Cash Flow Through Dividends

How to Pick a Winner

The first step in DIFCCO, after opening an account with a mutual fund/stock provider, (go to Fidelity.com) is to identify a dividend stock hat is going to put checks in the mail on a recurring basis. Below is a simple screen for id'ing a high yielder (but not too high) and a link to a free stock screener. 1) Use a Dividend Yield Screen of 8 - 20% (anything above 20% is typically bad news.) 2) The Market Cap should be >= $1 billion - no small caps. 3) ROE >= 10% 4) The Fundamental Grade should be >= C 5) Institutional ownership >= 30% 6) Recommendation > = Hold from analysts 7) EPS Growth next year > = 1 The reasoning behind these metrics: first we want a stock that is going to result in decent pay thus a yield of 8 -20%. To find out how much income will find its way into your pocket each month, simply multiply the amount of your investment principal by the yield of the stock and divide by 12. For example, if you find a 12% yielding stock and you wish to invest $10,000, .12 x $10,000 equals $1,200. This result divided by 12, results in a monthly income of $100. ($10,000 * .12) / 12 = $100 F stands for Fundamental Analysis and Fuqua In the beginning there was Benjamin Graham and he begat Warren Buffett and he sort of begat Peter Lynch and he begat the Motley Fool's Dave and Tom Gardener. And God looked around and said that it was good and then he said "a PEG ratio of less than one is a good indicator that a stock is on sale." A great book that breaks down how one of the masters (remember that whole begetting stuff) mastered Wall Street, is Peter Lynch's One up on Wall Street." This book details what Peter Lynch looks for in a stock when he is performing a detailed fundamental analysis on the stock. Peter Lynch's success in the 80s and 90s came from his fundamental investment strategies he used while at the helm of Fidelity Magellan fund in. One of Lynch's biggest stipulations as detailed in his book is to invest in a company or product that you are familiar, something you know. He goes into detail about visiting retail stores if the business is myhappyassets.com retail and talking to company top execs if possible. Lynch professes that being familiar with the brand is an important part of the equation - it would be like going to a franchise restaurant that is getting ready to take off and noticing that business is booming, something is going on here. He also goes into detail regarding what to look for in the company's financials and key ratios. For our purposes, here is the breakdown of his more salient and screen-able points:

The Dividend Screen Sifting for Winners

Measure Formula What to Look For Dividend Yield Dividend per share divided by stock price Yield at least equal to that of the S&P 500 and not out of line with that of the S&P industry yield. Price to Earnings Ratio Stock Price Divided by per-share earnings P/E that is not excessive compared with company's historical P/E and with S&P industry P/E Cash Flow Per Share Net income plus depreciation and amortization divided by number of shares outstanding Should be at least three times dividend payment Quick Ratio Current assets minus inventory divided by current liabilities Should be at least 1.0 Payout Ratio Per-share dividends divided by per-share earnings Should be higher than 50% but not exceed 100% Dividend Coverage Ratio Cash flow per share divided by dividends per share Minimum should be 120% Short-Term Debt Coverage Ratio Operating income divided by short-term debt Should be at least 2.0