How to Buy the Right Dividend Stock - At the Right Price

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 |  Includes: CMRE, DHT, DIA, DIG, ESEA, GLBS, NMM, SEA, SPY, TGP, TOO
by: Five Plus Investor

I have a confession to make. I am an “extreme couponer”.

If you have seen the TV show “Extreme Couponing”, you know exactly what I’m talking about. I’m one of those crazy ladies that clips mounds of coupons and plans my shopping trips to the last detail based on store sales, cash back bonuses and coupons.

Laugh if you will, but in the last month I obtained all my family’s toothpaste, deodorant and paper products for FREE. Why pay more for something when it can be obtained for nearly nothing?

I carry this same sense of bargaining when looking for dividend-paying common stocks to invest in. I never buy retail in my real life – why should I start in my investing life?

“We Interrupt This Series to Bring You the Following Special Article…”

I debated about whether or not today’s article belongs in my “Sleep at Night Series”. The “Sleep at Night” series focuses on certain classes of investments that one can hold in good markets and bad. So far, we have focused on certain classes of fixed income investments. These investments generate high dividend yield and may not appreciate much in a good market…but they won’t depreciate much in a declining market either.

While the “Sleep at Night” series may open the investing jungle up to new classes of investments that most common stock investors aren’t aware of, we still have the “elephant” in the room…the “eighteen hundred pound gorilla”…

What about high dividend common stocks?

Common stocks are typically more volatile than preferred stocks or debt instruments. They are the market’s general proxy for a company’s financial health, and therefore are more subject to depreciation and dividend cuts upon bad news. This can differ – sometimes dramatically - from most companies' related fixed income instruments.

At the same time, common stocks are also the general proxy for a company’s good news. Common stocks are the primary beneficiary of a growing healthy company. As a result, common stocks are better with rising stock prices in a bull market, and are superior to fixed income instruments for dividend increases.

If you want to grow the capital appreciation and dividends of your portfolio, there is no better vehicle than common stocks. The question then becomes:

Can I invest safely in common stocks?

There is a “sleep at night” way to say “yes” to this question, and I will address that strategy in a future article. But saying “yes” to that strategy, in most cases, leaves a key component off the table, and that is: capital appreciation.

“I’ll Take a Side Order of Capital Appreciation with My Dividends, Please…”

For the pure dividend growth investor, capital appreciation is strictly optional. These investors are buy-and-hold until a dividend cut, and they view depreciation as an opportunity to buy, not sell. I fully concede that this is a more “sleep at night” approach to common stock investing than what this article proposes.

If, however, you want a side order of capital appreciation with your dividends, this article will address a key concept in obtaining capital appreciation, and that is:

Buy the right dividend stock - at the right price.

The danger for the new retail investor is assuming that by taking a common stock position, they will experience capital appreciation - automatically. I read (with understanding humor) comments from new investors that they view a particular stock as “dangerous” because the stock sank upon taking a position. May I gently propose that, just as you wouldn’t hunt the elephant or the “eighteen hundred pound gorilla” without scouting the landscape, consulting with experienced hunters and gathering the proper ammunition, you can’t take a position in a common stock without proper guidance and tools - then expect success on your quest for capital appreciation.

This article endeavors to assist new investors with the guidance and skill needed to take a good position - at the right price. We will address two primary factors that influence buy/sell decisions:

  • Market / Stock Environment (Fundamentals)
  • Market / Stock Performance (Technicals)

The article then proposes the steps needed to assess environment and performance:

  • Evaluating the Market
  • Evaluating Sectors
  • Screening for Stocks
  • Evaluating Candidates for a Watch List
  • Finalizing the Watch List
  • Taking Your Position
  • Gathering More Information
  • Exiting if Needed

Step One – Evaluating the Market

Use Fundamentals and Technicals

There is no real debate that fundamental factors are more important than technical factors. However, because the technical aspects of the market affect the pricing of stocks, the blended approach investor looks at both factors. This is a theme we will address throughout this article.

When we evaluate the market, we are simply looking at how the indices are currently performing, in relationship to current news and technical strength.

Fundamental factors to look at when evaluating the market are how the economy is currently performing; current political climate; and news that affects the markets. In general, when there is good economic news, the market will usually react with rising stock prices. On a broader scale, there are bull and bear markets where markets rise or depreciate, spanning over years, and even decades.

