This Well-Known Dividend Payer Is Due For A Big Rebound

Friday, March 27, 2015 - 7:30am

by Michael Kahn

The search for yield in a world where the benchmark 10-year U.S. Treasury note offers less than 2% is a tough task. Fortunately, there are stocks that still offer attractive income and the potential for trading gains. 

By nature, stocks are risker than bonds, especially default-risk-free Treasuries, but with that risk comes the potential for greater reward.

Not all stocks offering high dividend yields are good investments. Yields rise as share prices fall. If a company is in trouble, it is unlikely it will be able to sustain its dividend payout.

One way to predict whether a stock's high yield is a potential sign that the dividend may be cut is to look at the chart. A falling price trend is a red flag, as the market often seems to know what lies ahead before analysts figure it out.

But if a stock with a big yield has a positive chart, it could wind up rewarding investors with both high income and capital gains.

One of my favorite dividend stocks right now that is showing a turnaround on its chart is Kimberly-Clark (NYSE: KMB)

Shares of the personal products maker have had a rough 2015 to date, but when viewed on a long-term chart, it appears to be only a correction. KMB is now starting to recover from its collapse in January after announcing a disappointing outlook.

The stock fell nearly 13% from its January high to its low earlier this month. However, on-balance volume, shown on the bottom of the chart, barely dropped. 

This indicator keeps a running total of volume traded on up days minus volume on down days, and most of the time it tracks a stock's price. When it holds steady as prices fall, we can surmise that sellers are not that aggressive and demand has not really waned. 

On-balance volume suggests KMB is on sale. But before jumping in, we need to assess whether shares are done falling. 

On Wednesday, as the Dow Jones Industrial Average was socked for a 293-point loss, KMB dropped back below its 200-day average after failing at its 50-day moving average. Those two events, if taken alone, would paint a bearish picture. However, the 200-day moving average is flat, and flat averages are not very good indicators. 

Furthermore, the stock moved above a short-term trendline a week earlier for a minor upside breakout. And that followed a hold of support at the long-term trendline drawn from the August 2011 low. 

So while moving average analysis for KMB is shaky, trendline analysis is fairly positive. Toss in on-balance volume and we've got a decent stock on the charts. 

KMB has even started to outperform over the past week as defensive consumer products stocks are wont to do when there is uncertainty in the market. 

If KMB maintains a similar ebb and flow as it has done since 2011, then we can expect a new high, possibly near $125, before summer. And going after its generous 3.3% dividend yield looks to be a good risk at this time. 

KMB is scheduled to make a quarterly dividend payment next week to shareholders of record on March 4, so traders' next opportunity to collect a dividend will not be for a few months. However, if you're interested in collecting monthly income payments from KMB or any stock in your portfolio, you can put the shares in a high-income brokerage account. To learn more about that, click here.

Recommended Trade Setup:

-- Buy KMB at the market price
-- Set stop-loss at $103
-- Set initial price target at $125 for a potential 16% gain in eight weeks

This article was originally published on ProfitbleTrading.com: On-Sale Dividend Stock is Due for a Big Rebound

Michael Kahn does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.