We won’t bury our heads in the sand, 2014 may not be as profitable as 2013. It has become harder to find cheap stocks and good companies are not on sale anymore. However, I’m fairly confident that I will be able to beat the market for a third year in a row. In fact, history has showed us that each time the market boomed like it did in 2013, the following year is a good year on the market.
When the market is up for so long, the media and gurus are jumping upaand down the claiming it will all end soon. Their rationale is often based on elementary school thinking such as “everything that goes up must come down”. However, the stock market has always gone up, in the long run. I’m pretty sure we are not on the edge of a cliff right now, so let’s see what we can do.
Today, I’m going to share with you the method I use to manage my portfolio and successfully invest in dividend stocks. This is my way of finding valuable stocks year after year without taking on too much risk. I believe an investor must adapt his investing strategies according to the current market environment. This is what I’m doing right now.
#1 Start From Your Investment Strategy
It’s not because the market is up or down by 30% that you must scrap your investing theory in the first place and start over from scratch. So here are the basic metrics I use when starting my hunt for a new stock:
Dividend yield over 3%
Positive 5 year dividend growth
Dividend payout ratio under 75%
Return on equity (ROE) over 10%
Positive 5 year annual income growth rate
Current price / earnings ratio (PE) under 20
My minimum requirements are defined to show strong companies that have everything under their belt to continue paying a healthy dividend. My thinking is to identify stocks that are able to increase their dividend year after year. If they do that, it means that everything else is going well. After all, no matter how hard a company wishes to increase its dividend, if there is no money in the bank account, it just can’t write those checks!
#2 Allow Yourself to Cheat
Who said cheating wasn’t permitted? The key is to cheat only on one or two metrics – not to completely deviate from your investing process. Remember, when cheating, you take higher risk… but with higher risks, can come higher rewards!
In 2013, I cheated three times when I added stocks to my portfolio.
#1 I added AAPL when the company didn’t show a 5 year history of dividends and didn’t pay over 3% in dividend yield. This was because AAPL was trading at a very low price and showed strong dividend payment opportunities in the future.
#2 I added DIS when the company wasn’t even paying 2% in dividends! But the other metrics caught my attention since the company is definitely on a roll to grow its value over time.
#3 I bought shares of WMT when it didn’t pay over 3% in dividend yield. Walmart is one of the holdings I plan to keep for years to protect me during rough markets.
As of January 6th, AAPL is up 27.22%, DIS is up 14.44% and WMT is down by 0.18% (excluding dividends, not annualized returns, stocks were not purchased at the beginning of 2013). Therefore, I can say that I didn’t make any bad decisions so far.
#3 Review Your Dividend Yield Expectations
In 2014, I will even lower my expectations in terms of dividend yield to 2.5% for new purchases. The reason being I don’t want to miss a great company with a lower dividend payment. In the end, the most important point is to select companies that will generate money, regardless if it is true dividend payments or capital gains.
A reader answered my most recent newsletter announcing my 2014 Best Dividend Stocks saying his picks were showing more than double the dividend yield than mine. I didn’t answer his comment right away and I didn’t want to seem cocky or arrogant. And the first thing that crosses my mind was who cares about what yield you getting right now? If that company doesn’t increase in value and its dividend stagnates, this is a BAD INVESTMENT.
Just for fun, I pulled a screener with all US and CDN companies with over $1B in market value paying between 7 and 10% dividend yield. Here are a few examples of my find:
If we forget about EC which is truly a catastrophe, the other 3 stocks are not producing anything interesting either. I could have wasted hours looking at the 82 results the screener gave me but after a dozen, I didn’t find any “stellar” investments. I agree that you are cashing out a high dividend but this is all you get.
Remember, and this is especially true when interest rates are this low, if a stock is paying a high dividend yield, it is usually because there is higher risk attached to it. If not, don’t you think that any bozo who can run the Google Finance stock screener would not build a super high yield dividend paying portfolio and live like a fat cat?
Some people will argue they are after income since they are retired, well it is even more important for you to care about the quality of the companies you buy! I would rather sell a few shares of Disney to compensate for its 1% dividend yield while it went up 45% in 2013 than to cash a 7% dividend of a stock that does nothing.
#4 Make Sure Your Core Portfolio is Solid Before Taking Gambles
If you read this blog for a while, you know that I like to take more risk once in a while. I come from an active trader background and my passion for market dynamics makes me trade more than the usual dividend investors (this is what makes me interesting, yes?).
Over the past 3 years, I’ve worked on building a core of stocks that I plan to hold forever. Then, from time to time, I buy and sell stocks on opportunities. Within my current holdings, I know that I will not hold AAPL forever and it’s probably the case for HSE as well. However, I strongly intend to stick to other companies such as CVX, KO, JNJ, MCD, WMT, DIS, BNS, NA and T (Telus). This is my core portfolio. It is more conservative and I don’t mind. This is why I take more risk with the rest of my money.
In 2014, I will add another $5,000 to my trading account (which should happen any day now). I will combine this new money, my cash and my Altamira US index fund to buy 2 more companies. These, along with AAPL and HSE, will be my “gambles” for the year.
You can be sure I’ll take picks from my 2014 Best Dividend Stock Picks Edition 😉
Readers, what about you – is the new year or the performance of 2013 affecting your next trades?