The Benefits and Pitfalls of Dividend Stocks

Are you planning to invest in stocks? If so, it is important to know the advantages and risks of different styles of investing.

In this blog, we list some benefits and pitfalls of investing in dividend stocks. These will be helpful to you in making informed decisions regarding basic issues of philosophy and strategy.

The Benefits

  • The dividend is not paper profit that can vanish in a bear market. Companies provide the dividend in cold, hard cash. And since most companies have a strong aversion to cutting their dividends, the average dividend is safe and reliable.
  • Because dividends are generally presumed safe, the stock prices of companies that pay dividends tend to be less volatile. This means that dividend investors not only get part of their return in cash, but the price of their portfolio tends to exhibit far less volatility on a day-to-day basis.
  • The whole purpose of any business enterprise (no matter how much growth potential it has) is to generate cash eventually. Companies that pay no dividends (and have no potential to pay dividends) are companies that are offering only promises. They seldom excel over the long run. And speculating in these companies usually leads to disappointment. Favoring long-term dividend stocks is not only the safest way to invest, but it is usually the most profitable.

The Pitfalls

  • Arguably, companies with higher dividends are of lower risk than companies with low dividends since part of the return they offer is in cash. But this is true only up to a point. Companies in dire straits many times see their dividend yields rise when their prices plummet. Many times, a high dividend yield is an indicator of the exact opposite of what many investors believe it is an indicator of.
  • Few companies are actually obligated to pay a dividend. But in our modern capital market, investors expect (and many valuation models assume) any dividend a firm pays will continue indefinitely. As a result, any firm that cuts its dividend is usually punished severely by the market. Therefore, from the typical firm’s perspective, a dividend is almost as binding as a debt payment. What this means is that companies that fall on hard times and that do not pay a dividend, in a sense, are in a better position than those companies that do pay dividends. They can right the ship without having the extra burden of paying a dividend.
  • Many times in stock investing, it is not the current level of profitability that really matters, but rather the The biggest returns accrue to those stock investors who identify and buy those companies with increasing dividends rather than high dividends. A company with a high dividend will have a hard time increasing that dividend; and it may even cut it. A company with no dividend cannot cut its dividend; and it just might pleasantly surprise and initiate a dividend. A company with a modest (or even no dividend) might be preferable to a company with a high dividend if chances are good that dividend will be increased.

To understand the benefits and pitfalls of dividend stocks more comprehensively, visit Vershire.com. Our site will provide you information about the best stocks to invest in now.

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The Benefits and Pitfalls of Dividend Stocks

How to Determine Undervalued Stocks

Many investors concentrate on those stocks that are often in news and that are followed by the masses. They feel most comfortable with these familiar names. This practice is foolish. Such stocks are less likely to be undervalued.

It is not entirely proper to fault investors for this general approach, as they cannot analyze thousands of companies. We all need simple ways to whittle a huge number of options down to a manageable few.

However, there are more effective and profitable ways of doing this whittling. Here, we present some simple but effective steps that will help the average investor to zero in on the undervalued stocks to invest in now.

Before we begin, we would like to remind you of the words of Warren Buffets, “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Decide on the Quantifiable Criteria to Identify the Best Investment Options-

In the first stage of the analysis, the investor cannot devote much time to each and every stock. Investors cannot do much “thinking” about the stocks that are potential investments. In other words, investors must use quantifiable and unambiguous criteria that will objectively and reliably lead them to potential investments that will beat the averages in terms of risk-adjusted return (if only in a slight way).

Candidates for consideration include the return on equity ratio, the debt to equity ratio, the current ratio and other financial ratios. Currently, most shrewd investors would say that expected return on equity should be above 10%, debt to equity must be less than 0.5, and current ratio must be above 2. But, understand that these exact numbers vary over time. In certain markets and under certain conditions, these cutoffs may change dramatically.

Shortlist-

Apply these objective criteria to actual investments to identify stocks with the greatest potential. Come up with a shortlist of stocks on which you can focus much more time and energy.

Although at this point all you are doing is crunching numbers, apply your objective criteria carefully, critically and thoughtfully.

Calculate the Intrinsic Value

Determine the intrinsic value of these high-potential stocks. Determining intrinsic value is a much more time-consuming task; and at times, it is a much more subjective task. It requires you to make an assessment about such hard-to-quantify but important characteristics as shareholder friendly culture, sustainable competitive advantage, and honest management.

