Tuesday, May 08, 2012
Saturday, May 05, 2012
Morningstar: Four key attributes of a good dividend stock
Dear Investor,
The appeal of dividends has grown a lot in recent years, but by itself, a fat dividend yield isn't enough. To work for you in the long run, these cash payments need to come from fundamentally attractive businesses. That's why at Morningstar DividendInvestor I focus on helping you separate the wheat from the chaff.
Once you find those reliable dividend-payers, hold on tight, because the dividends you earn are real cash in your pocket. You can reinvest them to supercharge your portfolio and watch them rise no matter which way the market goes.
Of course, we're not talking about crazy, speculative investments. I look for solid companies with strong competitive advantages. What kind of companies do I look for? Here are four key attributes I look for before putting my hard-earned capital to work:
1. Resilient earning power. Some businesses, like homebuilders or auto manufacturers, need a booming economy just to be profitable. Others are in better shape, but still ride the economy's roller coaster--as do their shareholders. My favorite businesses, however, are the ones selling products and services their customers need through all kinds of economic conditions, from packaged foods to petroleum pipelines. I may not have as much to "win" in the boom times, but I continue collecting big dividend checks through the inevitable busts.
2. Strong, identifiable competitive advantages. One hallmark of a good business is an ability to fend off rivals and keep profits high. Some have strong brands that command premium prices. Others have patents. Still others benefit from inherently low costs relative to their rivals. Whatever the reasons, these advantages support the profits that in turn fund my dividends, so I require evidence of competitive strength for any stock I would consider.
3. Attractive dividend policies. It's a shame so few large companies pay the dividends they're capable of paying. Many and perhaps even most good businesses divert their cash flow into questionable share buybacks or downright dubious acquisitions. I want my companies to grow, of course, and I like to see some reinvestment in the business. But a dividend policy that shares a large proportion of annual earnings with shareholders is a must.
4. Reasonable valuation. The number-one mistake an investor can make is to pay too much for a stock in relation to the intrinsic value of the underlying business. This can apply to any individual issue, or to the entire market--which goes a long way toward explaining why the past decade has been so disappointing overall. Fortunately, big dividends tend to keep investors rational. I'm not looking at any stocks that can't deliver a yield of at least 2%, and preferably 3%, 5%, or better. And I won't pay more than the business is worth, no matter what the yield may be.
My "pitch" holds no mystery: If DividendInvestor sounds like a service that might help you meet your financial goals, give us a try. And with our money-back guarantee, there's no risk.
Best regards,
Josh Peters, CFA
Senior Equity Strategist
Editor, Morningstar DividendInvestor
Author, Ultimate Dividend Playbook
Life, Liberty, & the Pursuit of Happiness
The appeal of dividends has grown a lot in recent years, but by itself, a fat dividend yield isn't enough. To work for you in the long run, these cash payments need to come from fundamentally attractive businesses. That's why at Morningstar DividendInvestor I focus on helping you separate the wheat from the chaff.
Once you find those reliable dividend-payers, hold on tight, because the dividends you earn are real cash in your pocket. You can reinvest them to supercharge your portfolio and watch them rise no matter which way the market goes.
Of course, we're not talking about crazy, speculative investments. I look for solid companies with strong competitive advantages. What kind of companies do I look for? Here are four key attributes I look for before putting my hard-earned capital to work:
1. Resilient earning power. Some businesses, like homebuilders or auto manufacturers, need a booming economy just to be profitable. Others are in better shape, but still ride the economy's roller coaster--as do their shareholders. My favorite businesses, however, are the ones selling products and services their customers need through all kinds of economic conditions, from packaged foods to petroleum pipelines. I may not have as much to "win" in the boom times, but I continue collecting big dividend checks through the inevitable busts.
2. Strong, identifiable competitive advantages. One hallmark of a good business is an ability to fend off rivals and keep profits high. Some have strong brands that command premium prices. Others have patents. Still others benefit from inherently low costs relative to their rivals. Whatever the reasons, these advantages support the profits that in turn fund my dividends, so I require evidence of competitive strength for any stock I would consider.
3. Attractive dividend policies. It's a shame so few large companies pay the dividends they're capable of paying. Many and perhaps even most good businesses divert their cash flow into questionable share buybacks or downright dubious acquisitions. I want my companies to grow, of course, and I like to see some reinvestment in the business. But a dividend policy that shares a large proportion of annual earnings with shareholders is a must.
4. Reasonable valuation. The number-one mistake an investor can make is to pay too much for a stock in relation to the intrinsic value of the underlying business. This can apply to any individual issue, or to the entire market--which goes a long way toward explaining why the past decade has been so disappointing overall. Fortunately, big dividends tend to keep investors rational. I'm not looking at any stocks that can't deliver a yield of at least 2%, and preferably 3%, 5%, or better. And I won't pay more than the business is worth, no matter what the yield may be.
My "pitch" holds no mystery: If DividendInvestor sounds like a service that might help you meet your financial goals, give us a try. And with our money-back guarantee, there's no risk.
Best regards,
Josh Peters, CFA
Senior Equity Strategist
Editor, Morningstar DividendInvestor
Author, Ultimate Dividend Playbook
Life, Liberty, & the Pursuit of Happiness
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