I ran into Alfred Ferol playing golf in Palm Beach, though not at Mar-a-Lago*. He said to me, "Did you notice all the real estate for sale? A property I think should be priced at $1.5 million is now $15 million." Yet, here I live, quite well, on the income I create without owning a palace in Palm Beach.
The point Alfred was making is to not measure investments by their price but by the income. All retired people who live off the income from their investments have to focus on income.
Income is expensive these days
When I got to know Alfred, he bought a Certificate of Deposit (CD) earning 18% for 2 years. Let's put this in perspective: $10,000 @ 18% provides $1,800 simple interest. Today, you would have to invest $75,000 in a two-year CD to get the same $1,800 simple interest income. Two-year CDs pay only 2.4-2.5%. Does that nail the point that income is expensive?
Trade issues are affecting income
Investors here and abroad are nervous about trade issues and international affairs in general. The U.S. is the safe haven. The Nervous Nellies are all buying our U.S.-backed fixed income, which renders it very expensive and low-yielding.
Alfred reassured me to not be nervous about trade issues. Trade is not a problem, it is an opportunity. Industrial production is much more facile and mobile than in the past. Capitalism has invaded many continents, and the human predilection to do what we have to to eat has provided a very large labor pool. Today, moving production from China to Vietnam, for instance, is easier than in the past.
He admits the trade issues affect stock prices, which is why he sees opportunity. But you have to find stocks with good fundamentals that are cheap. Find a stock that is cheap for a reason that will not negatively affect your income.
Is the stock cheap because upside stock price potential is less than, say, Chipotle (CMG)? But for you it is an opportunity because it produces dividend income and dividend income that grows. Your first objective in this exercise of picking stocks is income, not growth.
It is all about income. Income is dividends. Dividends come from earnings, and earnings are driven by revenue growth. Put all that together with a solid balance sheet and you can find stocks with dividends that beat that 2.5% CD.
Guideline for Picking Dividend Stocks.
- Earnings per share, or EPS, must exceed dividends paid out. Otherwise, don't take the risk
- Dividend yield has to exceed 2-year U.S. Treasury. Otherwise, don't take the risk
- Dividend growth has to keep up with inflation.
- Debt to equity ratio has to be 1 or less or within industry standard. Otherwise, don't take the risk.
Industries with low P/E stocks.
Industries with stocks that pay dividends but have low P/E price earnings ratios include:
- Regional and Commercial Banks;
- Auto and Tires in the consumer discretionary area;
- Grocery stores in retail; and finally
There are the industries I will search and these are the criteria I will measure. As I identify stocks I like and that I buy, I will write up their fundamentals and post my trade. Here is an interesting link to a list of stocks for consideration.
Good Income Investing.
* Mar-a-Lago does not have a golf course. Trump International Golf course is in West Palm Beach.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.