How to Determine Undervalued Stocks

Oil Stocks – Still Not the Best Investment Option for 2016

The oil industry is in better shape than many think, but we are still not bullish on oil stocks.

There Are a Few Signs of Hope on the Horizon for the Oil Industry

Russia Working With OPEC

The major players in the oil industry seem willing and able to finally address the rampant oversupply. Senior Russian and OPEC officials stepped up talks in January to take joint action to remedy one of the worst supply gluts in decades. Speaking in London, OPEC Secretary General Abdullah al-Badri urged other producers to work with the group to drain the ocean of oil that is washing over the world and forcing prices to their lowest levels in years.

India Taking over for China

For years, there was worry that a slow down in China would cool what demand there was for oil and send prices even lower. But just in the nick of time, India appears to be picking up for China. India made up almost 30 percent of the global increase in demand for oil for the first quarter of the year, the International Energy Agency (IEA) reported last Thursday. The IEA further reported that the demand for oil is set to grow at a “solid” rate for 2016.

Decreasing Oil Exploration

The drop in price, as expected, is having a chilling effect on exploration. In February, Valor International reported that oil exploration fell to its lowest level since 1970. The International Business Times also reported in February that U.S. energy companies slashed mining and exploration spending by 1/3. Worldwide, oil and gas companies have canceled a total of $380 billion in projects since the oil-price downturn began in 2014.

These things are all bullish for oil long term.

Current Outlook is not Favorable

We have never been as bearish on oil stocks as some have been. This notion that oil and oil companies will not ever have their time in the sun again is wrong and foolish. Eventually, the price of oil will recover to its long term-average price which is about 1/12th the price of an ounce of gold. The above points are very good reasons why the price of oil will recover eventually.

However, we are still not very bullish on oil (and more importantly oil stocks) in the near future. We would rate very few of the roughly 2,000 companies we follow as some of the best stocks to invest in now. And we rate the oil industry as (at best) average. If you would like to learn exactly why, continue to monitor our posts. We will be publishing more reports shortly.

Oil Stocks – Still Not the Best Investment Option for 2016

In Focus – ACIW

In our “In focus” reports, we do a detailed examination of one of the roughly 2,000 companies we cover to determine if the selected company is also one of the best stocks to buy now. In this report, we will cover ACI Worldwide (ACIW).

Background

ACI Worldwide (ACIW) is a software company that develops, markets, and supports a line of software and services that primarily facilitate electronic payments. This software and services are used mainly by financial institutions, retailers, and electronic payment processors. It also acts as sales agent for software developed by third parties.

ACI Worldwide is headquartered in New York, New York. However, it does business worldwide. And its products are sold in three geographic regions: the Americas, Europe/Middle East/Africa (EMEA), and Asia/Pacific.

Stock Fundamentals

ACI Worldwide scores well on many of the metrics we study. It is consistently profitable and it has cash flows that shadow its paper profits. Its operating margins and net margins are strong and holding steady (if not improving). Its other measures of efficiency are mostly average or above average. It even did well in the high-stress years of 2008 and 2009.

Furthermore, its growth has been stellar. Sales, profits and cash flows have all grown vigorously for roughly 10 years.

On the negative side, we would categorize its balance sheet as only of average strength, it pays no dividends, and its price multiples are on the high side. On balance, we feel ACIW’s overall fundamentals are only average. And we do not consider it one of the best stocks to buy now.

Stat Sheet – ACI Worldwide Inc. 5/3/16

Ticker ACIW
Industry Software & Programming
Price $ 20.06
Market Cap  $ 2,366
Dividend Yield 0.00
Dividend/CFOp 0.00
Equity/Assets 0.343
Average Equity/Assets 0.383
Financial Strength Average
Growth Prospects Above Average
Beta 1.34
Price Volatility Average
Stock Fundamentals C

(Our assessment of this firm’s fundamentals will be in effect for the rest of calendar year 2016.)

We provide much more research to help investors uncover the best stocks to buy now. If you would like to see more of this research, click the link below.

Best Stocks to Buy Now

If you would like to learn why we have a preference for the best dividend stocks, click the link below.

