There is more to successful dividend investing than just buying high yielding stocks and waiting. Many investors mistakenly believe that wealth is easily created by holding onto high dividend-paying companies. Nothing could be further from the truth.
I have discovered three dividend-paying stocks trading well off their highs that will make excellent candidates for this approach.
The Power Of Dividend Reinvestment
Dividends alone make up a huge part of the overall total returns of the stock market. In fact, the numbers astounded me. Morgan Stanley published a study revealing that, since 1930, 42% of all U.S. stock market returns were due to dividends! Talk about a powerful stock market force that cannot be ignored.
Dividend reinvestment means plowing the cash earned from the dividends back into the stock. Simply stated, it means buying more shares with the proceeds of the dividends. Don't worry; this is not something you need to monitor carefully. For most stocks, dividend reinvestment is an automated process you can set up through your broker.
Compound interest is why dividend reinvestment is so effective at building long-term wealth. Compounding refers to earning interest on interest.
Discounted Stocks Provide An Added Boost
My experience -- and multiple studies -- have made clear that buying stocks that have been beaten down is more profitable over time than stocks that are surging higher.
It is the manifestation of the common stock market mantra of buying weakness and selling strength.
The major caveat to buying stocks at a discount is to make certain there are real, long-term fundamental catalysts at play to lift the shares. Bullish catalysts may be visible or may only be evident in the technical price picture of the stock. Many times, insider buying or other powerful bullish catalysts are not visible at all to company outsiders. The only way to key into these changes is by seeing bullish patterns on the price chart.
Here Are Three Hated Dividend Stocks You Need To Know
Ford (NYSE: F) -- The stock price of this quintessential American car company is approaching long term technical support in the $11.00 per share zone.
Shares have been punished since October 13, when the company reported net income of $957 million in the third quarter of 2016 -- a 56% plunge from the same time last year. While this works out to an adjusted $0.26 per share, which actually beat analyst estimates of $0.20 per share, investors have become cautious of the company.
This drop-off in earnings is the result of a trifecta of bad luck. First, Ford has reported slowing U.S. sales, a $600 million hit from a 2.4 million car recall due to faulty door latches, and a launch of a new super duty pickup truck that required an entire plant to be revamped.
Two of these three price pressures are short term: the recall and the plant revamp. While it could be argued that the sales slowdown is temporary and due to the cyclical nature of auto sales, it may be with us for awhile.
Remember, Ford is coming off a record $10.8 billion pre-tax profit in 2015 and a six-year uptrend in U.S. sales. A pullback should not have been unexpected.
The stock pays a quarterly dividend of $0.15, which is good for a dividend yield of just over 5% at today's prices, and also shows a greater than 28% free cash flow yield during the last 12 months. These are solid numbers that should continue to support the dividend.
At the same time, Ford's stock trades for 6.9% estimated 2017 earnings, allowing for upside in the share price.
Risks To Consider: Some analysts think that automobile sales have entered a long-term down cycle. Should this be the case, it will create strong headwinds for the share price.
Action to Take: The dividend yield and solid metrics paint a compelling picture for the shares. Buy Ford now in the $11.00 to $11.50 per share zone. Initial stops are suggested at $9.73 per share, and my target price is $15.00 per share.
HCP Inc (NYSE: HCP) -- This healthcare REIT is part of the coveted S&P 500's Dividend Aristocrats. Dividend Aristocrats are stocks that have increased their dividends every year for the last 25-plus years.
The shares pay a quarterly dividend of $0.52, which comes to a very impressive yield of 6.4%, with an 8.33% trailing 12-month free cash flow yield.
Investors have knocked the shares lower due to fear of the slated spinoff of HCP's ManorCare division into a separate REIT called Quality Care Properties.
ManorCare has been troubled since the original acquisition. Difficulties include a Justice Department investigation and Medicare reimbursement changes resulting in a severe decline in cash flow. The acquisition also caused HCP to add significantly to debt.
While HCP's dividends will fall after the spinoff, the long-term benefits make this short-term negative completely negligible. Benefits include a reduction in debt, an increased reliance on private payers (thus away from the Medicare system), and finally, HCP will be able to focus on its core competencies of medical offices, senior facilities, and life sciences.
Risks To Consider: After the spinoff, HCP will likely no longer be part of the Dividend Aristocrats. Also, there may be unexpected issues with the spinoff, resulting in higher costs. Make no mistake; this investment is high risk, but the risk is worthwhile with the judicious use of a stop loss.
Action To Take: I think the selling is over-aggressive and now is the time to jump in. Enter on an upside break of $30.00 per share, with stops at $27.93. The target is $36.00 per share.
Kohls Corp (NYSE: KSS) -- I love the bullish chart pattern on Kohls. A price base is building in the $42.50 per share area while the daily price range is attempting to push higher.
Right now the department store chain has a free cash flow yield over the last 12 months of just under 17% and a quarterly dividend of $0.50, good for a 4.5%-plus dividend yield. Shares are trading lower by 10% this year, setting up an ideal buying opportunity.
While the company's performance has been lackluster, it is trading at 10.6 times the estimated 2017 earnings of just over $4.00 per share. These metrics place Kohls' performance well below the S&P 500 Multiline Retail sector average.
Risks To Consider: Lower margins, slower growth, and weak operating cash flows are hindering the bullish move higher.
Action To Take: Buy now in the $43.70 per share zone with a $62.50 per share target price. Stops are suggested at $39.57 per share.
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