How to pick dividend-paying stocks

CHAPEL HILL, N.C. (MarketWatch) — So you’ve lastly determined to heed the oft-repeated recommendation to spend money on dividend-paying stocks.

Now what?

It seems that you simply nonetheless have an overwhelmingly massive variety of stocks to select amongst. In 2012, for instance, greater than 400 of the five hundred stocks within the S&P 500 index

 paid dividends — or greater than 80% of them.

Telling me to confine myself to simply the dividend-payers, due to this fact, doesn’t slender my purchase listing down to a useful quantity.

The greatest manner of going about establishing a portfolio of dividend-paying stocks, based mostly on the Hulbert Financial Digest’s monitoring of greater than 500 separate methods, is to observe the methodology employed by Investment Quality Trends.

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This service, inaugurated by Geraldine Weiss greater than 4 a long time in the past and at the moment edited by Kelley Wright, doesn’t merely advocate the dividend stocks with the best yield. The service as an alternative focuses extra narrowly on the bluest of the blue-chip dividend-paying stocks, and recommends certainly one of them solely when its yield is close to the excessive finish of its historic vary.

The service’s restriction to simply the bluest of blue-chip firms is designed to keep away from firms at which the dividend yield is simply quickly excessive — corporations which might be about to minimize their dividends, in different phrases.

Specifically, Wright places a inventory on his watch listing provided that it satisfies not less than 5 of the next six standards:

  • Has elevated its dividend not less than 5 instances during the last dozen years
  • Has an S&P Quality Ranking within the “A” class
  • Has not less than 5 million shares excellent
  • Has not less than 80 institutional buyers
  • Has paid dividends for not less than 25 straight years
  • Has produced increased earnings per share in not less than 7 of the final 12 years

The service’s give attention to relative dividend yield is a recognition that every firm has a distinct baseline. A utility firm, for instance, should still pay a a lot increased dividend yield than different firms, even when that yield is decrease than its baseline — and when, due to this fact, it extra doubtless than not is overvalued.

How has this method carried out? Over the final 12 months, for instance, it has outperformed all the main dividend-oriented ETFs. The common portfolio from Investment Quality Trends has gained 16.9% over this era, in accordance to the Hulbert Financial Digest.

Better but, this superior return was produced with almost 20% much less volatility, or threat — which suggests its efficiency on a risk-adjusted foundation is even higher than the uncooked numbers already recommend.

Its file over the long run has additionally been spectacular. Over the 25 years the Hulbert Financial Digest has tracked it, it has crushed a buy-and-hold by one share level per 12 months on an annualized foundation, whereas nonetheless incurring 14% much less threat.

Investment Quality Trends at the moment is in third place for risk-adjusted efficiency during the last 25 years.

Which high-quality stocks are at the moment really helpful by this method? The following is Wright’s “Timely Ten” listing of his prime 10 present suggestions:

This package deal of 10 stocks not solely has a median dividend yield of two.6% however, Wright is satisfied, has good capital-appreciation potential within the occasion of a continuation of the bull market, and wholesome draw back safety within the occasion of a bear market.

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