How to pick a Winning Dividend Stock
March 22, 2012
Discussed in these articles are:
McDonald's Corp. (NYSE:
MCD),
Wal-Mart Stores Inc. (NYSE:
WMT),
WisdomTree Emerging Markets High Yielding Equity ETF (NYSE:
DEM),
SPDR S&P International Dividend ETF (NYSEArca:
DWX),
BHP Billiton Ltd. (NYSE ADR:
BBL):
Diageo plc (NYSE:
DEO):
Enbridge Inc. (NYSE:
ENB).
Do you need more income? Join the crowd. It seems everyone is scouring the landscape these days for decent
income investments to beef up their monthly take-home - especially now
with the price of gas and other everyday items skyrocketing.
But it's not too late to find great dividend stocks.
You can still get cold, hard cash on a regular basis by investing in
companies that reward loyal investors with substantial dividends. In fact, if dividend-paying stocks aren't a
major part of your portfolio, the odds of being successful in the markets are stacked against you.
Need proof? An exhaustive
study of stock market returns from 1871 through 2003 showed that over a
135-year period owning stocks and reinvesting the dividends produced
97% of all stock market returns. Meanwhile a paltry 3% was produced by
capital gains.
Dividend stocks
are safer too. The very same qualities that allow companies to pay
steady dividends means they're much less vulnerable to broad market
drops than your typical stock. And right now corporate America is willing to pay even more in dividends.
Companies are on pace to pay a record $263 billion in dividends to shareholders over the next year even though the
S&P 500 Index is still more than 10% below its peak, according to S&P Capital IQ reports. "We're seeing good dividend increases across the board," Richard Helm of Cohen & Steers Dividend Value fund told
USA Today.
Buying Great Dividend Stocks
It's no secret - a company's dividends play a major role in their
performance. Yet many investors completely ignore this important fact.
But you can't just plunk your money down on any old dividend stock.
You see, most people get "income investing" all wrong.
They either settle for dividends that are much too low and never grow a penny or they take on way too much risk.
But you can always do better than that if you know what to look for.
Here are three keys to help you identify a great dividend stock...
#1 - Check the Payout Ratio
Some companies may seem to be humming right along, but the truth is
they're consistently paying out more in dividends than they take in.
After a few years of this, the cash runs out and they have to cut or
eliminate the dividend...or worse.
The payout ratio (P/R) helps you sort the wheat from the chaff. A low payout ratio means a company has enough cash to pay off debt, with money left over to invest in growing the business.
To calculate the payout ratio simply divide the annual dividend by earnings per share. If a company pays an annual dividend of $1 per share and earns $2 per
share, the payout ratio would be 50%. Conversely, a dividend of $4 a
share with the same earnings would have an unsustainable P/R of 200%. In general, stocks with a payout ratio under 60% provide an adequate
margin of safety, but as always your personal risk tolerance should be
the determining factor.
#2 - Find Companies with Growing Dividends
If a company is truly a great investment, profits should be going up,
cash should be going up and dividends should also be going up. But truly savvy income investors focus on companies that raise distributions
every year.
And the very best companies have consistently raised dividends for long periods of time.
Typically these businesses have wide moats and strong brands. Companies like McDonald's Corp. (NYSE:
MCD) and Wal-Mart Stores Inc. (NYSE:
WMT)
(
Gold Avalanche note: consider this article on Wal-mart) are able to raise their dividends over time because they can pass cost
increases on to consumers and keep profit margins growing. Look for companies that have been increasing their dividend for at
least five years. These companies should do well during inflationary
times and the rising dividend will also help investors keep their
purchasing power growing as well.
#3 - Calculate the Return on Investment
When you make an investment you should always know what your return
is. You can project your return on investment (ROI) by adding the
dividend to the increase in a stock's price and dividing it by your
original investment.
Say you buy a stock for $10 a share that pays 40 cents a share in
annual dividends. The stock goes up $1 per share the next year, giving
you a profit of $1.40. Divide that by your original investment of $10
and you have an ROI of 14%.
Look for dividend stocks that have consistently beaten the returns on
the S&P 500 Index. The extra margin of safety built in to dividend
stocks also exposes you to less risk. With income hard to come by, dividend stocks are a wise investment choice for
any portfolio. But as always you need to do your due diligence to tailor them to your own unique needs.
Emerging Market Dividend Stocks Give Investors the Best of Both Worlds
February 16, 2012
By Martin Hutchinson, Global Investing Strategist, Money Morning
http://moneymorning.com/2012/02/16/emerging-market-dividend-stocks-give-investors-the-best-of-both-worlds/
Here Gold Avalanche, we see an opportunity developing in Emerging markets, so we want to keep our eye on some of the most visible and widely accessible plays available.Below are some well researched articles to help you on your way. Remember that nothing here should be considered personal investment advice, so talk to your adviser before making any investment decisions.
