Monday, December 29, 2008

Stock market: A good dividend and value strategy

I read about many investment strategies in the last years since i began investing actively in the stock market.

But as i am a follower of Warren Buffet i like to buy undervalued stocks and additional they should pay some "big" dividends.

Ok, i know Mr. Buffet doesn't like them so much because a company should use the money for letting their own business grow faster and not giving it to the stockholders who use it for something else ;-).

With big dividends i mean not the amount but the dividend yield.
The yield should be above the 10-year-bond-yield - most likely around the double or triple amount - at the moment i speak from 5+%.

I like simple techniques like the O'Higgins-Strategy or Dog of the Dows (nearly the same).

Just look out for the 10 highest yielding dividend stocks from any index or the Dow Jones (usually at the end of the year).
Then buy these stocks and hold them for a year (or longer if you like). Otherwise exchange them after one year with the new dividend stocks who have a higher yield.

O'Higgins watches out for the 5 stocks with additional the lowest stock price out of the 10 picks.
It's more based on psychology because lower prices look cheaper for investors but it works out fine, too!
On the website of Dog of the Dows they call these the Small Dogs.

At the moment these stocks would be (percentage is the dividend yield):

Bank of America (BAC) 9,58%
General Electric (GE) 7,76%
Pfizer (PFE) 7,49 %
Alcoa (AA) 6,95 %
DuPont (DP) 6,57 %
AT&T (T) 5,87 %
Verizon (VZ) 5,54 %
Merck (MRK) 5,24 %
JP Morgan Chase (JPM) 5,10 %
Kraft (KFT) 4,35 %

For the O'Higgins-Strategy it would be the first five stocks in the list.

At the moment i would be cautious with the banking stocks because i guess the dividends won't be that big in 2009 because of the big write-downs in the last months (drop in this case BAC and JPM).

The other companies will have also significantly lower income but the dividends should be paid even in the coming two years. The strategy worked well in the last 30 years, it mostly outperformed the Dow Jones even when there were losses like in the Years 2001, 2002 and 2005.
They worked out better than the Dow Jones, meaning better than an index fund :-)
More of these statistics can be found on "Dogs of the Dow".

When you stick with dividend stock usually you get some money back each year and in the long run, this adds up to the additional stock price gain or a drop don't hurt that much because you cashed in already 5 to 10% dividend each year.

I bought in Germany in the year 2000 some good paying dividend stocks (already at this time 5 to 8%) and in the coming years they increased the dividend yearly around 10 to 15%.
This resulted for me in 2008 in a dividend yield of 11 to 15% already.
I think i just have to hold them another 3 or 4 years and my whole investment is being paid out by their dividend.
They are Norddeutsche Affinerie, Vossloh and Sartorius all from the German stock market.

If you want further information about the "Dogs of the Dow" visit their website. There you can also sign up free for their newsletter updates on this strategy!

I will update this informations every month or if some changes in the dividend policies of the companies occur.


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