Hunting for higher dividends
High yield, high beta stocks allow investors to find low prices and big returns.
NEW YORK (TheStreet) -- In a land of low interest rates, stocks with high dividend yields rule. For investors, the issue becomes how to select the ones that will be the most rewarding. High yield, high value beta blue chips such as BHP Billiton (BHP), Caterpillar (CAT) and Dow Chemical (DOW) offer opportunities for investors to buy on the dips to maximize the long term total return.
Hunters often acquire a target by setting the crosshairs on a fixed position. The trigger is pulled when the target crosses it. This strategy is very efficient and very effective, as it obviates the need for roaming around and trying to find the target. The target comes to the hunter.
Dividend investors can similarly set a target by selecting a certain yield and then buying the desired stock when that yield is available.
Stocks that have high betas -- like BHP Billiton, Caterpillar and Dow Chemical -- fluctuate a great deal in price. (High beta stocks are more volatile than the market on average; low beta stocks move less than the market on average. The beta for the stock market as a whole is 1.) Dow Chemical has a beta of 2.67, well more than twice as volatile as the market on average. The beta for Caterpillar is 1.84. For BHP Billiton, the beta is 1.52.
Although the stock prices move around more than the market does, these aren't shaky companies. Caterpillar is a member of the Dow Jones Industrial Average. The market cap for Dow Chemical is nearly $50 billion, with annual sales of over $56 billion. BHP Billiton is the world's largest natural resources company.
Due to how solid these firms are, it results in each being ideal for buying on the dips when the share price is lower and the dividend yield is higher.
These companies are all able to pay dividends that have higher yields than the average of around 1.9 percent for a member of the S&P 500. The dividend yield for BHP Billiton is 3.61 percent. For Dow Chemical, it is right around 3 percent. Caterpillar pays a dividend of 2.67 percent. At the moment, all of these dividends are at least 30 percent more than the average for a member of the S&P 500.
And if investors buy when the share price falls, the yields become even more rewarding. For example, Dow is now trading around $42.70, with about a 3 percent dividend. If someone wanted to buy Dow when it was yielding 3.6 percent, or 20 percent higher than it is now and almost double the S&P average, the investor would put in a buy order at around $34. The 52-week low for Dow Chemical is $29.07, so that buy order would surely have been executed some time in the last year.
If investors buy when the stock price is depressed, it is likely that when the yield is paid, it will be based on a higher stock price. Effectively, that increases the investor's yield on the original investment.
Plus, the dividend growth rate adds to the appeal of stocks bought using this technique. Over the past five years, BHP Billiton has had a dividend growth rate of 13.81 percent. For that period, the dividend growth rate for Caterpillar was 8.41 percent.
All investors should accept that it is impossible to time the market, no matter what the asset class. But if investors purchase stocks at lower prices, they will receive higher yields. Just use the dividend as a target for buying.
There are many blue chips like BHP Billiton, Caterpillar, and Dow Chemical that move around in price much more than the stock market as a whole. But these solid firms aren't a bad investment. Quite the opposite. Buying with a set yield as the target can result in a lower share price and a greater dividend that increases the long term total return.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
More from TheStreet:
And just where are these geniuses going to invest ?
Choose Large Cap Iconic (Brands you use, know and trust) Dividend Stocks for the Long term. Take a vacation and relax - Let the idiots like those writing these articles try jumping in and out of stocks like the rats they are ! Almost 28% return last year and I know I'll beat this guy and most like him this year ! When the price drops my Dividends just buy even more shares - its a beautiful thing !
They are simply adorable and loving little things aren't they?
I believe that's going to be a "pretty slow" rotation out of stocks..
Comparing to what has been said about raising the rates, in accordance to Inflation or U/E.
And other indicators associated with our waning years of Recovery.
Yawn. Boardroom talk... let's shell out some dividends so we can rent shareholder money to string along our deadbeat business platform. You should expect activity to replace stagnation and history says cheese gets moved whether you want it moved or not.
Putting 90 million people back to work won't light a fire under any of these stocks. In fact, the cost of on-boarding and subsequently, integration and adverse assimilation (ending the Kool Aid mentality) will compromise the markets.
That's a "best-case" scenario for you guys. I demonstrate $700 TRILLION in derivatives outstanding and too many balk at it. In truth, the figure $632 TRILLION was verifiable in August 2012. Based on the mother-of-all-bull-runs vs. absolute stagnation in economy, anyone can speculate on where that figure is now... $800 Trillion? A Quadrillion? One thing is for sure, there's no economy and it's impossible to absorb all that's outstanding but not coursing in an economy that MUST revive or face the probability of World War III.
After doing some research to pick up on some of the fundamentals of a company; I find it very easy to use a Watch List to keep an eye on or a method for easy tracking..
Then if by chance it gets closer to being worth the time or price, we put a buy order in for shares.
I believe with any long term order, too many things can happen before a fill.
Smeado, I'm trying to digest or understand your statement about dividend paying stocks ??
Are you not only saying, that there are "better dividend" paying stocks...?
Or that "all stocks", are risky investments..??
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
Consumers are very status conscious in Asia, Africa and other emerging-market areas. This is especially true in China.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.