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Strategy – Final Steps

Posted by on 3. January 2014

Happy New Year!

Part of your new year’s resolutions should have been to actually read up on the suggested links below from our last discussion. Yes, seriously!

Building on the concept of dividend paying stocks, preferably stocks that continue to increase their respective payouts over time, we will go through the Dividend Aristocrats and DRIP listing to narrow down the possible investment choice for our initial seed money. Yes, that still sits in that nifty only brokerage account of ours, and is not really doing much of anything just yet.

The screen requirements or filters for our exercise here will be as follows:

a) dividend yield greater than current market (banks, CDs, etc.)

b) either stable or increasing dividend payout over the last 5 years

c) stock price being $20 and below (and having stayed stable over the last 2 years), yet higher than $5

The above filters should eliminate quite a few of the contained stocks, including the really boring staples, where it would take a significant initial investment amount in order to have a return above inflation in real dollars. Remember to always keep an eye on both the relative yield (percentage) and the actual return (in real dollars). If only focusing on the percentage value, it can be rather misleading should you choose to “cash out” the return for some real world benefits.

The above should also eliminate the stocks that exhibit a significant amount of imbalance, fluctuating up and down frequently. While we are in the game for a solid return, we are not in the game for risk beyond tolerance. Others could argue that capping the price at a maximum of $20 invites just such intolerable risks (we are planning to invest directly into individual stocks); that is a true statement to a certain extent, yes. Our underlying philosophy is inherently risky, and more so than investing in mutual funds or large institutional offerings. If any such lingering questions remain, please go back and review the very first article in this series!

Stock prices below $5 / share mark are indeed not on our radar. Stable prices between $5 and $20 could (notice the conditional) signal that a company may have a sound business plan and financial footing, yet in a less attractive or growth oriented category. Think the large Telco trying to stave off the landline decline, or public utility companies. At first glance, not really an attractive business model, yet from a financial perspective, there may be quite some interest. Historically, such operations are throwing off their cash cow profits back to the shareholders, as there is not much profit opportunity by re-investing (relative to other factors).

Rather than rambling on about pros and cons, let’s start looking at our potential candidates and start weeding out the ones we don’t like.