Stock Raider -- Because stock trading is not a game

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Because stock trading is not a game

Dividend stocks

If you manage your own IRA or 401K, knowing about dividend stocks is a must. When considering diversification of your portfolio, dividend stocks are a good alternative to regular stocks, mutual funds and exchange traded funds (ETFs).

Dividend paying stocks pay dividends on various schedules: monthly, quarterly, semi-annually, and even annually. Personally I like monthly dividends since they compound faster and you have more opportunity to get out of the stock if you have to (each month you can ponder if it's still worth holding the stock while with quarterly dividends you can only ponder each quarter). However, there are many more quarterly paying dividend stocks than monthly paying ones, and some high paying quarterly stocks are attractive.

How do you know if a stock pays dividends, and how much, and on what schedule? Go to any stock in Yahoo!, say NLY. Select 'Historical Prices' on the left, select 'Monthly' and click 'Get Prices'. For NLY you can now easily see it pays dividends of around $0.65 per quarter. Multiply by 4 ($2.60), and divide by the current price of $18.70, making for a 14% dividend. Now try FMY which pays monthly dividends of $0.16. Multiply by 12 ($1.92), divide by current price of $21.17 makes for a 9% dividend.

When to buy

Dividend stocks and ETF's go up and down just like any other stock, and they can easily go down more than what you get back in dividends. A simple plan for when to buy is to use long term buy/sell signals such as a 13 / 34 weekly EMA crossover scheme (buy when the 13 weekly EMA goes above the 34 weekly EMA, and sell when the 13 weekly EMA goes below the 34 weekly EMA). This will keep you out of the stock when dividends can not compensate enough for any price losses, and when you are in the stock, there will be dividends and price gains (can be a difference between 8 - 9% in just dividends or 15 - 25% in dividends and gains).

You can also follow the rules of the simple trading system outlined on these pages and use a 50 weekly MA.

REITs

Real estate investment trusts (REITs) are one kind of dividend paying stocks. REITs have to pay out most of their profits (around 90%) in dividends if they want to be considered a REIT for tax reasons. That makes for some hefty dividends in the most successful REITs. Some of the better run REITs are AGNC, CIM, HTS, NLY, and TWO, all paying around 15% dividends per year. The drawback of REITs is that they are highly leveraged. Click on any of the REIT symbols previously mentioned (which goes to their Yahoo! page), select their Key Statistics page, and look at their Total Debt / Equity numbers. Those are all much bigger than 100, and for most 600. If you are worried about the debt levels being too high, choose the lower ones such as CIM (175) or TWO (381).

Higher debt means more risk when interest rates go up. For now interest rate are very low and they are not going up any time soon it seems, so REITs with their sky-high dividends are an attractive choice.

REITs often make wild price swings. On the ex-dividend date (listed on the Key Statistics page of each stock on Yahoo!), the price drops by the amount of the dividend (see NLY chart above on March 28, 2011 where a dividend of $0.62 was paid). Then the price often makes a run up till the next ex-dividend date (see same NLY chart, next ex-dividend day is coming soon on June 28). Try to buy into a REIT a few days after the ex-dividend date.

Closed-end Funds

Closed-end funds (CEFs) are some of my favorites. They often pay monthly dividends, there are plenty to choose from that pay 9 - 10% dividends per year, and there are good web sites that can help research them. Why are they closed-end? The funds collect a bunch of money, issue a fixed number of shares at one time, and while the fund plays with the money to make more money, the shares are freely traded in the stock market. Contrast that with open-end funds which control the number of shares outstanding, they are free to issue more shares or buy back existing shares at any time.

A great web site to research CEFs is CEFConnect. Bring up the "Fund Screener" (see top of page), and you can pick any type of CEF you want. E.g. select 'All' next to 'US Equity', and click the Submit button. Next click on 'Add Criteria' and add 'Distribution Frequency'. You can sort on any column, e.g. Distribution Frequency' or Distribution Rate (the dividend rate).

How do you pick a CEF? Well if you have a good economics or accounting background you would go to the fund's website (listed for each fund on CEFConnect) and judge the fund by their hard, published numbers. For the rest of us there are some general rules you can apply:

A good CEF can reliably pay a dividend of around 9 or 10% per year. There is no reason to buy funds that pay 5 - 8%. Consider anything 9% and up.
Each fund has a price at which its shares are traded (indicates what people think the value is) and a net asset value (NAV) which says what the fund is actually worth per share. Both are displayed on CEFConnect. The Premium / Discount tells at a glance how much the price differs from the NAV, and is displayed in CEFConnect with 52 week ranges. In general try to NOT buy a CEF when the Premium / Discount is at the top of the 52 week range because most likely the price will try to go down to get closer to the NAV again. Instead buy when the Premium / Discount is closer to the bottom of the 52 week range.
A high Premium / Discount either means a stellar record (see PHK a Pimco fund) or the CEF looks attractive, such as a high dividend (see CFP, but click on the 'Distributions' tab, and notice CFP only makes 72% of its dividend in income, a danger sign). For stellar CEFs like PHK, buy at the low end of the 52 week Premium / Discount range, but be a bit worried since the price can easily go down, e.g. PHK was recently downgraded for having a Premiun / Discount that was much too high. For other high Premium / Discount CEFs, try to determine if there are things wrong, such as an income lower than the dividend.
For negative Premium / Discounts, consider how much negative. If it's -10% or even lower, there is probably something wrong, for instance the CEF can't generate any reasonable income.
Try to stick with Premium / Discounts of -5% - +10% and buy towards the lower end of the 52 week range.
When a CEF decreases or increases the dividend, the price might react erratically for a bit, trying to find a new equilibrium with the NAV. Consider buying if the price goes too low before finding equilibrium. Don't buy if the price shoots up too high.
On the page of each CEF, in the 'Leverage' section, CEFConnect shows how much leverage the CEF applies (leverage is great when things go well, but will magnify problems when things don't go that well). The 'Fund Screener' (mentioned above) shows the Leverage in the table. A CEF that pays a hefty dividend with little leverage (e.g. AGD) is attractive because there is less risk. Be wary of high leverage CEFs.
Click on the 'Distributions' tab. Look for the Return of Capital (ROC) numbers, in the table and also the bottom right. In general positive ROC amounts indicate that the fund can't earn its dividend and instead pays out of its savings (if any). Another indication that a CEF can't earn its dividend is a negative 'Avg. UNII per Share' (undistributed net investment income). There is NO need to buy a CEF with negative (more than a few pennies) UNII or positive ROC numbers because it's likely they will have to decrease their dividend in the near future.

Just considering the above mentioned criteria will help select healthier CEFs than choosing them blindly or on rumors.

For a diversified portfolio of CEFs, consider some CEFs that invest globally (AGD, AOD), invest in municipal bonds for tax advantage (NMZ, NMD), invest in convertibles (NCZ, NCV), bonds (PPT), and mortgages (FMY).