As you may have noticed, predicting what happens next in the stock market is harder than it looks, asserts Harry Domash; here, the editor of Dividend Detective offers a primer on uncovering dividend payers for difficult markets.
So instead of trying to time the market, why not set up a portfolio of high-dividend paying stocks likely to continue paying those dividends under most foreseeable circumstances?
By doing that, we'll enjoy a steady income stream while we're waiting for the market to recover. But as you'll see in a minute, that's only half of the story.
But first, how can we be sure that the stocks we pick will continue paying the same or higher dividends? It's simple! Dividends come from earnings. So, the trick is to choose stocks unlikely to experience an earnings drop. Consequently, we'll look for stocks more likely to enjoy earnings growth than an earnings cut. We'll win two ways if we can pull that off.
For starters, the higher earnings will ensure that these stocks continue paying, or even raise their current dividends. Even better, in normal markets, share prices track earnings per share more than any other single factor. Thus, when the market downdraft ends, the expected earnings growth, if it happens, should drive share prices higher.
To find these stocks, we conducted a screen for U.S.-based stocks that yield over 3%. We also specify return on assets over 5%. Cheap stocks get that way for a reason. I've found that stocks trading for over $15 typically outperform lower-priced stocks.
Earnings per-share growth is what will drive share prices higher once the market normalizes. Therefore we screen only for stocks with 15% EPS growth this year, next year and over the next 5 years. While individual analyst forecasts are frequently wrong, consensus (average) forecasts are the best single gauge of a stock's share price growth prospects.
This screen should uncover solid dividend paying stocks that are suitable for rough markets. Here are the five stocks that passed this screen:
• Apollo Global (APO) is a private equity firm specializing in credit, private equity and real estate markets. It's paying a 3.2% dividend yield.
• Kennametal (KMT) produces tungsten carbides, ceramics, and super-hard materials and solutions for use in metal cutting and extreme wear applications. The stock has a 3.0% yield.
• Medifast (MED) produces weight management and other nutritional products. The stock offers 4.0% yield.
• NRG Energy (NRG) sells energy services to customers across the U.S. and Canada. The stock has a 3.1% yield.
• Tapestry (TPR) markets luxury women's clothing and accessories internationally. The stock offers a 3.1% yield.
I would emphasize that the stocks that are turned up by any screen should be considered as research candidates, not a buy list. You still have to do your due diligence on these ideas.
