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A downturn is the time to hunt for dividend stocks

The beach is sparkling in the sun, the water looks inviting, and I'm sitting in front of a computer screen because Mr. Market is once again sliding into depression. But a little panic is invigorating because there are bargains to be had, and I'm on the hunt for a few good dividend stocks.

Dividend payers can be attractive in downturns because they tend to be large, mature firms with fairly stable growth prospects that are unlikely to get washed away when the tide goes out. Don't get me wrong: They aren't risk-free, and they may get banged up a bit in a real collapse. But you can only buy them at reasonable prices when the outlook is grim.

Naturally enough, not every dividend stock will do. Experienced investors know that stocks sporting extraordinarily high yields deserve extra scrutiny because they can be risky.

For instance, Yellow Media's (YLO) dividend yield recently topped 30 per cent, which significantly exceeds the single-digit yields offered by most high-yielding Canadian stocks. That's a giant warning flag. As it turns out, the warning was prophetic because Yellow slashed its annual dividend from $0.65 per share to $0.15 on Thursday. Painfully, its stock fell 43.3 per cent that day. So, take a lesson from Yellow Media and don't stretch too far for yield.

Indeed, past history has shown that dividend investors should focus on stocks with above-average, but not stratospheric, dividend yields. That's exactly the sort of stock I'll hunt for today.

I start my quest by visiting GlobeInvestor.com, head to the Markets section (in the dark grey menu), and then to the Indexes sub-section (in the light grey menu) which gets me to the indexes page.

A click on the 'Complete Member Listings' link on the right hand side of the page goes to the Index Quotes page, which is where the real fun begins.

I use 'Option B: Index Members Stock Report' which provides information on each stock in the index selected. I choose the S&P100 as the index from the pull-down menu, specify the 'Price Report - % Change' as the report type, and click Go.

As a result, a big table of data on each stock in the S&P100 appears. But I want to focus on high-yielding stocks. So, I click on the 'Dividend Yield' heading, which sorts the list by dividend yield from high to low.

The complete member listing for indexes is a great feature and something that I use frequently to find high-yielding stocks in a variety of indexes. You can also discover low-P/E or low-P/B stocks in a similar fashion if you click on the financial tab.

But let's get back to dividend stocks. I went with the S&P100 because it tracks 100 of the largest stocks in the United States, which makes it a good place to get ideas for conservative investors. It also happens that many large U.S. stocks have been in a rut due, in part, to ongoing political shenanigans and depressed economic conditions.

I want to stick with good but not super-high yields and first eliminate stocks with below-average yields from consideration. I then knock out 10 per cent of the stocks with the highest yields. As it turns out, no S&P100 stock currently sports an outrageously high yield but I'll err on the side of caution and stick with my cautious method, nonetheless.

That narrows down the list but I want to add in another important safety factor. After all, while big stocks are generally more stable than their smaller brethren, they can still topple over in a big storm.

For reassurance, I like to examine a firm's earnings. More specifically, I want a company to earn much more than the dividend it pays out. A company that pays investors more than it earns over the long term will eventually be forced to cut its dividend and disappoint them.

I also want to avoid overly concentrating in one industry group, which is a trap that dividend investors can fall into. For diversification's sake, I've selected one stock per industry with a high and well-covered dividend yield. The 10 with the highest yields are shown in the accompanying table.

I think this screen produces a nice starting list of stocks that can be investigated in more detail. Even better, it is easily applied to other North American indexes such as the Dow Jones industrial average, S&P500, or the S&P/TSX60 for Canadian stocks. Head over to GlobeInvestor.com, try it out yourself, and think about adding a few dividend stocks to your portfolio.

Stocks with above average, but not unusually high, dividend yields have outperformed over the long term. Here are a few blue-chip U.S. stocks for dividend investors.
NameSymbolPriceYield %E/P %P/E
Lockheed MartinLMT71.32 4.2 10.6 9.5
IntelINTC20.85 4.1 10.6 9.4
NYSE EuronextNYX29.20 4.1 7.713.0
Avon ProductsAVP22.88 4.0 7.5 13.4
Abbott LabsABT48.77 3.9 9.0 11.1
ConocoPhillipsCOP66.92 3.9 10.59.5
Philip Morris InternationalPM67.40 3.86.515.5
HeinzHNZ50.19 3.8 6.1 16.4
General ElectricGE16.47 3.67.912.7
DuPontDD47.24 3.5 8.0 12.5
Source: Globeinvestor.com, August 4, 2011


First published in the Globe and Mail, August 2011.

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