I’ve said it before, but it bears repeating. There are only two ways to increase a stock’s dividend yield: either raise the payout (which takes time) or decrease the share price (which can happen with lightning speed).
While everyone loves the former, they tend to despise the latter. That’s understandable if the stock is retreating because of a material change that might pose a serious threat to earnings. But in many cases, the fundamentals are sound and then stock is simply moving along with the broad market current.
[ad#Google Adsense 336×280-IA]The S&P 500 has dropped more than 8% just since January 1.
The overwhelming majority of stocks have fallen by more than 20% over the past three months.
So that $20 stock with the $0.50 per share annual dividend is now a $16 stock.
Suddenly, what was once a 2.50% dividend yield is now a stronger 3.12%.
We could get the same increase in yield if the dividend rose from 50 cents to 62 cents. But even at a healthy 10% annual pace, that would still take more than two years.
Though we hate it, the falling share price got us to that goal much more quickly.
There’s also the added benefit of capturing a 25% capital appreciation bounce once the panic subsides and the stock returns to $20.
Of course, while the math checks out, it’s never easy to invest when the market is tanking. There is always the fear that the $16 stock that seems cheap today might be a $14 stock tomorrow. That’s as true now as ever, which places even more importance on rigorous financial analysis.
To paraphrase Warren Buffett, the stock market is a voting machine in the short-term and a weighing machine in the long-term. We can’t control what happens the next few months, but we can identify well-positioned market leaders with strong returns on capital, visible cash flows, and durable competitive advantages — the type that can maintain or even increase their distributions.
For now, I want to focus my screen on stocks whose yields have been propelled above the 4% mark (the minimum for being eligible for my portfolio). To help weed out troubled companies that are falling for a reason, all candidates must have positive free cash flow, 15% or better return on equity (ROE), and positive expected earnings growth in 2016.
Action to Take: Like any stock screen, the stocks above were pulled from the broader market based on loose criteria, not hard in-depth research. Still, they are all quality businesses whose earnings are growing in this economy, not shrinking.
And thanks to the market’s foul mood, you can lock in yields 38%, 55% and even up to 91% higher than they have been recently offering.
— Nathan Slaughter
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Source: Street Authority