In his latest piece for NASDAQ.com, Validea CEO John Reese takes a look at some dividend stocks that also offer solid fundamentals.
In the article, Reese looks at Patrick O’Shaughnessy’s latest research on dividend payers, which shows that high yielding stocks no longer trade at the discount to the market that they traditionally have. According to Reese, the fact that this valuation advantage no longer exists means that investors need to look much more closely at the fundamentals of a company and cannot rely on dividend alone. As Reese puts it, “Rushing blindly into high-dividend stocks simply because they have a high yield is not good investing. Sometimes, the dividend yield will be high because the price of the stock is very low, and low for good reason (i.e., the firm is a dog and its shares are going nowhere). And, after all, what’s the point of getting a high dividend payment if the stock costs you money by performing poorly?”
Using his guru models from Validea.com, Reese identifies 4 dividend payers that also exhibit solid fundamentals that may be worth consideration. To read the full article, click here.
Every other issue of The Validea Hot List newsletter examines in detail one of John Reese’s computerized Guru Strategies. This latest issue looks at the Peter Lynch-inspired strategy, which has averaged annual returns of 11.2% since its July 2003 inception vs. 6.4% for the S&P 500. Below is an excerpt from the newsletter, along with several recent top-scoring stock ideas from the Lynch-based investment strategy.
With Christmas just around the corner, John Buckingham says undervalued dividend stocks are on his Christmas list.
Looking for strong dividend stocks? Some top fund managers are finding them in an unlikely place: the tech sector.
In his first-quarter letter to shareholders, top fund manager Bill Nygren of Oakmark says that he’s keying on companies that are putting their cash to work.
“Corporations today have unusually strong balance sheets and are generating much more cash than they can profitably reinvest in their own businesses,” Nygren writes. “Unless managements just let the piles of cash keep growing, which is clearly suboptimal, there are only three ways to deploy it: higher dividends, share repurchases and acquisitions. And companies are doing all three.”
Nygren says that most investors don’t focus on those uses of cash. “They assume that EPS growth and dividend growth will mimic organic net income growth and that, when they diverge, it is unsustainable,” he says. “We believe that historically low dividend payout ratios make it likely that dividend growth will exceed EPS growth for years to come.” Last year, he says, the S&P payout ratio was 30%; from the 1960s to the 1980s, it was 50%. “If earnings grow at 5% per year, and if by the end of the decade the payout ratio has returned to 50%, annual dividends will have grown at a double-digit rate, more than double the rate of earnings growth,” Nygren says. He adds that he thinks EPS growth will exceed organic net income growth. “Most of the share repurchases and acquisitions that our companies made last year were funded from cash generated in the normal course of operations, not from a one-time levering up of their balance sheets,” he says.
In his latest column for MSN Money’s Top Stocks, Validea CEO John Reese highlights a handful of high-dividend stocks he thinks are worth a look right now.
“In the months leading up to the fiscal deal, high-dividend stocks have been taking some hits,” Reese writes. “While fiscal cliff and higher taxes on dividends may not be the only reason, no doubt these concerns were playing some role in dividend stocks’ sluggishness.”
But, he says, the declines “have shaken some of the excess bullish sentiment out of high dividend plays, which had gotten fairly pricey earlier this year as investors, starved for yield in the current low-interest-rate environment, flocked to them. What’s more, there’s some intriguing research showing that, historically, high-dividend stocks haven’t suffered when dividend taxes have been high or increasing dramatically.”
Reese discusses that research, and looks at five high-dividend plays that his Guru Strategies — each of which is based on the approach of a different investing great — are high on right now. Among them: Japanese telecom NTT Docomo.
T. Rowe Price’s Tom Huber, whose Dividend Growth fund is in the top 13% of funds in its category over the past five years, according to Morningstar, says that tax increases associated with the fiscal cliff aren’t reason to avoid dividend-paying stocks.
“There is a lot of discussion and worry [about the tax hikes] more than I think it deserves,” Huber tells Barrons.com. “Higher tax rates are not good. But I think [these stocks] have been shown to work over time.”
While consumer staples, utilities, financials, and telecom have traditionally been areas to find strong dividend plays, Huber says that’s changing, with consumer discretionary and tech firms now joining the dividend players. “Utilities and telecom stocks have higher yields, though the payout ratios are higher and dividend growth is slower,” he says. “But because technology stocks are new to the dividend-paying world, the payout ratios tend to be lower, which leaves lots of room to raise payments.”
Huber also talks about his dividend strategy. He says he generally wants his portfolio to have a market-level dividend yield, but he focuses on firms that he thinks can grow their dividend payouts faster than their broader sectors. He talks about some of his current favorite picks, including Automatic Data Processing and Pfizer.