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The Seven Factor Model
08/13/2014 6:00 am EST
Forbes Dividend Investor John Dobosz breaks down Benjamin Graham's value-based system and shares several dividend plays that could provide consistent returns.
SPEAKER: Hi, I am here today with John Dobosz, Editor of Forbes Dividend Investor and Forbes Premium Income Report. I am going to talk about dividend stocks, should people consider them, why do they want to be in them and then mostly figure out how you pick them.
JOHN DOBOSZ: They have been very popular, as you know, because people cannot get yield in many other places and so people have been stretching for yield. It turns out dividend stocks, if you find good value type of dividend stocks that are cheap, you get the double bonus of buying something, locking in a yield and as the prices goes up and they keep raising their dividends, the company, if it is a good company with a long-term history of paying dividends, you have locked in that yield and your yield on cost will be very high going forward. I do it with a value-based system. We will shout out to Ben Graham, the guy who taught Warren Buffet to be the guy he is. It is a seven-factor model, all equally weighted. First, I look at the discounts to the five-year averages of three multiples, price-to-sales, price-to-book value and price-to-earnings. If earnings and book value are giving you trouble, but you have good discounts on sales, go with that, because you cannot fake sales. You can fake profits and book value; so much is included in that that it can be kind of a meaningless metric a lot of times.
SPEAKER: Some things do not change.
JOHN DOBOSZ: Some things do not change, so you get those three right there. I am looking for a revenue growth from last year to this year, positive because you cannot pay higher dividends in the future if you do not have rising revenue. I exclude companies that do not have operating cash flow, positive in the past 12-month period, and I score higher points for the greater the dividend growth and the higher the dividend yield and then another thing I look at also is the dividend payout ratio. You want it to be less than 100, but as I was alluding to…
SPEAKER: What is the dividend payout ratio?
JOHN DOBOSZ: That is the dividends per share paid per year divided by the price per share. Five dollars in dividends on a $100 stock, you have a 5% yield. I look at cash flow. Are the earnings covered by cash flow, because we just said earnings can be manipulatable? Then from there…
SPEAKER: Do you want to see consistent increasing in dividends over the year?
JOHN DOBOSZ: Exactly, you want to see a company that would really, it would break management’s heart and the Board to cut dividends.
SPEAKER: Boards are not even increasing…
JOHN DOBOSZ: Exactly, because that would destroy a lot of their shareholder base, they get angry, they go elsewhere and they want to keep them happy, stocks like Johnson and Johnson and stuff like that.
SPEAKER: What are a couple that you like right now?
JOHN DOBOSZ: Right now, I look all over the world and I will do ADRs, one of them right now in China, the biggest offshore oil producer in CNOOC. The ticker is CEO. You are getting a yield about 4.7%. It was a little bit in the cellar there for a while because people were worried about China’s growth slowing down, slowing to 7.5% and it is triple to what we have going on here in the U.S., but slow down. The way I look at it is it is cheap. It meets all the things I was talking about plus you still have 1.2 billion Chinese people, many of them have never even seen a car and they are learning to drive and stuff like that. That is CNOOC, 4.7% yield, and energy producer.
SPEAKER: What is another one you like perhaps?
JOHN DOBOSZ: Western Union.
SPEAKER: You had that before.
JOHN DOBOSZ: Exactly, we had it in 2012. It sold off and we bought it and had a nice gain in it. I believe in selling after you have triggered a 10% trailing stock. We got out of it. It is based a little while, you know the old expression is one of yours probably or your Dad’s, do not catch a falling knife. I do not want to catch the falling knife, so it is based a little while and it is around $16 now, yielding 3.3%. Walmart is in the business of money transfer, which is what Western Union’s primary business is, they have not done telegrams since 2006, but I think the fear is overdone. The discounts are huge and management is very confident that they can beat Walmart, so it looks good and we will give it the benefit of the doubt here.
SPEAKER: These are a couple of stocks people could get into right now.
JOHN DOBOSZ: Right now, I mean those two look pretty good. There are a lot of MLPs, master limited partnerships and REITs. I have one that looks pretty good is Getty Realty, GTY. They own about 150 gas stations in New Jersey, Pennsylvania, some parts of New York and Maryland, they lease them out to owner operators of the gas station and it is like a triple net lease deal. They pay the insurance, the upkeep and the taxes on it and Getty just collects rents and passes them on to you. Getty Realty. Let us go with an MLP, Lynn Energy. They are not an MLP in the sense of the old doing pipelines and storing, they are actually an exploration and production company, so if oil goes down they could get hurt and that is why you are getting a yield of about 10% in Lynn.
SPEAKER: Thanks so much, John. Thanks for joining us on Money Show.com.
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