In today's market, dividend investing is the best way to achieve a decent income stream without taking on too much risk.On the other hand, this is also true: emerging markets give investors the benefit of the world's fastest economic growth. Investors would be wise then to combine these two strategies by buying emerging markets stocks that pay steady dividends.
In practice, this is more difficult than it ought to be - but it's not impossible. In fact, as you'll learn later I have found numerous ways to profit from this best of both worlds strategy.
What You Need to Know About Emerging Market Dividend Stocks
Dividend-paying stocks in emerging markets have the same advantages as they do in the U.S. market.
Just like here in The States, a sizeable dividend from overseas is not only money in your pocket, it's also evidence that the management is working in your interests as a shareholder. And by paying dividends investors can be sure that at least some of the earnings the company is generating are real and not the result of an accounting flim-flam.
If a company in a fast-growing emerging market is able to pay a decent dividend and participate in local growth, then you can anticipate very good returns indeed, since the dividend itself is likely to grow on the back of the company's rapidly increasing profits. Of course, there are always risks in emerging market investing, but a good yield gives your holding a solidity that isn't present in companies with mere paper earnings.
But here's what you need to know...
Most countries impose a withholding tax of 20% or so on the dividends paid to U.S. recipients before you receive them. In a taxable account, these foreign withholding taxes often (but not always) give you a credit against your payable U.S. taxes. In a tax-free retirement account, which is the most sensible place for most investments, there is no U.S. tax against which the withholding tax can be offset, and so the yield to you is correspondingly reduced.
How to Choose the Right Emerging Market Dividend Stocks
Another problem with investing in emerging market dividend payers is that many of them, particularly those located in countries where bank finance is expensive, prefer to retain earnings and thereby reduce bank debt rather than pay dividends. The Brazilian Petrobras (NYSE: PBR), for example, pays out only 5% of its earnings in dividends, giving investors a yield of only 0.5%. Another example is America Movil (NYSE:
AMX). The Mexican mobile telecom company is the basis for Carlos Slim's world-leading fortune. America Movil pays out only one sixth of its earnings and yields just 1.1%. Conversely, in Taiwan, companies gain tax benefits by paying out 80% of their earnings in dividends. As a result, some Taiwanese companies have high dividend yields, although the really juicy ones tend to occur when the semiconductor cycle is favorable, which it currently is not. Still, even at a mere 2.9% yield, Taiwan Semiconductor (NYSE: TSM) is worth considering.
Two Ways to Create an Emerging Market Income Stream
Since many of the better paying companies are not listed on U.S. exchanges, the most efficient way to buy emerging market dividend stocks is through a fund.
The largest and most solid of these is the WisdomTree Emerging Markets High Yielding Equity ETF (NYSE:
DEM)
. This fund has total assets of a chunky $2.7 billion and an expense ratio of 0.63%. It also has an attractive yield of 4.12%, which is highly competitive with even the longest-term Treasury or agency bonds. The fund's P/E ratio is a modest 11 times earnings. The fund has 280 holdings with a good range of emerging market exposure - 21% in Brazil, 20% in Taiwan, 9% in South Africa, 8% in Malaysia, and 5% in Chile. In terms of sector exposure, finance represents 27% of the fund. But not to worry -- this is less of a problem in emerging markets, where the follies of Western banking are only mildly apparent! Other industries include telecoms at 20% of the fund, IT at 13%, and materials and utilities each at 10%.
Alternatively, if you're feeling adventurous and looking for high-yielding exotica, try Kumba Iron Ore (PINK: KUMBF). It's one of the largest companies you've never heard of. Kumba has a market capitalization of $23 billion, and is the iron ore mining subsidiary of Anglo American, the well-known South African mining group. The company just reported a 19% jump in 2011 earnings. Yet the stock is trading at only 10.6 times trailing earnings, with earnings per share (EPS) expected by analysts to increase another 10% in 2012. It has declared a final dividend of 22.50 South African Rand ($2.91 at today's exchange rate), which is expected to go ex-dividend in March. And in August 2011 it paid an interim dividend, for a total of ZAR44.20 ($5.72 approximately), a yield of 7.6% currently. With iron ore prices strong on continued Chinese growth, KUMBF looks like an
interesting buy, and is not overpriced.
Either way, income investors would be wise to look into emerging market dividend stocks. They really are the best of both worlds.
