Wednesday, August 9, 2017
My Dividend Stock Shopping List
Check out my stocks shopping list!
I maintain a shopping list of stocks that I'm interested in buying under right buying conditions.
The right buying conditions come true when certain valuation, dividend, and price movement metrics reach a reasonable value or an attractive range.
The overall goal of this shopping list or watch list is to help me identify most attractive buy candidates from a group of stocks that I'm interested in buying at some point in the future.
I also do preliminary research before adding any stocks to my shopping list as I only want to track and buy stocks that are high quality in terms of their credit ratings, dividend sustainability, and future growth.
Below is a snapshot of my current shopping list with various metrics I track.
In today's article, I'm going to talk about three basic metrics that I track in my watch/shopping list to identify top buying candidate stocks. These three metrics are discount-to-fair value, current dividend yield to 5 year average yield comparison, and % below 52 wk high.
This is by no means a complete list of metrics or due diligence that one should do before buying any stocks. Instead, these metrics are simply a starting point in identifying attractive buy candidates for further analysis and research.
Discount to Fair Value (FV)
Fair value is simply a price at which we think the intrinsic value of a stock lies and what the underlying business is worth. Stock price can go up and down, sometimes becoming overvalued and other times undervalued.
It is however expected that over a long-term, a stock price will regress to its mean value. We can think of this mean value as the fair value that can be calculated using various different methods and tools. I have covered in a past blog post how I determine a FV, you can read it here if you are interested: Having A Stock Watch list Can Help You Become A Better Investor
In my shopping or watch list, I have a FV calculated for each stock and I use it as a reference to determine the discount or premium rate at which the stock is currently trading.
General Electric (GE), IBM, and William Sonoma (WSM) are currently the most attractive stocks in my watch list based on the highest Discount-to-Fair Value (FV) metric. Whereas General Mills (GIS) is about neutral and currently trading at its fair value and AWR is the most expensive or trading at highest premium to FV.
Current Yield to 5 Yr Ave Yield Delta
This metric tells me which stocks are currently paying a dividend yield that is greater than their 5 year average dividend yield. It is another metric to determine how cheap or expensive an stock is based on their historic yield.
Dividend stocks tend to have bottom support around their 5 year average yield and hence the 5 year average yield can be used as a good indicator for the bottom.
The top three stocks that have yields higher than their 5 year average are IBM, WSM, and XOM. This implies these stocks are trading at historic lows and paying yields that we haven't seen in over 5 years.
The chart below shows the delta between current yield and 5 year average yield. Both IBM and WSM tops the list by considerably exceeding their 5 year average yields by maintaining very generous current yields of 4.24% and 3.36%, respectively.
% Below 52 wk High
The third metric in my watch list tells me how far low a stock is from its 52 wk high. You can think of it as a way to determine how big a dip is for a given stock.
Generally speaking, a stock closest to its 52 wk high tends to be more expensive, and a stock farthest from 52 wk high is least expensive.
In this case, IBM, GIS, and GE are currently trading farthest from their 52 wk highs and therefore have the most potential to go up and likely the cheapest of the bunch.
Based on these simple metrics, IBM, GIS, GE, and WSM achieve top positions in my shopping list of high quality dividend paying stocks that are becoming very attractive for a purchase.
Even though many of these stocks look cheap, the overall market is still trading at quite high multiples and a small or medium size correction is imminent, especially given recent geopolitical risks.
Therefore, I would continue to be patient and sit tight for even better entry points for my top buy candidate stocks before pulling a buy trigger.
What are your top buying candidate stocks?
Disclaimer: Author of this article is not a licensed/registered financial or investment adviser and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. This article is for informational and entertainment purposes only. Full disclaimer can be read here: Full Disclaimer