Best Dividend Stocks

Disclaimer – Information contained herein has been obtained from sources believed to be reliable. Neither the author nor the publisher guarantees the accuracy or completeness of the information and methods described. This information is offered as general commentary only. It is not intended as investment advice. Investment and trading of securities involves risk, including of loss of capital. Market conditions change over time, and no assurance can be given that a reader may apply the principles described to make a profit. The author and publisher expressly disclaim all and any liability to any person for any investment or trading decisions that the reader may make in reliance on this information.

In Focus – ACIW

In Focus – ACET

Aceto Corporation (ACET) is just one of the roughly 2,000 companies we follow. In this report, we study ACET in a little more detail to determine if it is one of the best stocks to buy now.

Background

Aceto Corporation (ACET) is a chemical manufacturing company. ACET is primarily engaged in the sourcing, marketing, and distribution of pharmaceutical intermediates, generics, nutraceutical products, agricultural protection products, and specialty chemicals. It operates in three business segments: Health Sciences, Specialty Chemicals, and Agricultural Protection Products.

Aceto is headquartered in Lake Success, New York. But it does business internationally, and it has regional managers in Europe and Asia as well as in the U.S.

Stock Fundamentals

Aceto (ACET) has had decent sales growth over the previous business cycle. It’s also been mostly profitable. And its cash flows seem to confirm and corroborate its paper profits. It also scores well on many of the metrics that we look at that reveal a firm’s ability to operate efficiently and competitively.

Furthermore, its balance sheet appears, for the most part, sound. And it deserves at least an average rating for the strength of its financials.

Lastly, its price multiples are not excessive. In fact, in terms of possibly the two most popular metrics, earnings and sales, ACET is selling at a discount.

Overall, ACET’s fundamentals are not outstanding and they do not deserve our highest grade. But they are at least better than those of the average stock. And we consider ACET one of the best stocks to buy now.

Stat Sheet – Aceto 5/3/16

Ticker ACET
Industry Chemical Manufacturing
Price $ 22.37
Market Cap  $ 648
Dividend Yield 1.07
Dividend/CFOp 0.566
Equity/Assets 0.541
Average Equity/Assets 0.563
Financial Strength Average
Growth Prospects Average
Beta 1.35
Price Volatility Average
Stock Fundamentals B

(Our assessment of this firm’s fundamentals will be in effect for the rest of calendar year 2016.)

If you would like to see more research on the other companies we cover, click the link below.

Best Stocks to Buy Now

It is beneficial to have a bias in favor of the best dividend stocks. We certainly do. To learn why, click the link below.

Best Dividend Stocks

Disclaimer – Information contained herein has been obtained from sources believed to be reliable. Neither the author nor the publisher guarantees the accuracy or completeness of the information and methods described. This information is offered as general commentary only. It is not intended as investment advice. Investment and trading of securities involves risk, including of loss of capital. Market conditions change over time, and no assurance can be given that a reader may apply the principles described to make a profit. The author and publisher expressly disclaim all and any liability to any person for any investment or trading decisions that the reader may make in reliance on this information.

In Focus – ACET

In Focus – ACN

The purpose of our “In Focus” reports is to focus in on one company out of the 2,000 we cover, and to do a much more in-depth analysis of that one company. In this way, we can determine if that company deserves to be classified as one of the best stocks to buy now. In this report, we focus on Accenture Plc.

Background

Accenture Plc. (ACN) is a management consulting, technology services, and outsourcing company. Its business is organized into five operating groups: Products (25 %), Financial Services (21 %), Communications & High Tech (20 %), Health & Public Service (18 %), and Resources (16 %).

Accenture is headquartered in Dublin, Ireland. But it has operations in more than 200 cities and 53 countries.

Stock Fundamentals

There is not much to dislike about Accenture. The last time it experienced even a hiccup in its ability to generate sales, profits, and cash was during the market panic and beginning of the subsequent Great Recession in 2008. Since then it has performed stupendously.

Financially, it is one of the strongest companies we follow. Its growth has been strong, steady, and balanced. It has paid a dividend since 2006 and has increased it every year. It scores near the top in almost all the measures we study that reveal a firm’s efficiency and profitability.

Furthermore, despite its tremendous growth and huge size (market cap of almost $ 70 billion), we feel its future growth will be admirable. We are confident predicting that its future growth will be above the average expected growth of the roughly 2,000 companies we follow.

Perhaps the greatest feature of ACN is (despite the fact that it has a magnificent track record of generating profits and cash, and creating value) it is not wildly overpriced. Its P/E is roughly 20 (about average); and most of its other price multiples are close to (or even slightly below) average. An outstanding company at an average price is a screaming bargain.

