Monthly Archives: January 2016

February’s Pick

If you’re trying to pick a stock to purchase in February, just throw a dart at a list of the S&P 100 and you’ll likely do well. More than 50 of the companies on the index are currently trading at more than 20% off their 52 week high and another 40 or so are at least 10% off that mark. If capital growth is your goal, it’s hard to go wrong. But we want more. While it might sound like a broken record, we are, for the third month in a row, recommending International Business Machines Corp. (NYSE: IBM). Before we get to the reasons, let’s look at three other front-runners.

When all the scores had been assigned, Potash Corporation of Saskatchewan Inc. was in our top 3. It’s 55% off the 52 week high with a low P/E of 10.05 and they’re still profitable despite the collapse of potash prices. That collapse, however brings with it some uncertainty about their future price and we’d rather buy them on their way up than down. There are also some rumors about them cutting their jaw-dropping 10% dividend. Mind you, even if they slashed it by half you’d still earn a respectable 5%. If that dividend outweighs the price risk for you, buy them!

National Oilwell Varco (NYSE: NOV) is also a good-looking stock. They are 49% off the 52 week high with P/E of 10.57 and EPS of 3.29. This company designs and builds equipment for oil and gas drilling so they enjoy some protection from the oil price market. Still, the current uncertainty in oil prices makes this stock a little uncertain also. Of course, we all know that oil prices will recover and that means drilling will continue and eventually expand also. Their 6.2% dividend certainly makes them rewarding in the meantime.

Finally, Caterpillar (NYSE: CAT). This company was on our radar back in December but was nudged out by IBM. Well, they still look good. At 35% off the 52 week high, and with a P/E of 14.39 and EPS of 4.82 they continue to offer a juicy dividend of 5.3%. Caterpillar has its work cut out for it as low oil prices and sagging commodity prices mean less demand for their equipment. Nevertheless, they are a profitable company at a good price. Again, we prefer to buy on the way up but that dividend might make them attractive for some investors in the meantime.

To be honest, we’d be happy buying and holding any of these three, but we’re settling on IBM again. There are some mixed reviews about the near future of the company and time will undoubtedly prove half of those analysts right. For us, we want a solid company at a good price that pays a nice dividend. This month, that’s IBM. They are 31% below the 52 week high and, while they are still losing ground, we’re willing to ignore that and increase our position because the P/E and EPS are both so great at 9.5 and 14.8, respectively. They have a long history of rewarding investors with a steady (and growing) dividend which is currently at 4.3%.

Seems like the current market has something for every investor so you should find it relatively easy to pick a stock this month. We thought we’d give you a few options because, while the scores say one thing, it never hurts to consider some outside factors that influence prices. Remember, the name of the game here is buy and hold so no matter which of the four you go with, a few years from now you won’t have any regrets.

Choosing a stock – Part 5: Does the company deserve the price?

I have to admit that the metrics we discussed in the previous three posts (the dividend return, whether  the stock is on sale, and the percentage above the 52 week low) are the most important for me and, of those three,  the first two are the most important. When I’m buying my piece of camping gear, I want a trustworthy company that offers a good-quality product and I want to buy it on sale. On sale or not, I also want to know whether the value of the product warrants the price. To help me make the best decision, I routinely read customer reviews online. What better way to judge the quality of something than to read the opinion of others who have purchased the same item. If the item seems a little pricey (even on sale) but lots of people have reviewed it favorably, I might go ahead and spend the money. If, on the other hand, the reviews are positive but only a few people have written a review, I might think twice. Some people might purchase the product at that inflated price based on a handful of positive reviews but, sooner or later, the supplier will realize that shoppers think the item is over-priced for what they’re getting and they’ll have to drop the price.

choosing a stock 5How do we figure this out when it comes to buying stocks? Shareholders don’t write reviews after buying shares but there is a way they indirectly tell us what they think of the value of the company – it’s the price-to-earnings ratio (or P/E). This is the ratio of the company’s share price to its earnings per share. In other words, it’s a way of comparing the ability of the company to earn money (certainly an important way of determining value) to how much people are willing to pay for a share. To calculate the P/E, we take the current stock price and divide by its earnings per share (or EPS). The P/E allows us to evaluate what people are willing to pay for one dollar of the company’s earnings. In the Telus example, the P/E is 15.4 which means you’re paying $15.40 for every dollar of earnings the company generates. We can think of the P/E as a way of asking “does the company make enough money to warrant the price of the stock?” A low P/E is like a product with lots of positive reviews – it’s good quality at a good price.  A high P/E means the stock price could be out of whack with the earnings of the company and, eventually, people will realize that and the price will experience a correction – possibly a major one.