How you visualize the market environment (and the performance of a particular stock) is where technical analysis comes in. In a nutshell, technical analysis plots market buy/sell activity and seeks to show in a visual way how the market and individual stocks are performing.

Let’s look at the market today. The political and economic news of late has been mixed. The markets have been jolted by more bad news regarding the ongoing European debt crisis. There is also the old trader’s saying – “sell in May and go away.” There is a fundamental reason to wait for your buying. What does this look like visually?

Technical Analysis Tools

There are two extremely simple ways to “visualize” the markets and individual stocks. These are:

  • Use ETFs as a proxy
  • Use Finviz.com as your chart tool

In my opinion there is no better website to understand basic technical factors than Finviz.com. ETFs, which are primarily index funds, also act as basic (although imperfect) proxies for the market and market sectors.

Therefore, looking technically at the market as a whole, we are going to use index ETFs, plugged into Finviz.com, to chart out current technical strength.

An Introduction to Technical Analysis using Market Indices

DIA is the Dow Jones Index ETF and SPY is a S&P Index ETF. We can use these ETFs to track easily how the Dow and S&P are performing.

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click on each chart to enlarge

At this point I will pause to explain two key concepts of technical analysis: support/resistance, and moving averages. There are many other concepts, but these two are the most accessible to most investors.

The blue lines on the charts above are support lines, and the purple lines are resistance lines. Support lines chart the low points of the stock’s closing prices, and resistance lines chart the high points. The swirling pink, orange and tan lines are 20-, 50- and 200-day moving averages. Moving averages follow pricing trends, based on past closing prices, and are another way to define support and resistance.

The support and resistance lines form a pricing channel. When a stock is appreciating, it normally follows a channel up pattern, where the support and resistance lines create a tube-like formation that inclines. Conversely, a channel down reflects a depreciating stock price, and forms a tube-like pattern that declines.

Ideally, one wants to buy into a stock that is channeling up. The closer one can ascertain that a stock is trending up and can buy into the up trend - or visually, the bottom end of the tube - the greater likelihood of experiencing capital appreciation.

As well, one wants to buy closer to support lines, rather than resistance lines. Buying on the low end of the channel (support), rather than the high end (resistance) better insures a good price for your buy. Conversely, buying on resistance may mean the stock will likely channel back down. This means the stock will depreciate, and you must hang on to the stock, hoping it will continue channeling up, in order to attain any capital appreciation.

Back to our charts: looking at DIA and SPY, we can see that in terms of general market direction, now may not be the right time for buying, period. The SPY especially looks troublesome, as we see that the pricing trend has broken below the support line. This usually means that the market may be heading lower.

When these technical factors are combined with bad fundamental news, this usually means we are headed for some corrective trends in the market.

Simply put, one does not want to be doing most of their buying on the cusp of a market correction. This is how portfolios lose out in capital appreciation, and how many an investor lost their shirt in the 2008 market crash.

Step Two – Evaluating Sectors

In any bear market, statistics show that 70% of stocks decline in value. The good news in that statistic is that 30% of stocks do not decline. One of the keys to holding, or even growing, your portfolio appreciation in the tough times is to invest in those sectors that are prospering in the midst of a declining market.

After evaluating the market (Step One), you may well make the good decision not to buy right now. But curiosity may get the best of you. Are there sectors that may be ready for a comeback?

For fundamental trends, there is no substitute for being well-read. The successful retail investor never rests on what he/she already knows. Instead, they devote themselves to daily reading Seeking Alpha and reputable investment/economic publications. For other media input, avoid TV and stick to Bloomberg radio, which gives balanced and thorough analysis of economics, politics, stocks, sectors and trends.

For technical trends on various sectors, we can use sector-specific ETFs as a proxy for sector direction. For purposes of this article, we will look at two sectors – oil/gas, and shipping.

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DIG is an oil/gas ETF. Oil and gas has lately been a hot sector for investment, as commodity prices rise while the dollar deflates. But is now a great time for a buy? According to the chart above (click to enlarge) the answer could be both “yes” and “no”. DIG is off the highs of resistance, but it has also broken support. DIG was a better buy at the sub-$40.00 level.

