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Good Old Dividends
14 02 06  20  20
-------- Keep em coming
(Joint and simultaneous posting in Stocks For Me and Money and Investing) It used to be that the reason someone wanted to have an interest in a company was to have at least a share or portion of the profits of such company - that is called dividends. Nowadays people are very concentrated on growth, and sometimes they forget that you want a company to be profitable and share the profits with you. Fortunately, there are still companies that do believe in sharing their luck with their owners. And with a few exceptions like General Motors (GM) -- which reminds us that there is no perfect investment scheme, they do grow in share price year over year. A few good examples that I keep in my portfolio are: Bank of America (BAC) with 4.5% yield, Citibank ( C ) with 4.2% yield, Altria (MO) with 4.4% yield, and US Bank (USB) with 4.4% yield. You may have seen me posting on them on my Stocks for Me blog.
There are two very important things about dividends that differentiate them from the yield of a bond or bank account: - While you can either enjoy or reinvest the dividend, the stock can continue appreciating. This can have the effect of protecting you against inflation, while offering you a potentially increasing dividend year over year. Bank interests and bond yields are all you will get (save any appreciation you may get on the bonds on a declining rate market, or in an improving credit conditions for a corporate bond).
- Uncle Sam only charges you 15% on the dividend income for most stocks. However, our fair uncle charges a different and usually higher rate for bank interests and bond yields: the same as your top tax bracket – not fun.
And there are very important reasons for having dividend paying stocks rather than stocks that don’t pay them: - Even in down markets, you have the reassurance that the company can come up with the cash.
- Cold cash is difficult to fake. Remember Enron?
- Dividends payments mean that the company cares about their investors, and usually pair attention about their opinions.
- Dividend paying stocks are stable – most people tend to stay with them even after a bad quarter.
I invite you to research into dividend paying stocks. I usually use yahoo stock screens to look for dividend paying stocks worthy of your money. I use a screen like this one:
- Yield of 3% or more.
- Current Price to Earnings Ratio of less than 20.
- Earnings Growth for this year (estimate) of more than 7% - This, together with the 3% yield gives me a save investment that stays ahead of inflation and taxes. I also ask it to give me companies that will grow their earnings (estimates) for more than 7% for the next 5 years. - This bullet is the only subjectivity in my analysis - and is based on the analyst consensus, not on their buy/sell opinions.
- If you want stability, ask for companies with more than $50 Billion Dollars in Market Capitalization.
A screen like that one gives me 14 stocks to choose from. British Petroleoum (BP), Citigroup (C), Petro China (PTR), JP Morgan (JPM), Wells Fargo (WFC), China Mobile (CHL), AT&T (formerly Southwestern Bell Corporation) (T), Wachovia (WB), Telefonica (TEF), Deutche Telecom (DT), France Telecom (FTE), Companhia Vale (RIO), US Bank (USB), and Taiwan Semiconductors (TSM). I own shares in those in boldface. Before investing into any of the securities provided by a screen a close analysis of the company financials is in order. The screen is not a solve all tool. However, it does scales down the number of companies you have to analyze.
Another source of good dividend paying stocks is to look at the Standard and Poor’s Aristocrats indexes, composed of those companies that consistently have paid dividends for a large amount of time. Other resources you may want to check are: |