Sometimes share prices are affected by speculation on events which might happen in the company’s future. Maybe they’re releasing a hot new product that is expected to do well and their share price takes off as investors drive it up in anticipation. What if that hot new product turns out to be a dud? We want to avoid buying that stock at an inflated price and then suffering through the correction. Of course, lots of people have made lots of money speculating on future prices but we aren’t interested in risking our money. It`s easy to find headlines online like “5 Stocks Set to Double This Year” or “Stock Secrets Insiders Don’t Want You to Know.” Don’t be fooled – nobody can predict what a share price will do. We want to play it safe by making purchases to hold for the long term and then sleeping well at night. As with the other factors, I assign a score to each stock on the S&P 100 based on the P/E. Remember that a low P/E is good so high scores are awarded to stocks with low ratios.

My strategy makes it unlikely to get fooled by a temporary volatility in a stock price because I’ve already considered the 52 week high and low so we know how the price has behaved recently. Still, it is possible that a stock price was dramatically inflated sometime over the last year (thereby increasing the 52 week high) while being currently well below that (thereby seeming to be on sale) and still be overvalued (i.e., has a high P/E). There are lots of companies on the S&P 100 so why take a chance?

Choosing a stock – Part 4: Don’t buy if the price will be better next week.

So far we’ve looked at two of the five factors I think are important in choosing a stock. Hopefully you agree that the system seems quite simple and requires very little time. Remember, the name of this blog is Passive Dividend Income. I don’t want to spend too much time or effort on this and I certainly don’t want to have to think about my portfolio all the time. I invest a little time in choosing a stock and then pretty much forget about it until it’s time to buy again, letting that small investment pay dividends in the future. Ok, I couldn’t resist that pun. In the last entry we talked about buying a stock that’s on sale. Now let’s talk about making sure there won’t be a better sale on that stock in the future.

Back to our analogy. I’ve picked the supplier I want to buy from, I’ve found the item I want and now I’m checking to see if it’s on sale. I’m in luck! It is. The trouble is, how do I know this is the best price I can get? In other words, what if I buy it now and then it goes on sale the following week at a deeper discount? Oh, the horror! Last time we learned we can determine if the stock is on sale by comparing the current price to the 52 week high. As with the camping gear, how do I know this is the lowest the price will go? I don’t. But what I can know is how the current price compares to the lowest price people have paid in the last year (known as the 52 week low).

picking_a_stock_part_4Time for another calculation. For each company on the S&P 100 I figure out how far above the 52 week low it is. This gives me an idea of whether the sale price is the best price for this stock or if it’s likely to go lower in the future. In the example at the left, we see the stock is 0.8% above the 52 week low. This is exceptionally close to its 52 week low which means that, while it’s still on sale, the price could go lower still. In other words, if the stock were trading at, say, 10% higher than the 52 week low, it suggests that the price is recovering. To be sure, we could simply look at the price history for the last few weeks. Lots of websites provide that kind of information but the charts at are especially easy to use.

A stock that is far from the 52 week low is not at the best sale price anymore. Remember, share prices fluctuate between the 52 week high and 52 week low. Our goal is to try and buy when they are far below the high but not yet far above the low. Incidentally, being a little above the 52 week low also suggests the price is recovering and less likely to go lower after I buy it. I’m a little wary of stocks that are at their 52 week low for that very reason.

