growth for Realty Income of 8% for the next five years. If this occurs, the potential FFO for 2017 would be $3.38, up from $2.30 in 2012. The average high Price/FFO ratio for O for the past 5 years has been 17.2. Multiplying $3.38 x 17.2, gives a potential high price of $58.14.
Multiplying the 2012 FFO of $2.30 by 13.9--the average low P/FFO of the last five years--gives a potential low price of $31.88. So, a possible 5-year price range for Realty Income could be $31.88-$58.14. The price as of this writing, $38.14, would give you an upside/downside ration of 3.1 to 1. (The potential gain would be $20.00 and the potential loss would be $6.26.) By dividing the price range into fourths, the lower "fourth" of the range would top at $38.45 and the upper fourth would begin at $51.58. Thus, a "buy" target today would be $38.45 or below. A "sell" target would be $51.58 or above.
If Realty Income were to hit the projected high price of $58.14 five years out, that would represent a 10.5% annual appreciation from the present price. The average projected yield--based on an average payout of 87% of FFO--in those five years would be 6.6%, for a projected total return of 17.1%.
Completing a Stock Selection Guide for Consolidated Edison
The April 30 closing price for Consolidated Edison (NYSE:ED) was $63.65, for yield of 3.86%. The November 27 closing price was $55.19, a decline of 13.3%. The yield on November 27 was 4.46%.
If one projects a five-year EPS growth rate of 4% for ED, that gives a potential EPS for ED of $4.69 in 2017. With an average high P/E of 16.3, this gives you a potential high price of $76.59. Multiplying the 2012 EPS of $3.88 by the 5-year average low P/E of 12.4 gives a potential low price of $48.04. Thus a "buy range" would be from $48.04 to $55.18. A "sell range" would be from $69.45 to $76.59. The upside/downside ratio at a present price of $55.19 would be 2.99 to 1.
If ConEd were to hit the projected possible high price of $76.59, that would be a 7.75% annual appreciation from the present price (as of this writing) of $55.19. By projecting a 1% annual growth of the dividend, the average yield for the next 5 years (based on a price of $55.19) would be 5.2%. This gives a possible average total return of 12.96%.
If you are a long term, dividend investor, sector declines such as these can provide good opportunities to pick up shares of solid companies with growing dividends at discount prices.
The prices can go lower, of course. Dollar cost averaging can be a great tool for taking advantage of such price movements. I bought some shares of ED on November 27 at $55.10. I may pick up some additional shares of O at $37.97 or below.
This is presented not as a recommendation to buy or sell any security, but rather as a suggestion for some stocks to study. Everyone's situation and risk tolerance is different. Please do your own due diligence.
Disclosure: I am long GPC, ED, O, WPC, SO, ETN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.