If you assess fundamentally by recent news, the answer may be, “wait”. The U.S. currently has an abundance of strategic oil reserves, and there are hints from the current administration that they may allow more drilling permits. Since we are looking for a “buy” and not a “wait”, we will move on from oil and gas and explore a different sector.

Here’s a sector that has caught the author’s eye – shipping. The shipping sector ETF is SEA:

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This chart (click to enlarge) makes the contrarian investor wake up and take notice. The shipping sector has been declining since November 2010. You see on the chart two blue support lines. One is trending downward since early December 2010. The other is holding steady since September 2010. Right now, the ETF is trading just below support. The question then becomes – is shipping as a sector on a decline, or is it showing signs of recovery?

To answer that question we need to go back to the more important aspect - fundamental analysis. Most brokerage accounts include research on sectors and stocks by Moody’s and S&P. You can also access Morningstar through membership at most public libraries. There are many reputable investing websites that publish articles on investing. Looking at information readily available, the outlook for the shipping sector is cautiously optimistic. Most analysts predict increased shipping activity for 2011 – 2012:

Conclusion? Now may not be the right time to buy into the shipping sector. However, it is a great time to evaluate the sector to create a watch list. If the sector begins to trade above the support line (the $25.00 level), making higher highs and higher lows, then technically the sector will be in recovery mode. If this happens, getting in early is the key to experiencing the most appreciation on your stock picks.

Step Three – Screening for Stocks

Once you locate a sector of interest, it is time to screen. The purpose of the screen is not to buy immediately, but to create a watch list of potential buys.

Before you run your first screen, set your criteria.

CAVEAT: For the purposes if this article, I am keeping it simple on the fundamental metrics. Let me state from the outset: there are a whole set of fundamental metrics that must be considered before taking a position. I am only using one metric (P/E) NOT as a recommendation, but for simplicity's sake.

For the purposes of the article the criteria is set at:

  • Dividend yield of 5% or more
  • Stable or growing dividend
  • No dividend cuts in the last five years
  • Undervalued sector
  • P/E under 20
  • “Buy” or Better Analyst Recommendation
  • Technical indicators ripe for rebound

Your First Stop….

A great place to locate a dividend performer is David Fish’s Dividend Champions, Contenders and Challengers list. Click here for the list in Excel, and click here for the list in PDF. I propose that the David Fish lists be your first stop in locating possible candidates for your watch list.

You can sort the Excel version according to “industry” or sector. David Fish lists shipping stocks in the “Transportation” sector. There are no “Champions” in Transportation, but in the “Contenders” and “Challengers” sections there are several selections.

For the purposes of this article, none of these yield 5% or more. So we will move on to our stock screen. The blended approach / high yield investor can let go of a growing dividend, if the dividend is stable.

Screening for yield, PE and a buy

Using Finviz for our screener, we screen for stocks in the shipping sector with:

  • low P/E (under 20)
  • High dividend 5%
  • Shipping sector
  • Analyst recommend of “Buy” or better

The screen gives us seven possibilities: Costamare (NYSE:CMRE), DHT Holdings (NYSE:DHT), Euroseas Ltd. (NASDAQ:ESEA), Globus Maritime(NASDAQ:GLBS), Navios Maritime Partners (NYSE:NMM), Teekay LNG Partners (NYSE:TGP) and Teekay Offshore Partners (NYSE:TOO).

Finding a Stable or Growing Dividend

To determine if the dividend is stable or growing, one needs to ascertain the dividend history.

There are several ways to find the dividend history:

  1. DailyFinance.com – input your stock quote, then click “Dividends & Splits”.
  2. Your brokerage house charting tool: set the chart for 5 years and

    click the “dividends” tab.

Looking for Technical Strength

You can accomplish this with your brokerage house charting tools and with Finviz.com for a complete picture. This will be detailed in Step Four.

Step Four – Evaluating Candidates for a Watch List

Let’s put it all together to see which of our screened stocks may meet our criteria for a watch list “buy”, based on fundamentals and technical strength.

