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How to Choose Dividend Stocks

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I gave my thoughts to Kyle Woodley for a recent article he wrote for US News and World Reports. Here is an excerpt:

Dividend stocks are the bedrock for any long-term portfolio. That’s not news. If you’ve spent 30 minutes on any financial media website or Investing 101 primer, someone somewhere has assuredly told you that a portion of your investments should be spent collecting stock dividends.

The rub is this: In a market with literally thousands of stocks paying out dividends … well, where in the heck do you even begin?

Charles Sizemore, a portfolio manager on Covestor and chief investment officer at Sizemore Capital Management, a registered investment advisor in Dallas, points out four things investors should do when seeking out stock dividends:

  1. Look for companies that are recession-resistant and have stable cash flows.
  2. Look for consistent dividend growth.
  3. Look for a high yield, but not excessively high.
  4. Watch the payout ratio.

So, what signs of quality are you looking for? It depends on who you ask.

Sizemore says to look at the dividend history. “Did they cut their dividend during the last recession?” he asks. “As a rule of thumb, I say that a company that survived 2008 with its dividend intact is likely to keep that dividend intact through the next crisis, too.”

Keep it growing. While it’s far from a bad thing for a dividend stock to maintain its payout over a long period, many professionals agree that dividend growth is a much better sign for any company paying dividends.

Besides, you want your dividend to keep up with inflation, don’t you? “You want companies that raise their dividends every year, or at least close to every year,” Sizemore says. “Otherwise your stock is essentially a risky bond and nothing more.”

Photo credit: 401(K) 2012

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On Running a Concentrated Portfolio

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I tend to run a fairly concentrated portfolio at Sizemore Capital. My Dividend Growth portfolio – which is an income-focused long-only strategy – will generally have between 20 and 30 stocks at any given time.

There is no particular “science” that goes into this number. It isn’t a magic number, and I haven’t run studies to optimize it. But in my experience, 20-30 stocks is the sweet spot for me. It’s concentrated enough to allow for my favorite stocks to really have an impact on portfolio returns. But it’s diversified, so if a single stock has an unexpected blow-up on me, it won’t sink the portfolio.

I can also watch 20-30 stocks like a hawk. But that gets a lot harder at higher numbers. I couldn’t do in-depth research on a portfolio of 50 stocks, let alone 100. And frankly, once a portfolio gets that big, your best ideas get diluted to the point that you’re essentially a closet indexer.

I have no place for closet indexers. It’s not to say that I don’t see a place for index funds. I most certainly do. But a client doesn’t need to be paying active manager fees — which can be 1%-2% for long portfolios and the dreaded 2% of assets and 20% of profits charged by most hedge funds – for something that can be had at Vanguard for a fee of 0.09% per year.

When you let the number of positions in your portfolio expand, quality will inevitably start to suffer. If you have 100 “best” ideas, then they really aren’t your best ideas.

Of course, the downside to running a concentrated portfolio is that, when things don’t go your way, you can really underperform the market. Now, I could get into a much longer conversation about benchmarks, how they are misused, and why it’s a mistake to compare every portfolio to the S&P 500. But the fact is, if the market is up, even by a modest amount, and your portfolio loses money due to your concentrated investments not performing as expected, you’re going to have angry clients.

Some will leave you. Others will simply voice their displeasure loudly and often. Some may do both. I had a little of all three this past January, and I understand. Losing money – even a modest amount – is scary.

This is where communication comes into play. Your clients need to understand what it is you’re doing and they need to share your basic outlook. They are a lot more likely to be forgiving when trades go awry if they understood your investment thesis going into it.

And that’s important. Because when your strategy recovers and has a winning year, you want your clients to participate in the growth. If they lose faith and leave before your strategy rebounds, then both of you lose.

And if you’re not comfortable running a concentrated portfolio?

Then you’re not very good at your job, you have no business running money professionally, and you should return your clients’ fees and refer them to a low-cost index fund.

Note: There is one exception I would make here. If you’re running a “smart beta” quantitative strategy, then by all means, 50-100 stocks might be completely appropriate. But at the risk of splitting hairs, you’re not an “active” manager at that point but rather a sophisticated indexer looking to build a better mouse trap.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. 

Photo credit: Michael Dales

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Apple Is So Cheap, It’s Actually Ridiculous

The following is an excerpt from an article I originally wrote for InvestorPlace.

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There is nothing more dangerous than an “obvious” investment. Markets being what they are, by the time an investment “obviously” looks good, most of the good news is already priced in … and any whiff of less-than-perfect news can be enough to send the share price tumbling.

