Monday, May 26, 2014

Should Income Investors buy at the High?

Buying at the high; should you?

If a company pays 3.5% in dividends and has raised dividend payouts every year including the very difficult years of 2008, 2001, 1994, 1992, 1987 (spans my investing career,) and has a good balance sheet you should buy it even at the high.    Don’t put all your money in that stock but it is okay to nibble.  In this post let's look at some other opportunities.  

Chevron is a good example of one of these companies.    But I have already added Chevron, CVX, to the 2014 model portfolio and today, I am back from vacation with some money that needs to be put to work.  Yet I hate to buy at a premium, so I am going to mine the model portfolios for stocks that will create ever increasing income through dividends.

Model Portfolio Performance

Instead of looking for a new stock to consider, I am going to mine the four Dividend Machine model portfolios published on this site.

First I want to illustrate with the data in the table below, that overall, an income investing strategy using Dividend Machine criteria works very well. 

Mining these portfolios for income investing stocks

When I look at these four portfolios, I am looking for a stock that still meets all four of my 2014 Dividend Machine Criteria but I want a stock on sale.  I want a stock with a price correction of 10% or more from its 52 week high.   So a stock has to pay a current dividend yield of 3.5% or more; has to have the most recent four quarters of EPS greater than the dividend payout; has to have increased the dividend an average of 4% per year over the past five years; and has an appropriate D/E ratio.

Here is what I found.

When we concentrate on finding stocks that have corrected ten percent or more over the past 52 weeks and these stocks meet all our income criteria, we can find a few ideas.

Darden Restaurants, DRI, which has corrected 10.32% and has a yummy dividend yield of 4.4% is a stock to consider.  EPS exceed dividend payout and during the past five years your income would have increased by 35% per year from $.20 to $.55 per share.  Plus, DRI covered calls make this a stock worth serious consideration.   DRI’s debt to equity ratio is about 1.2.

Meredith Publishing, MDP, has corrected 15.73% over the past 52 weeks.  MDP’s yield is 3.9% with EPS that exceed the dividend.   MDP’s annualized five year dividend increase is 18.44% per year.   And, MDP’s debt to equity ratio is only .6048.

Westwood Group, WGL has corrected 15.25% over the past 52 weeks.  WGL’s yield is 4.4% and if you average up the dividend increases over the past five years, your income would have increased by four percent.  WGL debt to equity ratio is .703.

Consider adding to your positions in these dividends machines.   They are on sale this year.  So yes, you can buy something like CVX at the high, but I prefer looking for stuff on sale.