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riphammer
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Defined Benefit Pension Plan Manager, 401k Manager. MBA
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Inurfaceinvesting
  • Dividend Play- Maximize Your Returns 0 comments
    Feb 18, 2013 7:21 AM | about stocks: RSO

    The dividend game is not the easiest game to play. How do you determine what a good divident play is and what is not? Do you chase high yields? The answer to that question is "Yes and no." High yields need investigating. When looking at a stock with a high yield, a smart investor will check to see if the high yield is trying to drive buying and increase the stock price, if the stock price took a dive, which increases the yield or if the dividend is sustainable.

    So, how do you determine the quality of the dividend? The first thing to check is the levered free cash flow as this number determines how much money is available after expenses and taxes. If the levered cash flow is does not support the dividend, then the dividend is simply bait to stimulate buying of the stock for dividend chasers. The way to determine if the levered cash flow does not support the dividend, just divide the levered cash flow by the number of outstanding shares. If the number is more than the dividend, then the levered cash flow does not support it.

    Another strategy is to check the dividend history to see if the payments are stagnant, increasing or decreasing. If the payments are stagnant, then that isn't necessarily a bad thing. You prefer the payments to be at least consistent, but preferably increasing each year. Missed payments is a big red flag and decreasing payments. The ideal dividend stock is one that is financially stable and increases dividend payments. If the stock is financially stable, but does not increase dividend payments, then the lever cash flow should be divered to research and development. If it is not, then the excess cash flow is being sent to cover stock options, which begs to question if the levered free cash flow is being wasted on the exectutives and being reinvested into the company to spur growth.

    Another strategy is to try to trade dividend stocks to maximize the number of dividend payments. This strategy is difficult as the transactions costs can be high, so the investor would need a significant amount of money in order to make enough to cover the excessive trading costs.

    The ideal dividend stock is financially stable, the levered free cash flow must justify the dividend payment. It also must have an increasing dividend payment (regardless of yield).

    The dividend game is easy, but as long as you aren't greedy, you can make effective decisions to maximize the returns from your investments. If history has taught us anything, it is that 70% of the historic returns from the market are from dividends.

    Use you head. Good luck!

    Disclosure: I am long RSO, DUK, JNJ.

    Stocks: RSO
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