I really believe that. So I’m choosing the words I’m about to say very carefully: At current prices, Apple (AAPL) is quite possibly the most obvious buy I’ve ever seen in my lifetime. I would go so far as to say that Apple is so cheap right now, it is actually ridiculous … as in stark-raving mad lunatic ridiculous. Were Apple CEO Tim Cook to actually wear clown makeup and juggle bowling pins while riding a unicycle during the next conference call, the pricing of Apple stock would be no more ridiculous than it is right now.

I know, I know. I just finished telling you that “obvious” investments rarely seem to work out as planned. But it seems that while I am focusing on the obvious cheapness of Apple stock at today’s prices, Mr. Market is fixated on the obvious slowing in iPhone sales.

Yes, iPhone sales are slowing. We all knew this day would come, particularly after the iPhone 6 windfall. But the market was pricing Apple as a no-growth company even before the recent collapse in the share price. Let’s play with the numbers a little.

Apple stock trades for 10 times earnings. Stripping out the cash, which accounts for more than 40% of Apple’s market cap, you get a P/E ratio in the mid-single digits.

Yes, yes. I realize that most of that cash is offshore. So let’s chop its value in half. You’re still looking at a company with a P/E ratio in the high-single digits.

Now, a low valuation by itself doesn’t really mean much. Plenty of companies are cheap for a reason, and slower-growth companies should command a lower multiple.

But shouldn’t Apple stock at least trade in line with slow-growth behemoths like Procter & Gamble (PG) or Kimberly-Clark Corp (KMB)?

To finish reading this article, please see AAPL: Apple Stock Is So Cheap, It’s Ridiculous

 

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6 Battered Stocks That Could TRIPLE by 2020

The following is an excerpt from 6 Battered Stocks That Could TRIPLE by 2020.

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We’re in a bear market. Yes, I know. The Dow Jones Industrial Average and S&P 500 have yet to fall the full 20% that “officially” defines a bear market.

But U.S. small caps and many world markets have been in bear territory for a while, and if you were to strip out the outsize gains of the “FANG” stocks and a handful of other highfliers, the market averages would be across that line as well.

That’s the bad news.

The good news is that bear markets create fantastic opportunities. They reset the clock, take prices back down to bargain levels, and allow investors with idyll cash (and strong intestinal fortitude) to make a killing.

Today, we’re going to look at six stocks that, after the beating they’ve taken in this bear mauling, are now priced to triple by the end of the decade. As you might guess, several are in the energy sector, where the selling has been the most aggressive. But there are plenty of opportunities across a few sectors for investors willing to roll the dice.

You should be careful, of course. You don’t get the potential to triple your money unless there are risks involved. But in each of these cases, I consider the risks well worth it.

Kinder Morgan Inc (KMI)

kinder 6 Battered Stocks That Could TRIPLE by 2020I’ll start with the stock that was almost single-handedly responsible for tanking the midstream master limited partnership market.

I’m talking, of course, about Kinder Morgan Inc (KMI).

Kinder Morgan slashed its dividend late last year, raising fears that it was only the first of many dominoes to fall. And more often than not, a dividend cut is a prelude to major problems. But remember, this is a company that as recently as October was raising its dividend and in fact hiked its dividends four times over the course of 2015. And this is also the same company that was promising double-digit annual dividend growth from now through 2020.

To read the rest of the article, please go to 6 Battered Stocks That Could TRIPLE by 2020.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. 

Photo credit: winterwined

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Choosing the Best Online Brokerage Account

The quality of brokerage account services has really come a long way over the past 20 years, even while costs have shrunk to almost nothing. If you’re paying more than about $10 per trade… frankly, you’re doing it wrong.

Whether your beat is day trading or long-term stock trading, there has never been a better time to be an investor. Today, your biggest challenge is simply choosing where to open your brokerage account. There are so many quality brokers, it can be a little overwhelming.

Let’s take a look at some of the major players to break down the good, the bad, and the ugly.

BrokerCost per tradeMinimum depositDRIPAccess to foreign marketsNotes
Charles Schwab$8.95$1,000YesADRs and Canadian stocksSolid all-around broker and a good choice for casual traders
E*Trade$9.99$500YesExtensiveReasonable prices and good international access
Fidelity$7.95$2,500YesExtensiveA worthy competitior with an elegant and easy to use website
Interactive Brokers$0.005 per share, $1 minimum$10,000NoExtensiveBest for professional traders and managers. Lowest margin rates and best inventory of stocks for shorting
Scottrade$7.00$2,500YesADRs and Canadian stocksSolid option for casual traders and professionals alike
TD Ameritrade$9.990YesADRs Very solid all-around broker; added sophistication and social sharing with thinkorswim
TradeKing$4.95$0YesADRsSophisticated setup, best overall mobile experience
TradeStation$4.99$5,000NoADRsCost prohibitive $99.99 platform fee on accounts smaller than $100,000

Charles Schwab

I’ll start with Charles Schwab, the granddaddy of discount brokers. Four decades ago, Schwab effectively brought investing to the masses, making it easy and affordable for regular people to open a brokerage account. And today, Schwab remains an excellent option for ETF, bond and stock trading and mutual funds.