We have said many times that it is better to buy a very good company at a little bit of a discount than to buy a lousy company at what seems like a huge discount. Accenture is a good example of that rule. Accenture is simply a very good company selling at a very reasonable price. It is one of the best stocks to buy now. And we highly recommend it.

Stat Sheet – Accenture Plc. 5/2/16

Ticker ACN
Industry Business Services
Price $ 114.40
Market Cap  $ 71,667
Dividend Yield 1.92
Dividend/CFOp 0.360
Equity/Assets 0.328
Average Equity/Assets 0.275
Financial Strength Above Average
Growth Prospects Above Average
Beta 1.07
Price Volatility Below Average
Stock Fundamentals A

(Our assessment of this firm’s fundamentals will be in effect for the rest of calendar year 2016.)

If you would like to see more research on the other 2,000 companies we follow, including the others we consider the best stocks to buy now, click the link below.

Best Stocks to Buy Now

If you would like to learn why it is so important to start with and focus dividend stocks, click the link below.

Best Dividend Stocks

Disclaimer – Information contained herein has been obtained from sources believed to be reliable. Neither the author nor the publisher guarantees the accuracy or completeness of the information and methods described. This information is offered as general commentary only. It is not intended as investment advice. Investment and trading of securities involves risk, including of loss of capital. Market conditions change over time, and no assurance can be given that a reader may apply the principles described to make a profit. The author and publisher expressly disclaim all and any liability to any person for any investment or trading decisions that the reader may make in reliance on this information.

In Focus – ACN

In Focus – ACCO

The purpose of our “In Focus” reports is to focus in on one company out of the 2,000 we cover, and to do a much more in-depth analysis of that one company. In this way, we can determine if that company deserves to be classified as one of the best stocks to buy now. In this report, we focus on ACCO Brands Corporation.

Background

ACCO Brands Corporation (ACCO) supplies branded office products to the office products resale industry. Specifically, it designs, develops, manufactures, and markets a variety of traditional and computer-related office products. ACCO operates in three segments: ACCO Brands America, ACCO Brands International, and Computer Products Group.

ACCO is headquartered in Lincolnshire, Illinois. It sells its products mainly in markets located in North America, Europe, and Australia.

Stock Fundamentals

Occasionally a firm will exhibit weak growth, but (in a sense) make up for that weak growth by also exhibiting solid and steady growth. ACCO is not one of those firms. Its growth has been both weak and erratic.

Its paper profits, cash flows, and even free cash flows have been mostly positive. This is good, but it is debatable how real these are and whether they will continue since ACCO does not have the confidence to pay a dividend. Furthermore, its financial strength is average at best. ACCO is clearly an inferior firm.

Its future growth does not look much brighter since its two biggest customers, Staples and Office Depot, will likely merge into one. This will only give its customers even more market power. It will also likely dent its sales, and reduce its margins.

The one redeeming quality ACCO has is that it is fairly cheap. Its P/E is about 11, and its other price multiples are equally low. However, this redeeming quality only makes its overall fundamentals average. We do not consider ACCO one of the best stocks to buy now.

Stat Sheet – ACCO Brands Corporation 5/2/16

Ticker ACCO
Industry Office Supplies
Price $ 9.85
Market Cap  $ 1,064
Dividend Yield 0.00
Dividend/CFOp 0.00
Equity/Assets 0.277
Average Equity/Assets NM
Financial Strength Average
Growth Prospects Average
Beta 2.08
Price Volatility Above Average
Stock Fundamentals C

(Our assessment of this firm’s fundamentals will be in effect for the rest of calendar year 2016.)

If you would like to see more research on the other 2,000 companies we follow, including the others we consider the best stocks to buy now, click the link below.

Best Stocks to Buy Now

If you would like to learn why it is so important to start with and focus dividend stocks, click the link below.

Best Dividend Stocks

Disclaimer – Information contained herein has been obtained from sources believed to be reliable. Neither the author nor the publisher guarantees the accuracy or completeness of the information and methods described. This information is offered as general commentary only. It is not intended as investment advice. Investment and trading of securities involves risk, including of loss of capital. Market conditions change over time, and no assurance can be given that a reader may apply the principles described to make a profit. The author and publisher expressly disclaim all and any liability to any person for any investment or trading decisions that the reader may make in reliance on this information.

In Focus – ACCO