Foreign Market Dividend Paying Stocks
By Don Miller, Contributing Writer, Money Morning
http://moneymorning.com/2012/03/26/how-to-buy-foreign-market-dividend-stocks/
As we saw above, there are some real opportunities in Emerging markets not only for profit, but for regular income. The same type of profit and income can also be had from simply looking beyond your own borders. In the US, this can be as close as that white wonderland to the north,
Canada.
Below is an article on some of the benefits of Foreign market dividend paying stocks, along with a couple of stocks to check out. These are not personal investment recommendations, so talk to your investment broker or adviser before making any investment decisions.
Foreign Market Dividend Stocks Are Bargains
Foreign market dividend stocks
share many of the same qualities of their U.S. counterparts. For the
vast majority, dividends -- not capital gains -- provide the lion's
share of returns. In fact, more than 80% of European returns from 1970-2010 came from a
combination of yield and real dividend growth, according to Blackrock
Inc. (NYSE:
BLK). What's more, even in high-growth regions like Asia, about 60% of
returns over the past 30 years have come from dividends and dividend
growth. And with U.S. investors now barreling into domestic dividend stocks,
international stocks offer another benefit-they are cheaper and less
competitive.
"With much of the dividend corner of the U.S. equity market - including
U.S. utility stocks in particular - now crowded and expensive,
investors might want to consider looking abroad for dividend income,"
BlackRock market strategist Russ Koesterich told
Barron's.
Top non-U.S. dividend stocks are currently priced at less than 10 times forward earnings, according to
Empirical Research Partners -- the only time that's happened since the early 1990s, except for the 2008 financial crisis.
Foreign stocks are also paying out higher yields than U.S. stocks. The broad
S&P 500 Index currently yields around 2% while markets in Australia, France, and Switzerland are yielding 3% to 5%. And there's another angle for investors to like - high-growth emerging
economies are carrying far less debt than developed countries. It's a great way to diversify away from the shrinking American dollar and rake in potential currency gains.
What You Need to Know About Foreign Market Dividend Stocks
But you should know there are some significant differences between U.S. and international dividend stocks. The first is that most foreign companies pay out dividends as a fixed percentage of earnings each year. That means dividends are more likely to be cut in response to
short-term fluctuations in profits, whereas U.S. companies are more
reluctant to cut dividends if the company has a bad year. And many international companies also pay dividends only once or twice a
year - far less than the monthly or quarterly dividends that Americans
have grown accustomed to. Most importantly, lots of foreign countries impose a withholding tax before sending you the dividend. Fortunately, most have treaties with the U.S. where you can claim a credit for the tax withheld, but only if you hold these stocks in a taxable account.
Four Ways to Invest in Foreign Dividend Stocks
Keeping those factors in mind, there are still plenty of great foreign
market dividend stocks that will reward you with high payouts and
substantial returns.
Since many high-paying companies are not listed on U.S. exchanges, a
good way to minimize risk and get plenty of diversification is to
invest in an exchange-traded fund (ETF).
One solid choice is the
SPDR S&P International Dividend ETF (NYSEArca:
DWX). This fund has total assets of over $800 million and a below-average expense ratio of 0.44%.
It also sports a juicy yield of 6.49%, which is a nice payoff compared
to long-term Treasury bonds. And it's cheap, carrying a forward P/E
ratio of only 9.
The fund has broad exposure to various market sectors, with
communication services (21%) and utilities (14%) leading the way. Best of all, the fund has returned nearly 9% year-to-date and over 90% in the last three years.
You can also choose from a bevy of quality individual stocks that trade on U.S. stock exchanges. Here are three foreign-based corporations which-- in keeping with our
criteria-- have increased their dividends for at least five consecutive
years and kept their payout ratio (P/R) below 60%.
They include:
BHP Billiton Ltd. (NYSE ADR:
BBL):
BHP is the world's largest mining company. While BHP's 2.9% yield
isn't jaw-dropping, its dividend has grown by 551% over the last 10
years. The company has $16.6 billion in cash and a rock-bottom payout
ratio of 21%.
Diageo plc (NYSE:
DEO):
DEO is one of the world's largest spirits distributing and packaging
companies. DEO has increased payments to shareholders every year since
1998. The company has delivered a 5.5% annual increase in earnings
per share since 2001, keeping its payout ratio under 50%.
Enbridge Inc. (NYSE:
ENB):
This Canadian energy company recently announced a 15% dividend
increase, the 17th consecutive year of dividend growth. Its 4.26% yield
equates to a 38% payout ratio.
The fact is, in today's global economy you can spice up your returns by
adding some international flavor. Foreign market dividend stocks are a
great place to start.
