Following a stock trend is one of the most effective investing methods devised. It's a straightforward strategy that involves waiting until an uptrend is apparent on a stock chart.
The uptrend in trend-following is created when certain criteria occur -- the price passes a particular point, or it pulls back on a shorter time-frame and resumes in the same direction, triggering a "buy" signal.
The hope is that the stock price will continue in the same direction after the investor enters the trade. The investor stays in the trade until the trend appears to have reversed.
Trend followers don't try to catch top or bottom prices; rather, they intend to ride the middle.
The advantage of trend-following is normally low transaction costs: The trader reaches a price target without needing to perform too many trades. There is also the ability to greatly profit from huge stock moves.
On the other hand, it's very difficult to determine when the trend will end, and sometimes, it takes multiple attempts before catching a profitable trend.
Power up with dividend stocks
That's why a good way to really escalate your potential gains from this strategy is to use it with dividend-paying stocks. That's why I call it a "powered-up strategy."
Uptrending stocks that pay even a small dividend can build wealth quickly from the combined forces of stock gains and dividend payouts. And you won't believe where I found two uptrending, dividend-paying stocks.
Most investors don't think of the technology sector when looking for dividend payers, because they are few and far between. This is a clear example of how out-of-the-box thinking can help investors locate the next great investment.
But these two tech stocks appear set to shine in 2013…
Nearly everyone from middle age and older remembers the classic Texas Instruments
) line of scientific calculators. These math machines used to be must-haves in high school and college classes.
While certainly not as brash as the typical high-tech company, Texas Instruments has been quietly raking in profits since 1938. The calculators are still part of its popular products, but the portfolio also includes semiconductors, data converters and a host of other under- the-radar gadgets of our high-tech world.
The company just lifted its quarterly dividend rate by 33% to 28 cents a share, capping off 10 straight years of increases. An increasing dividend yield of 2.2%, $5 billion of scheduled share repurchases and an earlier buyback plan that still has $3.4 billion to go create a compelling case for this stock.
Trends don't get much more compelling than the recent price moves of Texas Instruments. The price has climbed from about $26 in October 2012 to nearly $34 today. Buying on a daily close above $34 makes solid sense, considering this trend-following strategy.
) is another old-school technology company trending higher on confidence that recent troubles are being addressed. Founded in 1939, the company designs, produces and sells desktop and laptop computers. It's also involved in multiple segments of technology products and services.
The company just reported first-quarter results for its 2013 fiscal year. Though the numbers beat Wall Street expectations, year-over-year revenue still declined 6% to a little more than $28 billion. Net earnings were also higher than expected, but fell 16% to $1.23 billion, or 63 cents a share, year over year.
So why is this company climbing higher? Well, as you probably know, the stock market anticipates what is going to happen rather than what has actually happened. The recent financial results beat estimates and suggested improving prospects. Management provided 2013 earnings guidance of between $3.40 and $3.60 a share, also above analysts' consensus estimates.
The company's balance sheet is also a positive. Operating cash flow soared more than 115% to more than $2 billion in Hewlett-Packard's first quarter. The company used this capital to pay out more than $258 million in dividends and repurchased $253 million worth of shares. In addition, the scandal involving accounting improprieties at Autonomy, which the company acquired for $10.3 billion in 2012, has been winding down.
The share price has soared from about $11 to more than $20 since Nov. 19. The positive fiscal first-quarter results pushed shares above the 200-day simple moving average, creating powerful momentum on the upside. This upside momentum, with an average dividend yield of 2.7%, makes this stock a prime candidate for my powered-up trend-following strategy. The stock is a good buy right now, with a 12-month target of $25.
Risks to consider:The main negative to trend-following: It's impossible to tell when the trend is going to end. The old saying, "The trend is your friend, until it bends in the end," is apropos. Position size properly and use stops when investing.
Action to take: Hewlett Packard is a good buy right now, but I would wait for a breakout close above $34 to purchase Texas Instruments.
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