We humans always want to pay less if we can, whether it’s a new home or designer handbag. With quality being equal, why not buy when things are on sale? In investments, the purchase price makes a huge impact in determining profitability.
On the other hand, you do get what you pay for. So if the price is too cheap, the home you are looking at has problems or the handbag is a knock-off. Paying for quality is a good practice for the things we will hold onto for a long time, investments included.
Fortunately there’s a way to ensure quality and make to buy stocks on sale. Out universe of stocks in the Dividend System™ is comprised of only stocks that have a history of paying increasing dividends every year for the past five years. This eliminates most of the scoundrels. We then eliminate stocks with too much debt and too much volatility, as over time, those factors reduce profitability and lower total return. What we are left with is a pool of stocks that are of higher quality and have a likelihood to generate higher total return. And even these gems of the stock market sometimes go on sale!
All of the details of every stock listed in the US markets are tracked over time. We can look up the past prices, past dividends, past price/earnings ratio, and many more data points. Two of the data points that are useful in determining if a stock is on sale are the 10 year average dividend yield and the 10 year median price/earnings ratio.
Stocks on Sale Rule #1
When the current dividend yield is higher than the 10 year average dividend yield, the price is lower than normal. This indicates a potential opportunity to purchase the stock at a discount.
Stocks on Sale Rule #2
When the current price/earnings ratio is lower than the 10 year median price/earnings ratio, the price of the stock is lower than normal. This indicates a potential opportunity to purchase the stock at a discount.
When both of the above rules are true, we have a golden opportunity to dig further and see if the stock’s current price AND business situation represent a good time to buy. Of course, the stock’s price could be low for a reason–it’s a bad business, dying a slow death, experiencing selling (depressing the price, and inflating the dividend yield), it’s products have fallen out of favor, a scandal or other bad news hurt the company’s brand, etc. Buyer Beware! It pays to do some research to determine if the current situation is an indicator of value or bad business omens. If your research indicates the stock is still a good business for the long haul, then it may just be the right time to add a good company to your dividend portfolio!
Current Stocks on Sale
Listed below are the latest stocks with a dividend yield higher than their 10 year average AND price/earnings ratio below their 10 year median.
I am always interested in AT&T (T) for the continuous stream of dividends they have paid for the past 34 years. But they have taken on a burden with the purchase of Time Warner, so it remains to be seen if the dividend will continue–the 74% payout ratio is high and doesn’t leave management many options if there were impairments to their business. Nevertheless, AT&T is a quasi utility, and likely to be around for a lot longer!
Ingredion (INGR) is in the sweet spot, about to be promoted to a “Dividend Challenger,” as soon as it achieves a 10-year streak of dividend increases. I believe (and am working on research to support my belief) that the best time to own dividend stocks is in the 10-24 year time period of dividend increase streaks, as that’s when the most growth occurs. Ingredion has enjoyed an annualized 13.8% total return over the past 10 years and an annualized dividend growth rate of 19.1%. Unfortunately their free cash flow hasn’t grown at all in the last 10 years. So it’s a tough call.
Walgreens (WBA) is another possibility due to it’s huge array of stores in excellent locations. Although their average, annualized total return was only 8.56% for each of the past ten years, they have a low beta and low debt, so it would add stability to a portfolio should another recession occur.
What hidden gems can you find among the list? Let us know in the comments below.