CMRE – Costamare, Inc. Click to enlarge:

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  • P/E: 10.21
  • Forward P/E: 9.08
  • Dividend Yield: 5.8% ($1.00 yearly, stock price now $17.11)
  • Dividend History: only trading since November 2010
  • Analyst Rating: Dahlman Rose ranked “Buy” on May 11,2011
  • Technical: Now trading on support

Fundamental: Low P/E. It has analyst support, although only from one analyst. The dividend is stable at 25 cents per quarter. The greatest fundamental “hiccup” on this stock is its history. It has only been trading since November. Since CMRE is so new we must consider it speculative buy at best.

Technical: This stock has quite a run-up since its introduction. Right now, it appears to be taking a breather from making higher highs. It is trading nicely on support, but the secondary resistance line that is lower gives cause for concern.

Verdict: CMRE gets placed on my speculative watch list, but not on a watch list for an immediate buy.

DHT – DHT Holdings, Inc. Click to enlarge:

Click to enlarge

  • P/E: 16.40
  • Forward P/E: 9.76
  • Dividend Yield: 9.76%
  • Dividend History: Dividend Cut in 2009
  • Analyst Rating: Last upgrade was September 2010
  • Technical: Channel Down

Fundamental: Dividend was cut in 2009. It has been well over 8 months since the last analyst upgrade. S&P gives DHT only 2 stars.

Technical: Channeling down, and has yet to reach a bottom.

Verdict: DHT does not make my watch list.

ESEA – Euroseas, Ltd. Click to enlarge:

Click to enlarge

  • P/E: Not available
  • Forward P/E: 12.86
  • Dividend Yield: 5.18%%
  • Dividend History: Variable dividend, based roughly on stock price
  • Analyst Rating: Upgraded to Outperform by FBR Capital in March
  • Technical: Channel Up

Fundamental: Stock price is trading below $5.00. The lower the price of the stock, the more volatile it will behave. Dividend is worrisome, although the dividend increased in 2009 and is stable this year.

Technical: Not a bad chart, but it remains to be seen whether or not the stock will make a higher high, or dip back down to $3.50 support.

Verdict: Stock price too low and dividend history too questionable to make my watch list.

GLBS – Globus Maritime, Ltd. Click to enlarge:

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  • P/E: 10.90
  • Forward P/E: 15.15
  • Dividend Yield: 7.16%
  • Dividend History: One dividend in 2008; no dividends 2009; restarted
  • dividend in 2010; one dividend increase since
  • restarting dividend
  • Analyst Rating: Yahoo reports “Strong Buy” but does not give analyst
  • Technical: Trading above moving averages

Fundamental: Low P/E, but Forward P/E is not lower than present P/E. Dividend history is of concern, but it is encouraging that the company has recently increased dividend. Globus Maritime’s website did not state a dividend policy.

Technical: Price is very slowly creeping upward, and is trading above moving averages.

Verdict: More information needed. Contact Investor Relations to ascertain dividend policy. Place on a speculative watch list.

NMM – Navios Maritime Partners, LP. Click to enlarge:

Click to enlarge

  • P/E: 13.53
  • Forward P/E: 14.30
  • Dividend Yield: 8.59%
  • Dividend History: Increasing dividend; increases 1-2x per year
  • Analyst Rating: Scale 1 to 5 – ranks 2.5
  • Technical: Off resistance, testing moving averages

Fundamental: NMM is a shipper with one of the industry’s most consistent dividends. The forward P/E is essentially stable. Analysts are tepid as to whether or not NMM is currently a buy.

Technical: Current direction not clear. Support line at just under $18.00. Currently testing the moving average, may break downward to 200-day moving average.

Verdict: Goes on watch list just for dividend history, but not for a buy right now.

TGP – Teekay LNG Partners, Ltd. Click to enlarge:

Click to enlarge

  • P/E: 23.83
  • Forward P/E: 16.88
  • Dividend Yield: 7.14%
  • Dividend History: Increasing dividend; increases 1-2x per year
  • Analyst Rating: Last upgrade was in October 2010
  • Technical: Trading on upward support line

Fundamental: Teekay Corporation is a well-known shipping operation. Dividend history for last five years is solid. Current P/E is pretty much at valuation, but forward P/E is lower, and at 16 is on the cusp of being considered “undervalued”.

Technical: At a nearly perfect point for a buy, trading right on support. However, direction is not clear, as there is also a downward support line.

Verdict: BUY NOW at more risk; wait for future direction for less risk.

