Every day and quarter and year data is accumulated to measure different metrics to try to out perform the market. Ian Tam of Morningstar tried a theory which seems to work. He started with dividend companies; and tested going back to October 2006 or 10 years of testing to find if you bought these companies you would earn a return of 10% for a low risk strategy. The only time a company needed to be exchanged was if the stock fell out of top 30% of the ranked universe or the payout ratio exceeded 100%.
The criteria he used was:
market capitalization – higher the better
dividend yield relative to the sector median ( the stock’s yield minus the median yield of the sector to which the company belongs)
Dividend payout ratio relative to the sector median ( a low number is a good number)
Debt to equity ratio less than that of the sector median
Company Mkt Cap Yield Rel to Payout Payout Ratio Rel D/E Ratio to Div
$ bill Sect Med. Ratio % to Sec Med to Sec Med Yield
AT&T 248.848 4.26 63.58 57.54 0.8 4.75
Pfizer 207.081 3.51 44.44 44.44 0.94 3.51
Phillips 66 41.357 3.19 43.83 43.83 0.41 3.19
Exxon Mobil 352.796 3.53 68.18 68.18 0.23 3.53
Valero Energy 25.922 4.27 43.72 43.72 0.42 4.27
Abbott Labs 60.446 2.53 42.28 42.28 0.56 2.53
Carnival Corp 35.658 1.87 37.33 20.08 0.48 3.01
Accenture 92.688 1.99 37.64 37.64 0.01 1.99
General Dynamics 46.451 0.96 30.37 12.76 0.43 2.00
Honeywell 87.713 1.02 32.94 15.33 0.83 2.06
Linking to dividend paying stocks, after you believe the company will continue to perform or continue to make money, then you need to make comparisons of the company versus others in the same sector. Then other sectors can be compared to and you can come up with a variety of recommendations. You will be accurate in expectation and receiving continuing dividends but you will not know the capital gains to be received. However if a company is profitable you know it will trade to the prevailing P/E multiples for the market. If your concern is the long term, a profitable company paying dividends over the long term is a good investment. With the above strategy, the time to get out is when the payout ratio goes too high and fortunately on the stock market there are many alternatives.
There are more questions than answers, till the next time – to raising questions.