| |
 |
  |
|
| News Articles Stocks DRPs Brokers Links Free Newsletters |
| Rothery Report: Login Learn More Performance Sample Subscribe Contact Us |
5 Stingy Stocks for 2008
5 Graham Stocks for 2008
Is your index too active?
Graham's Simple Way
Canadian Graham Stocks
5 Stingy Stocks for 2007
8 Graham Stocks for 2007
Top SPPs
The Simple Way
A hole in your IPO?
Monkey Business
8 Stingy Stocks for 2006
Graham Stock Gainers
Blue-Chip Blues
Are Dividends Safe?
SPPs for 2005
Graham's Simplest Way
Selling Graham Stocks
RRSP Money Market Funds
Stingy Stocks for 2005
High Performance Graham
Intelligent Indexing
Unbundling Canadian ETFs
A history of yield
A Dynamic Duo
Canadian Graham Stock
Dividends at Risk
Thrifty Value Stocks
Stocks in Short Supply
The New Dividend
Hunting Goodwill
SPPs for 2003
RRSP: don't panic
Desirable Dividends
Stingy Selections 2003
10 Graham Picks
Growth Eh?
Timing Disaster
Dangerous Diversification
The Coffee Can Portfolio
Down with the dogs
Stingy Selections
Frugal Funds
Graham Revisited
Just Spend It
Ticker Temptation
Stock Mortality
Focus on Fees
SPPs for the Long Term
Seeking Solid Stocks
Relative Strength
The VR Approach
The Irrational Investor
Value Investing
Eye on PI
MoneySense Articles
Small stocks, big profits
Cdn Top 200 2008
US Top 500 2008
Value that sizzles
So simple it works
Income 100
No assembly required
Investing by the book
Cdn Top 200 2007
US Top 500 2007
Invest like the masters
A simple way to get rich
Top Trusts 2006
Stocks for cannibals
Car bites dogs
Cdn Top 200 2006
US Top 1000 2006
So easy, so profitable
Top Trusts 2005
Dogs of the Dow
Top 200 2005
Money for nothing
Yield of dreams
Return of the master
Norm Speaks
Dividends are making a big comeback with investors and it's not hard to see why. Many blue-chip stocks are now paying more than GICs, government bonds or high-interest savings accounts. The tax advantages of Canadian dividends makes them even more attractive.
I've long appreciated a good dividend and many of my core holdings pay generous yields, but I'm getting a little nervous about some high yield stocks. Interest rates are at historic lows and my guess is that they're more likely to rise than to fall. If interest rates do rise then high yield stocks will be punished. Also, dividend stocks are not appearing as frequently on some of my stock screens which are pointing to more value in down trodden ex-growth stocks.
Investors seeking high dividend yield should make sure that the dividend is safe. Dividends that are not fully supported by earnings are at risk, but a margin of safety can be achieved when dividends are less than two-thirds of earnings. Investors should also demand that their dividend stocks be supported by strong balance sheets. For industrial companies this means low debt-to-equity ratios and lots of cash. Although each industry is a little different, a debt-to-equity ratio of less than one is usually a good sign. Companies with little in the way of real assets should have even lower ratios. For instance, debt laden software companies tend to be dangerous creatures. Debt that has to be repaid quickly can be catastrophic without suitable cash reserves. A stock's current ratio is a useful tool for measuring short-term cash needs. The current ratio is equal to a company's current assets divided by its current liabilities. Firms with more current liabilities than current assets are risky. Businesses with a current ratio of two or more are relatively safe.
Aside from safety, the dividend investor should consider a firm's growth prospects. It is important to remember that about half of the return from high yield stocks tends to come from capital gains. Although, I am unwilling to pay much for growth I like to see growth potential which leads me to consider smaller companies that are still able to expand. Companies that pay out less than half of their earnings in dividends and have a history of increasing their dividends are particularly interesting. Also, lower yielding stocks with a history of sales and earnings growth are desirable provided that the price isn't too high.
In the end, the most important factor to consider is price. There are a wide variety of tools to help investors estimate when a stock's price is reasonable. I like to use four simple ratios: the price-to-earnings ratio, the price-to-sales ratio, the price-to-cash flow ratio and the price-to-book value ratio. A low value for these ratios is good but special care must be taken when the ratios are very low. Unusually, very low ratios are a sign of acute stress. In such cases, extra patience and additional digging are required. When analyzing ratios look at historical patterns. For instance, the major Canadian banks have traded at price-to-book value ratios of between one and two. In the early 1990s, when the banks were on the ropes, even smaller price-to-book value ratios were common. With the major banks currently trading at price-to-book value ratios of between 1.6 and 2.3 it would appear that their valuations are a little on the rich side. Remember, a dear price can easily turn a supposedly safe investment into a stinker.
Two dividend stocks that I currently favor are:
Phillip Morris (MO on the NYSE, $38.32)
If you think that tobacco companies are evil incarnate then it's best to skip this one. If you like a dividend yield of 6.7%, with a long history of dividend increases, and massive stock buybacks then MO is a stock you should consider. Phillip Morris is by far the largest stock in my portfolio and it is on the risky side due to smoking related litigation and taxation. Even with no growth, MO's earnings yield of 13.9% is mighty attractive.
Buhler Industries (BUI on the TSX, $5.89)
Buhler has been growing sales for years in the difficult farm equipment business. Yet despite its strong growth record the stock remains reasonably priced with a P/E of 10.5 and a price-to-sales of 0.58. To top off a good price, Buhler pays a 2.0% dividend and has a moderate debt-to-equity ratio of 0.52. Since Buhler is a family-controlled small-cap stock it is suitable only for the more adventurous.
First published in January 2003.
More Dividends
- The Top 100 Income Stocks and Trusts in Canada [2007 & 2008]
- Car bites dogs [2006]
- Dogs of the Dow [2005]
- A history of yield [2004]
- The New Dividend [2003]
- Desirable Dividends [2003]
|
|
| About Legal | Contact Us |
A Dan Hallett and Associates Inc. publication. Norm Rothery, Ph.D., CFA, is the Chief Investment Strategist at Dan Hallett and Associates Inc. (DH&A) and the founder of StingyInvestor.com. DH&A is registered as Investment Counsel in the province of Ontario. Norm, DH&A, or related-parties may have an interest in the securities mentioned. More...