Of course, lots of things affect share prices but these are big, blue chip companies with high daily trading volumes that are being bought and sold by lots of institutional investors so the prices don’t move very much day-to-day. Lots of people are doing in depth analyses of company valuations which means we don’t have to – thankfully! We can let the price history be our guide to what people are willing to pay now and what they might pay in the future. While our long-term focus is dividend income, we’d like to see growth in the value of the stock too!

January’s Pick

This month International Business Machines (NYSE: IBM) came out in the top spot with a score of 13, so we’re increasing our position in them after also recommending it last month. It’s currently trading at 21.6% below the 52-week high, representing a good sale, and offers a dividend of 3.8%.january_pick

The ratios are also still strong with a P/E of 9.49 and EPS of 14.57. Let’s not forget that Buffett still likes them. Works for us! Remember, too, that while our overall goal is to grow dividend income, capital appreciation of the share price is an important way to build wealth. IBM doesn’t have the highest dividend rate but it offers potential for share price improvement and is a safe bet overall. Last month we mentioned keeping an eye on Williams Companies (NYSE: WMB). This month they placed in the top ten but are too risky for us to recommend it. They are currently 60% below their 52-week high becausethey gave up some ground in the last month meaning their share price continues to slide. Sure, their dividend rate is now over 10% but that might not be sustainable and the slipping share price could still offset that return. We’ll keep waiting on that one.

Choosing a stock – Part 3: Buy on sale.

In the last entry we talked about the second factor to consider when buying a stock – the dividend rate. My overall goal is to develop a stream of income from my portfolio and collecting regular dividend payments is one way to do that. I buy companies on the S&P 100 which pay the highest dividend rate. In this entry we’ll move on to step 3.

Let’s go back to our analogy. I’m trying to buy a new piece of camping gear and I’ve decided to go with a well-known supplier. I’ve chosen a good quality piece of equipment (companies on the S&P 100) that will last and add value to my hiking experience (companies that pay the highest regular dividend). Being a frugal person (some friends would say ‘cheap’) I’m going to wait until the item I want is on sale. Why pay more than I have to right? If I wait for a sale I can get the same item for less!

walmart_priceWhen choosing a stock, I apply the same principle. The good news is, with so many companies on the S&P 100, there’s nearly always something on sale. You might be wondering what on earth I’m talking about when I say a company is on sale. Let me explain. I figure a good way to estimate the value of something is to see what people are willing to pay for it. This is true of camping equipment and stocks alike. It’s easy to see what people are willing to pay for a stock because that’s what the current trading price is. We can see from the image above that Walmart was trading at $61.30 per share on December 31, 2015.

Ok, now we know what the current price of a stock is but how do we tell if that’s a sale price or not? Easy! I look at the maximum price people were willing to pay over the last year (called the 52 week high) and compare that to the current price. Pretty simple, right?! Again, I find that price for every company on the S&P 100 and calculate how far below the 52 week high the current price is. Let’s look at an example.

picking_a_stock_part_3Basically, people were willing to pay $66.36 for this stock within the last year and I can now buy it for $33.49 – a discount of 49.5%. This is a solid company on the S&P 100 so, chances are, it’ll be back to that high within a year or so and I will have realized a 98.1% return. Oh yeah, and collected my 5.49% dividend in the meantime. Sweet! Would you be excited to buy something you think is valuable at that kind of discount? Of course, you would!

Just like with the dividend rate, I assign a score to each stock depending on how far below the 52 week high it’s trading. In other words, I look to see which stocks are really on sale. That score is added to the score the stock earned from its dividend and I’m one step closer to making a decision.

We sold Apple!

Apple (NASDAQ: AAPL) has been flat for several months now and they’re currently paying a dividend of only 1.98%. We don’t usually hold stocks that pay less than 3.5% so it was time to sell. We bought them in April, 2013 for $61.40 (adjusted before  a 7:1 split) because they were undervalued at that time. We happily accepted the less than stellar dividend because the share price was appreciating nicely. They’ve given up some ground lately and don’t seem to be recovering so it was time to take our profit. We sold at $107.50 to realize a return of 75% – not bad for 33 months! We’re confident their share price will improve again but in the meantime we’d like a better dividend. Thanks for the ride Apple!