Picking Dividend Stocks - Dividend Safety and the Bank of America Story
It is axiomatic in dividend investing that the best dividend stocks score highly on dividend yield, consistency, and growth.
When you are focusing on dividends (rather than exclusively on price), you obviously want to own companies that have a decent initial yield (more than a bank deposit), pay their dividends without fail, and increase their dividends regularly.
As with every form of stock investing, all you have to go on in selecting individual stocks is history and conjecture.
Conjecture consists of drawing reasonable inferences from the history and current conditions.
As to history, you want to find stocks that have a demonstrated record of paying dividends consistently (never missing a payment) and raising them often.
In my e-book, "The Top 40 Dividend Stocks for 2008," I present a scoring system for rating stocks along these two scales (plus several others) that I call the Easy-Rate(TM) system.
A company's history of dividend payments tells you a few things that you can reasonably project into the future.
For example, if a company has paid a dividend every quarter for ten straight years, and raised the dividend in seven of those years, that suggests that the company is run in such a way that dividend-paying is the norm.
Management expects to continue to pay the dividend every quarter, and they manage the company's money accordingly.
They know they have a constituency of shareholders who expect that dividend and periodic increases, and they "play to" that constituency.
Skipping a payment or cutting the dividend would probably cause many shareholders to abandon the stock, bringing a disastrous fall in the stock's price.
But any projection into the future is conjecture, isn't it? There is risk in any prediction, from weather forecasting, to picking your fantasy football team, to selecting the best stocks.
Even if the "odds are with you," or "all signs point in that direction," there is risk that any prediction will be wrong.
And so it is with dividend stocks.
Even if we take the utmost precautions to pick only stocks with a good yield, great dividend history, and the strongest signs of continuing that history, we can be wrong.
The financial sector in the past 12 months provides some vivid examples of such risk.
Many retail banks, commercial banks, investment banks, and mortgage lenders have been pummeled by the sub-prime mortgage crisis, which morphed into a full-blown credit crisis.
The iconic Bear Stearns failed (it was bailed out by the government).
The iconic Citigroup slashed its dividend along with more than 10,000 jobs.
Countrywide Financial, the country's largest mortgage issuer, nearly went out of business, "saved" only by being purchased at a fire-sale price by Bank of America.
In my e-book, I selected Bank of America (BAC) as one of the Top 40 dividend stocks.
It had a 6.
6% yield, good valuation, and had raised its dividend for more than 25 straight years -- a select club with only 59 members.
But BAC has been hit hard by the credit crisis, and it is hard to tell whether the acquisition of Countrywide, even for a song, is good or bad in the short term.
(It is probably very good in the long term.
) BAC, like a lot of banks right now, needs money.
One way to get money, of course, is to cut its dividend.
So BAC's dividend is "at risk.
" So far, BAC has resisted that temptation.
It paid its first-quarter dividend, even though the payout exceeded its profits.
It paid its second-quarter dividend on June 4.
Its next dividend (not yet declared) is scheduled for September 28 -- and this is normally the quarterly payment in which BAC increases its dividend each year.
In its second quarter report a few days ago, CEO Ken Lewis stated that management has recommended to the board that the third-quarter payout proceed as scheduled.
This is consistent with earlier statements from Lewis, who had said he "views the dividend as safe" (as reported by MarketWatch) shortly after the second-quarter payout in June.
Because of a significant price drop, BAC in June was yielding a sky-high 11.
4%, and several analysts and pundits stated flatly that BAC would have to cut its dividend, because it needed the money.
Turns out they were wrong, at least for this quarter.
I kept BAC on my Top 40 list, and it is still there.
I own shares.
It turns out that when the market heard the recent news about BAC's second-quarter results, it was so relieved that the stock jumped more than 70% in just a few days.
Other than the peril of the dividend being cut, BAC satisfies all my requirements for a top dividend stock.
Even at its recovering price (back about to where it was in mid-May), one could argue that this is a once-in-a-lifetime opportunity to get a world-class company -- which will now become the nation's largest mortgage lender -- at a yield that still exceeds 7%.
Chances like that do not come along often.
Notice that if the dividend is not cut, that 7% yield to a new purchaser will never go down in relation to the original investment.
In fact, it will go up if and when BAC increases its dividend.
Should BAC still be on my Top 40 list? Maybe.
Do you believe Lewis when he says the dividend is "safe"? What would you expect him to say? Do you think BAC will raise its dividend this year? I don't, but that alone does not disqualify the company.
Do you believe that at some point in the future, the financial sector will recover, and stocks like BAC will return to former prices? I do, although it will probably take a few years.
Remember the savings and loan crisis of the 1980's and 1990's? Banks recovered from that, albeit with a lot of government help and a number of bank failures.
A similar scenario is playing out today: Lots of government help, along with some failures.
As an investor, you can make up your own mind about Bank of America.
For my money, it looks like a good long-term investment.
The chance of it failing is near zero.
Its dividend is remarkably high for such a strong business.
And I think it's going to weather this storm and continue re-appreciating in price.
I'm focused on the dividend, so I am not as concerned with how long that takes as I would be with a "growth" stock.