TOO – Teekay Offshore Partners, LP. Click to enlarge:

Click to enlarge

  • P/E: 23.20
  • Forward P/E: 18.03
  • Dividend Yield: 6.80%
  • Dividend History: Increasing dividend; last dividend payment was increased
  • Analyst Rating: Neutral to Sell
  • Technical: Broken support, trending downward

Fundamental: Teekay Corporation partnership. Dividend history is solid but does not have the frequent dividend increases that apply to TGP. Forward P/E does not indicate an undervaluation.

Technical: Not the prettiest of charts. Just broke channel support.

Verdict: Due to valuation and technicals, does not go on watch list.

Step Five – Finalizing a Watch List

Based on the evaluations made above, I am placing CMRE and GLBS on a speculative buy watch list, and NMM and TGP on a watch list.

Step Six – Gathering More Information

Many experienced investors perform this step first of all. They familiarize themselves with a sector or industry; research the best performers; then go about creating a watch list based on their research.

Whether you do this before or after you screen for stocks, it will be important to dig deeper before taking a position. More information on the company can be gathered from:

  • Company website
  • Annual reports
  • Investor relations
  • Magazine and online articles (Wall Street Journal, IBD, et al)
  • Morningstar (available through public library)
  • S&P and other ratings services (reports often available with brokerage account)
  • Seeking Alpha
  • Online communities (Fool.com, brokerage forums)

Step Seven – Taking Your Position

When you see the convergence of a favorable market and an undervalued stock that is ripe for rebound – and you’ve done all your homework and are confident you are picking an under appreciated winner – then treat yourself to the fun part. Take your position. Stick to the rule of thumb that the position should not take more than 5 – 10 % of your total portfolio.

Step Eight – Exiting If Needed

Hopefully after taking your position, you reap the rewards of your hard work and see the stock appreciate. While you greatly increase your chances with abundant due diligence, Mr. Market has a mind of his own. Sometimes he simply determines that your trade won’t work…and it has nothing to do with you.

When a trade goes south, what should you do?

Option One: Sit idly by. Wring your sweaty hands. Believe that if you just hold on a little longer it will certainly go better. I mean - look at all the homework you put into it! Certainly, you can’t be wrong?

Option Two: Cut your losses and move on.

My advice is: choose Option Two. The hardest part of implementing a trading strategy is being a steely-eyed realist about your success. At the end of the day, it’s not all up to you – both the successes and the failures. Mr. Market has the final say, and he is not to be argued with. Therefore, before you ever take a position, determine your exit strategy.

Some investors put in a stop loss order immediately upon taking a position. I don't recommend this for a new investor. Instead, pick a percentage or dollar point of depreciation at which point you would sell, and monitor your position and the market closely.

My stop-loss criteria: I allow an equal percentage of negative depreciation to the stock yield. So – if a stock has a 5% yield, I allow it to go into negative territory up to 5%. A 7% yielder is allowed up to 7% depreciation. The standard benchmark for depreciation is 10%, as beyond 10% it becomes exponentially more difficult to make up the loss.

If your position reaches your pre-determined negative benchmark - SELL. Don’t look back. Move on. Look to the next opportunity. Above all, don’t take it personally. Even the most seasoned fund managers on Wall Street don’t get it right 100% of the time.

Concluding Remarks

High dividend common stocks, unless held in a DRIP or long-term for income regardless of capital appreciation, may not be a “sleep at night” investment for many new investors. However, buying common stocks well, represents the best opportunity for a growing dividend base with capital appreciation. The key to buying well is – buy the right stock at the right price.

Getting the right price for your stock means assessing the market, looking out for undervalued market segments, and creating a watch list of individual stocks with fundamental and technical characteristics that look to be on the rebound. Once a new investor learns some basic assessment and trading techniques, they can better “sleep at night” with common stocks that they hold for dual purposes of income and capital appreciation.

Disclosure: I have held NMM for several years. I have held ESEA in the past. I took a position in TGP two weeks ago, before writing this article.

Disclaimer: Five Plus Investor is written for the retail investor, from a retail investor’s experience and point of view. The articles presented by the author are for informational purposes only. Five Plus Investor is not a professional investment counselor. Before investing one should conduct their own due diligence or seek the advice of a professional as needed.