Validea is an advisory service which assesses stocks based on the investing criteria of many of the ...
Join John Dobosz LIVE at The MoneyShow Orlando!
Join John Dobosz LIVE at The MoneyShow Orlando!
Forbes Expert Eyes Income and Value
08/17/2016 10:00 am EST
John Dobosz is an industry-leading expert on income investing, combining his search for yield with an in-depth analysis of fundamental valuation. Here, the editor of Forbes Dividend Investor discusses his strategy, his outlook for retail and some picks and pans in the sector.
Steve Halpern: Joining us today is John Dobosz, income investing expert and editor of the industry leading, Forbes Dividend Investor. How are you doing today John?
John Dobosz: Hey Steve. Doing very well. Hope you are doing well too.
Steve Halpern: Before we begin I'd like to let our listeners know that you'll be a featured speaker at the upcoming San Francisco Money Show at the end of the month. Could you give our listeners a brief overview of what they can expect from your workshops if they're off, if they have plans to attend?
John Dobosz: Sure. I'll be at the San Francisco Marriott Marquis on the 23rd and the 24th of August. I'll be doing two workshops. They are kind of similar, but in both of those I will be talking about the strategy that I use, the particular factors that I look for in stocks that are on the Forbes Dividend Investor Top 25.
In addition to that, because it's kind of an income-generating seminar, I'm also talking about the strategy that I use in my other newsletter, the Forbes Premium Income Report, which focuses on the selling options on stocks that you wouldn't mind owning.
We'll cover how to sell puts, how to do buy rights, because when you buy a stock and sell an out of the money call option and then when you already own a portfolio of dividend paying stocks, how to sell covered calls to generate additional portfolio income.
I'll go over stock selection and then trading strategies for selling options. The end result is to produce superior levels of income and total return.
Steve Halpern: Turning back to the Forbes Dividend Investor newsletter, your strategy, as the name implies, focuses on dividends but valuation also plays a key role here. Could you explain how these two factors — dividends and value — are combined in your search for stocks?
John Dobosz: Sure. I developed a seven factors model where I look at valuations in at least four of those. I'll look at the price to sales ratio, the price/earnings ratio, the price to cash flow and price to book value.
What I look for is the five-year average to be higher than the current valuations on each of those measures, so if a stock traditionally trades at 20 times earning but it's only trading at 15 times earnings right now, they've got a 25% discount.
In other words, it should appreciate 33% all things equal to get back to its historical valuation. Then I kind of come up with a target price based on those discounts from historical valuations.
The other side of it is, like you said, the dividends because that's what it's all about. I look for companies that have had stable or more preferably rising dividends over time.
Companies that have cut dividends, have no use for me. There are a lot of stocks out there, approximately 2,200, that pay dividends. There are a lot of stocks to look at that have not cut their payouts. Focus only on those that have done what they can to keep the payouts rising.
Then I look also for revenue growth, because if revenue growth over the past three-year period or three years ago today for three more years you've got to see some evidence that's there's rising revenues, because if revenue are in a long-term decline you are not going to be able to sustain that dividend forever. In fact, you may have to cut it.
Its valuation is based upon the stock’s own five-year average of price to sales, price to earnings, price to cash flow, price to book value. I also look at enterprise value to EBITDA which gives you a look at how the company is generating earnings, looking at is debt as well, because enterprise value includes the company's debt.
From that I create a score based on how a company scores on those various factors and then I take the top 25. I take out some stocks that are in bad technical shape. The old adage that you don't want to catch a falling knife.
We've done pretty well. Year-to-date in the portfolio, the top 25 I call it from the Forbes Dividend Investor, we're up as of August 12, 15.96%. You can round that off to 16% year-to-date.
I was really pleased because I'm looking at the other - this has been a great time to be a dividend investor across the board. Dividend stocks are outperforming the overall market.
The big winner so far has been the Dow Jones Select Dividend Index ETF (DVY), up 17.3% year-to-date.