In the meantime, I will happily collect my checks each quarter.
That's my conjecture.
When you are focusing on dividends (rather than exclusively on price), you obviously want to own companies that have a decent initial yield (more than a bank deposit), pay their dividends without fail, and increase their dividends regularly.
As with every form of stock investing, all you have to go on in selecting individual stocks is history and conjecture.
Conjecture consists of drawing reasonable inferences from the history and current conditions.
As to history, you want to find stocks that have a demonstrated record of paying dividends consistently (never missing a payment) and raising them often.
In my e-book, "The Top 40 Dividend Stocks for 2008," I present a scoring system for rating stocks along these two scales (plus several others) that I call the Easy-Rate(TM) system.
A company's history of dividend payments tells you a few things that you can reasonably project into the future.
For example, if a company has paid a dividend every quarter for ten straight years, and raised the dividend in seven of those years, that suggests that the company is run in such a way that dividend-paying is the norm.
Management expects to continue to pay the dividend every quarter, and they manage the company's money accordingly.
They know they have a constituency of shareholders who expect that dividend and periodic increases, and they "play to" that constituency.
Skipping a payment or cutting the dividend would probably cause many shareholders to abandon the stock, bringing a disastrous fall in the stock's price.
But any projection into the future is conjecture, isn't it? There is risk in any prediction, from weather forecasting, to picking your fantasy football team, to selecting the best stocks.
Even if the "odds are with you," or "all signs point in that direction," there is risk that any prediction will be wrong.
And so it is with dividend stocks.
Even if we take the utmost precautions to pick only stocks with a good yield, great dividend history, and the strongest signs of continuing that history, we can be wrong.
The financial sector in the past 12 months provides some vivid examples of such risk.
Many retail banks, commercial banks, investment banks, and mortgage lenders have been pummeled by the sub-prime mortgage crisis, which morphed into a full-blown credit crisis.
The iconic Bear Stearns failed (it was bailed out by the government).
The iconic Citigroup slashed its dividend along with more than 10,000 jobs.
Countrywide Financial, the country's largest mortgage issuer, nearly went out of business, "saved" only by being purchased at a fire-sale price by Bank of America.
In my e-book, I selected Bank of America (BAC) as one of the Top 40 dividend stocks.
It had a 6.
6% yield, good valuation, and had raised its dividend for more than 25 straight years -- a select club with only 59 members.
But BAC has been hit hard by the credit crisis, and it is hard to tell whether the acquisition of Countrywide, even for a song, is good or bad in the short term.
(It is probably very good in the long term.
) BAC, like a lot of banks right now, needs money.
One way to get money, of course, is to cut its dividend.
So BAC's dividend is "at risk.
" So far, BAC has resisted that temptation.
It paid its first-quarter dividend, even though the payout exceeded its profits.
It paid its second-quarter dividend on June 4.
Its next dividend (not yet declared) is scheduled for September 28 -- and this is normally the quarterly payment in which BAC increases its dividend each year.
In its second quarter report a few days ago, CEO Ken Lewis stated that management has recommended to the board that the third-quarter payout proceed as scheduled.
This is consistent with earlier statements from Lewis, who had said he "views the dividend as safe" (as reported by MarketWatch) shortly after the second-quarter payout in June.
Because of a significant price drop, BAC in June was yielding a sky-high 11.
4%, and several analysts and pundits stated flatly that BAC would have to cut its dividend, because it needed the money.
Turns out they were wrong, at least for this quarter.
I kept BAC on my Top 40 list, and it is still there.
I own shares.
It turns out that when the market heard the recent news about BAC's second-quarter results, it was so relieved that the stock jumped more than 70% in just a few days.
Other than the peril of the dividend being cut, BAC satisfies all my requirements for a top dividend stock.
Even at its recovering price (back about to where it was in mid-May), one could argue that this is a once-in-a-lifetime opportunity to get a world-class company -- which will now become the nation's largest mortgage lender -- at a yield that still exceeds 7%.
Chances like that do not come along often.
Notice that if the dividend is not cut, that 7% yield to a new purchaser will never go down in relation to the original investment.
In fact, it will go up if and when BAC increases its dividend.
Should BAC still be on my Top 40 list? Maybe.
Do you believe Lewis when he says the dividend is "safe"? What would you expect him to say? Do you think BAC will raise its dividend this year? I don't, but that alone does not disqualify the company.
Do you believe that at some point in the future, the financial sector will recover, and stocks like BAC will return to former prices? I do, although it will probably take a few years.
Remember the savings and loan crisis of the 1980's and 1990's? Banks recovered from that, albeit with a lot of government help and a number of bank failures.
A similar scenario is playing out today: Lots of government help, along with some failures.
As an investor, you can make up your own mind about Bank of America.
For my money, it looks like a good long-term investment.
The chance of it failing is near zero.
Its dividend is remarkably high for such a strong business.
And I think it's going to weather this storm and continue re-appreciating in price.
I'm focused on the dividend, so I am not as concerned with how long that takes as I would be with a "growth" stock.
In the meantime, I will happily collect my checks each quarter.
That's my conjecture.