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Improving fundamentals mean big cash stores, and those are prompting companies to keep the dividends flowing, says John Dobosz of Forbes Dividend Investor.

Nancy Zambell: My guest is John Dobosz, the editor of Forbes Dividend Investor. This is a fairly new newsletter, since last summer, and is going gangbusters.

John, before we start talking about the newsletter in depth, why don't you tell me a bit about your market philosophy? We're coming up on May and you know what they say: "Sell in May and go away." Do you think that's going to happen this year?

John Dobosz: It's hard to project with accuracy what historical patterns will prevail each year, but it sure does seem that over the last three years, we've started out strong in January, rallied into March.

April had a few little speed bumps-especially in 2010 and 2011, we really went south as soon as the daffodils started coming out. But last year, the ECB got involved in a big way in June, and the market really took off from there.

Both Yale Hirsch of Stock Trader's Almanac and Sy Harding at Street Smart Report in the early '70s kind of simultaneously discovered this trend-the seasonal timing strategy. Yale Hirsch and his son put together a study that's just black and white.

Since 1950, two people each invest $10,000. One put his money in the favorable bull period, in November, and took it out at the end of April. But his friend put his money in the market May 1 and took it out October 31.

After 62 years of doing that, the guy who was in the favorable November through April period had something like $450,000, but the guy who was doing the opposite had less than his original $10,000-something like $9,500.

Over time, one might call you a maniac if you manage your portfolio that way, but history really bears it out. But you were asking about my overall philosophy with the market. I guess you could just say buy low, sell high, of course. I have a lot of respect for the value investing approach-Ben Graham. And it's hard to refute the success of people like Warren Buffett.

What I'm looking for with the dividend stocks, in addition to having a yield, are stocks that trade at discounts to their historical valuations. I'm looking at five-year price-to-earnings, price-to-book value, and price-to-sales ratios. I want the current ratios of those three to be less than their averages for the trailing five-year period.

In addition, we want to, obviously, see good dividend coverage. I know that year-to-year earnings can be up and down, so if you have a high payout ratio one year, you want to look ahead at the 2013 consensus forecast, and if there's a 2014 forecast-even though they're kind of murky-they at least give you an idea of some kind of normalized earnings.

And I don't like to see dividends cut. That'll get a company quickly kicked out of consideration; although I did make some exceptions in the European telecoms, because they all did it-they all had to. And they're all a little better off now that they don't have to make those big dividend payments.

I don't really look at technical, because this is really a value approach. Sometimes the charts will look ugly. But fortunately, because we're looking for things that trade at those discounts, a lot of times you'll see a stock that's already experienced what I would call selling exhaustion, so the storm has passed and it's all up from here.

Nancy Zambell: John, do you build any growth factors into the model, or is it strictly value plus dividends?

John Dobosz: As you know-because you're a value-growth hybrid person yourself-that means you want something that's cheap today, but has some kind of a case for growth. So yes, I do.

We do use the price-to-earnings growth ratio, but a lot of times stocks won't have five-year projected EPS growth rates, and even if they do, how reliable can they be for five years out? So you have to look at the company's past and project out.

If they continue to grow at this kind of a rate...divide this year's P/E ratio by what you think the company can grow at, EPS-wise, in the long run. So I do look at the PEG ratio, and that's a nice way of incorporating both growth and value considerations to see if it's priced cheaply for the multiple that it's trading at.

Nancy Zambell: A lot of people were disappointed in earnings this year. But you have to look at it from where we've come from. Back in 2007, 2008, and 2009, people were having a really tough time, but it looks like the earnings picture seems to be a little bit brighter now. What do you think?

John Dobosz: I just got a note from a guy over at S&P Capital IQ, showing that analysts' consensus forecasts for first-quarter earnings, which are going to be starting up here with Alcoa (AA) pretty soon, is for 0.6% EPS growth year-over-year. So if you drew a slope of earnings' growth over the last four years, it was steep as heck, coming out of the 2009 recession, and it's just been leveling out.

But this guy from S&P said that when you have this degree of pessimism, it really sets you up for positive surprises-and if you look at the macroeconomic data, they all have been suggesting acceleration in the economy. Housing, consumer confidence, consumer spending, and retail sales ten days ago were twice what they were supposed to be.

Right now, you've got dour outlooks from analysts on companies, but you've got irrefutable economic strengths. So looking at the market as a whole, I can't speak for it, but you can control what you invest in. If you apply that discipline I was talking about, or something that works, and you're consistent about it, I think you'll be fine.

I usually like 3% yielders, but sometimes there's an exceptionally cheap stock that has a good yield and a really good history of dividend growth. Coach (COH), the luxury handbag and leather goods maker, really fit that bill to a T.

They're only yielding 2.5%, but the company started paying out 7.5 cents per quarter in 2009; now they're paying out 30 cents a quarter in dividends. They are trading at 11 times earnings, but still expected to grow about 8.5% on the top line this year. Coach looks darn cheap, and a lady like you...

Nancy Zambell: Yes, most of us ladies like Coach, so we can have a nice handbag, a nice yield, and nice growth.

John Dobosz: If you put $10,000 into Coach today, you could get dividends that would let you buy a bag per year.

Nancy Zambell: I love it! Now, tell me this: I'm sure when you started the newsletter last July, you had just a ton of dividend stocks to choose from that were undervalued. Are you running out of stocks?

Tickers Mentioned: Tickers: AA, COH, PT, RDS-A, STO