In the late 1990s, networking giant Cisco Systems (Nasdaq: CSCO) and the company’s CEO, John Chambers, became famous for consistently beating Wall Street’s earnings expectations and seeing a big one-day pop after each quarterly earnings release.
The strong momentum in Cisco’s business in the late 1990s was one reason for the firm’s consistency. But many investors credited Chambers, saying he was a master at keeping earnings expectations low enough that he could over-deliver and impress analysts.
There are many fundamental, macroeconomic and psychological factors that move stocks or the market as a whole.
And, in recent weeks, traders have become increasingly concerned about some softening in U.S. economic data, a bright spot for the world economy since late last year.
But short-term moves aside, stocks are ultimately valuable because they produce a stream of profits and dividends for their shareholders over the long term.
A sustained rise in earnings will tend to support a rally in a stock over the long haul. And there’s nothing that will attract income-oriented investors faster than a company with a solid yield that’s able to steadily raise its dividends over time, supported by a commensurate rise in its earnings stream.
But changing earnings expectations can also move income-oriented stocks over shorter time frames, just as they did for Cisco in the late 1990s. When analysts become more confident in a particular company’s growth prospects, they’ll often raise their earnings estimates. Sometimes as a result of these revisions, analysts publish research reports or update their buy/sell/hold recommendations. Rising expectations surrounding a company’s prospects attract investors’ attention and generate buying interest.
While an analyst upgrade alone is not enough of a rationale to justify a stock purchase or sale in its own right, it pays to keep an eye on companies that are seeing consistent upward revisions to earnings expectations.
This can be a sign of a firm that’s consistently performing better than the market expects or is benefiting from certain sector-specific trends and tailwinds.
In other cases, investors have simply become too bearish on a firm’s earnings prospects and have priced in the worst-possible news — stocks often find their lows when the news seems most bearish, and few investors are positioned for upside.
As you may know, aside from being the Co-Founder of StreetAuthority, I’m also the Chief Investment Strategist behind High-Yield International, one of our most successful dividend-focused newsletters. Simply put, I think some of the most dynamic opportunities for investors to get high dividend yields lie overseas. Many companies in fast-growing emerging markets are not only growing rapidly, but they also pay richer dividends than their U.S. counterparts. And because I only invest in solid international dividend payers that trade as ADRs (American Depository Receipts) on the U.S. stock exchanges, I know my money is safe and easy to trade.
So I decided to sort through my database of companies, looking for U.S.-traded ADRs that have seen their current quarter earnings estimates revised higher by at least 7.5% in the past four weeks. In addition, I eliminated all firms that have not seen a positive revision to their full-year consensus earnings outlook in the past month. Finally, I limited my list to companies offering a dividend yield of at least 5% based both on the past 12 months of dividend history and the expected payout over the coming year.
Here’s what turned up…
Risks to Consider: Keep in mind that many foreign companies only pay dividends twice a year. You should also be aware of any currency risk as well as how that country taxes dividends.
Action to Take –> The stocks in this table should be used simply as a starting point for further research. Two of the stocks — Fly Leasing (NYSE: FLY) and Eni (NYSE: E) — are already in my High-Yield International portfolios, though. You’ll need to read up on these companies and see if they hold appeal for you, but the homework should pay off when you’re harvesting rich dividends.
– Paul Tracy
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Paul Tracy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of CSCO in one or more if its “real money” portfolios.