Dividend stocks
will again make up a large portion of investment income for 2013, as few other
income investment alternatives exist.
All bonds, municipal, corporate, and high yield remain very
expensive. I do not cover preferred
stock or real estate investments in this blog.
Dividends may not be and should not be your only source of investment
income, but in 2013, they will provide significant retirement cash flow. How should you pick a dividend stock in 2013?
Dividend stocks
come in two flavors. One group of stocks
pay less than 3% but are active enough to provide additional income in the form
of covered calls. Caterpillar, CAT, and
Qualcomm, QCOM are stocks that I have written about often in this blog. I call the other group of dividend stocks DIVIDEND MACHINES. These stocks are less volatile but generate
more dividend cash flow and are the subject of this post.
For 2013 my
criteria for picking a dividend machine has changed just a little from 2012 and
2011. I still require a company to pay
me at least a three percent yield at the price I buy it. In 2013, I will stick with the requirement
that earnings per share (EPS) for the previous four quarters must be greater
than the dividend payout. In 2011, I
required only the current quarter’s EPS to be greater than the dividend
payout. In 2012, I raised the bar to
make sure the last four quarters of earnings was greater than the last four
quarters of dividends. In 2013, I will
maintain that benchmark.
Risk for any
investor is important and I use two measures for dividend machines. First, I expect a dividend machine company
to do more than just continue to pay me the same dividend. My expenses go up every year and I expect my
income to go up as well. If a company has increased the dividend during
difficult times, I consider that to be a sign that I have invested in good
company and it is a measure of low risk.
I looked back at
my list of dividend machines and found that during the 2001 dot com crash, few
of these companies reduced the dividend.
That is not surprising because most of the carnage in the 2001 stock
market crash were high technology companies with low or no EPS. Not very many of the companies that imploded
paid dividends. Only recently have
companies like Intel (INTC) or Microsoft (MSFT) paid regular and increasing
dividends.
However, during the 2008 market crash, dividend
stocks did take quite a hit. In 2008, quality companies stopped or cut their
dividends, i.e. banks. Many companies recovered and started to pay
again. However, I want to make sure any
future investments I make in dividend machines are at a low risk of cutting my
dividend. Therefore, a company must have
a history of steady and regular increases of dividends since 2007, or 6 years,
to be considered a dividend machine. In
2011 and 2012, I required a history of regular dividend increases for at least
five years. In 2013, I am raising that
bar to six years.
My
last dividend machine criterion, the last one, is debt to equity ratio (D/E)
ratio. If a company has a responsible
history of managing their debt, they are more likely than not to stay in
business and be able to pay a steady and ever increasing dividend. D/E ratios vary a lot among industries. Some businesses need more debt than others
to conduct their business. A D/E ratio
of one or less or equal to industry standards will continue be the level that
is acceptable for a company to be considered a dividend machine.
I
recommend DIVIDEND MACHINES periodically in this blog. In 2011, I picked one every Monday for 52 weeks;
in 2012, I picked 48 stocks randomly though 48 weeks. In 2013, I am not going to pre define how
many stocks I profile, we will just have to see what the market provides for
us. This week, I expect to share one or
two stock picks with you so that you too can make steady, increasing retirement
cash flow from dividend stocks.
Study
these criteria and add them to your dividend stock screens for 2013; I believe
you will be pleased with the results.
TheMoneyMadam
