Friday, 18 November 2011

Dividend Initiators as a Stock Selection Concept

In his first feature article for the recently acquired Canadian MoneySaver, new owner Peter Hodson, formerly hedge fund manager at Sprott Asset Management, provides an intriguing idea for finding stocks that will pay off well in future. He goes so far as to state that this is the single best investing theme he has to offer after 25 years in the business. His principle: take a serious look at companies that declare their first ever dividend.

Why dividend initiation is significant
Hodson believes that initiating a dividend tells us the company: a) is doing well; b) has excess cash; c) is managed by a Board that respects shareholders and likely owns lots of shares itself; d) is likely to pay out a steady stream of stable or rising dividends for many years. That sounds sensible but how can we take the idea forward?

Finding first-time dividend payers
His article mentions two companies that have have recently declared their first dividends: Primary Corp (TSX: PYC) and DSW Inc (NYSE: DSW). To find others, we cannot unfortunately rely on that standard investor tool, the stock screener. We could find no screener with a first-dividend filter or even some proxy that would cleverly achieve that end. Instead our list below relied on the basic Internet tool that everyone knows, the Google search, where we searched for words such as "dividend, stock, initiate, first, Board".

Tracking and investigating the candidate stocks
Compiling a list is a start but not the end of the story. No doubt some of these companies and stocks look better than the rest and some may not look good at all.

Watchlist - A simple starting point is to set up a watchlist of the potential stocks, for example by using the GlobeInvestor My Watchlist (see screenshot below of the above list with a few of the customizations that the tool allows). It can contain both Canadian and US stocks and shows many of the financial indicators and ratios on profitability, growth rates, valuation and safety that give a good preliminary view of the attractiveness of the stock.

Company financial reports - Each company's website will contain the quarterly and annual financial reports that are replete with data and management comment on the company. Before buying stock, one should have read through a number of them.

Stock data websites - As well as the basic financial data in the company reports, several go much deeper in calculating a multitude of ratios and barometers of financial health of companies.
  • ADVFN - most extensive free set of data and ratios around
  • InvestorPoint - includes insider trading info
  • Google Finance - includes data on similar companies, though the degree of similarity varies (see example below of screenshot for WJA)

Stock discussion forums and boards - Though one should always be wary of the motives and expertise of the commentary, there may be nuggets of useful information in such online sites.
Whether this method really helps zero in on stocks worth buying, we don't know for sure as Hodson doesn't offer any systematic or rigorous data to back up his claim. However, it is always interesting to experiment with and entertain a new angle to stock selection.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.


Anonymous said...

Previously, you wrote about total return indexes for the S&P and TSX.

I am very concerned about my performance and so I have been using the XIU and the SPY as proxies for the TSX/S&P and then adding "commission-free" shares each quarter based on the stated dividend of each respectively(so that the compounding impact is accounted for).

Will that give me a relatively close approximation to "total return"?

Then I use those figures to compare to my performance. thx

CanadianInvestor said...

Anon, your calculation will be a lot more accurate than using just the price index but it won't match the theoretical index return, which assumes instantaneous constant reinvestment as they are paid out by companies in the index. XIU and SPY pay out quarterly not constantly so the reinvestment timing differences will cause variation.

One easier way to get Total Return for the TSX, if you can remember to do it, is to check the TRIV (Total Return Index Value) in the TMX Money website here - Every day it changes to give the current Total Return value that you can then compare at two different dates e.g. beginning and end of year, and the percent change gives the TR between the two dates. The challenge is that TMX doesn't publish historical tables of the TRIV so you must remember to check it those particular days you want. Otherwise the TRIV number disappears and is not later retrievable.