I love dividend stocks. I believe in the long-term power that dividend stocks have to dramatically boost a portfolio's return, but not all dividend stocks are created equal.
While dividends alone can bring nice income into your portfolio, that income can do little to erase the losses that can sometimes hit individual stocks. You need to find a good balance between finding stocks with solid dividend track records, and stocks that have the ability to trade higher along with the overall market.
In bad markets, even the most solid stocks can trade lower, so we are not necessarily hoping to find stocks that never trade lower, losses are a part of investing, but we want to make sure that our stocks are fairly priced, which gives them the best chance of enjoying price appreciation in up markets, and limited losses in down markets.
In order to find these particular stocks, we run screens for stocks with solid dividend histories, and acceptable valuations (typically P/E ratios of 20 or less). This week we are going to take the opposite approach. We are going to run a screen looking for stocks with solid dividend histories, but instead of looking for those which are fairly priced, we will screen for those which appear overvalued at the current time.
We will screen for stocks with a dividend yield of 2% or greater, with a P/E ratio of greater than 25.
We will also be checking the stock's payout ratios, which will give us an indication as to how well the company will be able to sustain its dividends moving forward.