The reason for that out performance there is the 35% wading in utility stocks and utilities are great when interest rates are going down, which they have been since late January this year. That's really a tailwind when rates go down, but since July 1 rates have been going up and utility stocks have been getting back some of those gains.
My approach, actually, I have very few utility stocks in the portfolio just because they are not driven so much by what the companies do, but by the interest rate environment.
I believe at some point, and I could have been saying this for the past four years or more, but I believe at some point we will have higher interest rates and then if you don't have a company that's also growing profits and sales at a nice pace you are going to be in danger. That's why I look for. I look for good valuations, consistent dividend payment.
I didn't mention, but I should have is I also look at coverage. In other words, what a company is paying out as dividends, how much more do they have in cash per share, do they generate in cash per share.
I like to see dividends paid out about 30% of earnings or cash flow. It will be higher for REITs obviously and MLPs, things like that that have to pay out at least 90% of earnings as dividends.
Steve Halpern: I noted as I looked at your Top 25 list that a couple of retail names have been added there. Could you talk to your general outlook for retailing?
One part of the newsletter and the risk management disciplines I employ is to sell a stock if it has declined 10% or more from its highest flows, that is the 10% trailing stop and you just get rid of it. That way you avoid stepping into situations where you're down 20%, 25% or more.
We did get rid of Kohl's and Nordstrom early in the year. You can pick up a stock chart and look at JWN or KSS and you can see the tremendous pain that both of those stocks was in for most of the springtime and through early summer.
They look cheap mind you. They look cheap if you look at my methodology, just historical valuations and all that kind of stuff, but the market just wasn't agreeing at the time.
Once I saw that there was some insider buying and once I saw that both of those stocks had stabilized I added them back to the portfolio because you've got great values there in both of those stocks and decent dividend yields that are rising at substantial rates.
Overall you've got to look at the fact that Amazon (AMZN) now controls a sizable part of the U.S. retail spending. A lot of stores are, face it, unpleasant to go to because maybe the prices are high, it's too much of a hassle to go there and park and walk miles and miles around.
Kohl's and Nordstrom do have appeal with consumers I think. Nordstrom just because it's a high-end retailer and if you want to buy nice stuff and you have a lot of money it's not a bad place to go.
The experience there is pleasant. The people there carry around cash registers, those little scanning devices. You don't need to go to a cash register, things like that.
Kohl's has good cheap stuff. If you need a pair of socks or some underwear or some kitchen appliances and you get those e-mails, Kohl's is a low price, so you've got both ends of the spectrum there. You are not caught in the middle.
You've got Kohl's that's been kind of a cheap but okay retailer, and then on the high-end you've got Nordstrom. I think the danger for companies is to be in the middle where you don't have a strong value propositions either has a discounter or as a high-level retailer.
There are other stocks those that have been swept up in this retail vortex. Macy's (M) just jumped this past week because of an announcement to close some stores, which they've been meaning to do for quite some time and the stock rallied very favorably. You also had a big rally in Kohl's because a lot of the bad news was out. The company reported same store sales slightly better than expected and so those two are on my portfolio -- JWN and KSS.
What I try to not do is get caught up too much in the overall group thinking out there that retail is a horrible place to be, because if you do believe that (and maybe it is in some cases), if you do believe that overall and stay out of the sector you are going to miss some nice opportunities to buy stock when they're very cheap.
Steve Halpern: Again, our guest is John Dobosz of Forbes Dividend Investor. It's always fascinating to talk to you. Thank you so much for your time today.
John Dobosz: Hope it was helpful. Thank you Steven.
Editor’s Note: John Dobosz will be a featured speaker at the upcoming San Francisco MoneyShow, August 23-25. He will offer workshops on generating dividends and premium income as well as more sophisticated options strategies for investing pros. To register, click here.
By John Dobosz, Editor of Forbes Dividend Investor
Related Articles on STRATEGIES
The Roman philosopher Seneca wasn’t talking about the stock market when he wrote that “T...
The Dow Theory was originally referred to as “Dow’s Theory,” since it was based on...
When stocks are selling at valuation extremes and consumer optimism is at one of the highest levels ...