Charles Schwab is a good choice for a beginning investor or for an investor that trades relatively infrequently. Customer service is solid, and Schwab’s website interface is easy to navigate. The cost per trade is a modest $8.95, and the minimum to open a brokerage account is only $1,000. Schwab offers dividend reinvestment, which is a major plus for long-term investors.

If you are a fairly active trader

The only real downside to Schwab is that its international offerings are a little limited. You have access to ADRs and Canadian stocks, but not much else overseas.

E*Trade

E*Trade was an early pioneer in online stock trading, and it remains a very strong competitor today. Commissions are very reasonable at $9.99 per trade, and the minimum to open a brokerage account is only $500. (If you have less than $500 to invest, you probably have no business opening a brokerage account.)

E*Trade’s ease of use make it a very solid option for a beginning investor, but its range of products make it a viable choice for an active trader as well. E*Trade offers a broad selection of mutual funds and ETF. bond, and stock trading. Among all the brokers reviewed here, E*Trade also has some of the best exposure to international markets if your stock trading takes you overseas.

And finally, for the buy-and-hold investors out there, E*Trade offers automatic dividend reinvestment.

Fidelity

Fidelity has really come a long way in recent years. Not that long ago, Fidelity was almost exclusively a mutual fund shop. It’s not a place you would have normally gone to open a brokerage account. But today, Fidelity offers a very competitive product at a very reasonable price. Fidelity charges a very modest $7.95 per trade and has a $2,500 minimum deposit to open. Fidelity also offers extensive access to foreign markets and automatic dividend reinvestment for long-term investors.

For a beginning investor, Fidelity is a fine option, as its interface is easy to use. But for an experienced market veteran, Fidelity also has a robust enough platform to get the job done well.

Interactive Brokers

I can’t tell you which broker is the “best” because what works for one investor might not work for another. But I can definitely tell you which broker is best for me, and that would be Interactive Brokers.

If you’re into day trading or active stock trading, Interactive Brokers is almost always going to be the cheapest option for you. Stock trades are $0.005 per share with a minimum commission of $1 per trade. For a hypothetical 6 stock trades and two options trades per month, you’d be paying just $20 by Barron’s estimates.

If you short stocks or trade on margin regularly, then Interactive Brokers is the only obvious choice. Interactive Brokers is in a class of its own in terms of inventory of stocks available to short, and its margin rates are the lowest by far. Margin rates can get as low as 0.5%, though most investors will likely pay closer to 1.7%. As a frame of reference, margin rates at most of the other brokers are well over 7%.

But Interactive Brokers is not just the cheapest option. It’s also one of the best for experienced traders. You have unrivaled access to foreign markets as well as futures and foreign exchange. And Interactive Brokers also gives you access to complex order types that most brokers do not offer (market on close, market on open, pegged to midpoint, etc.)

Is there anything not to like?

Interactive Brokers’ Trader Workstation is designed for a professional investors, so it can be difficult for a beginner investor. I would go so far as to say that a beginner investor could get themselves into trouble with it.

Interactive Brokers also has a higher minimum deposit than most at $10,000, and it doesn’t offer dividend reinvestment. And if you don’t do at least $10 per month in trading, you’re subject to a $10 per month maintenance fee (this is waived on accounts greater than $100,000.)

So, if you’re an experienced, active trader, Interactive Brokers is a fine choice for your brokerage account. If you’re a novice or an infrequent trader that focuses more on dividend reinvestment, then it might not be best for you.

Scottrade

I might always be a little partial to Scottrade because that is where I opened my first brokerage account. It remains a very decent competitor today, with good customer service, and easy to use interface, and very modest stock trading commissions at $7 per trade.

The minimum deposit, at $2,500, is also very reasonable, and Scottrade has an interesting twist on dividend reinvestment. Rather than reinvest your dividends into the company that pays them, you can opt to automatically reinvest them elsewhere. For example, you can automatically reinvest your Microsoft (MSFT) dividend in Apple (AAPL), or vice versa.

Scottrade has also beefed up its trading tools for day traders and more active traders with its ScottradeELITE program. Its exposure to foreign markets is limited to ADRs and Canadian stocks, but overall, Scottrade is a very decent broker for beginners and pros alike.

TD Ameritrade

TD Ameritrade is a solid all-around option for your brokerage account. In addition to offering reasonable commissions at $9.99 per trade, TD Ameritrade has a large branch network, good customer service, and a website that is extremely easy to navigate. All of this makes TD Ameritrade a good option for a beginning investor.

But TD Ameritrade also has quite a few tools that make it appealing to advanced stock traders as well. Its thinkorswim platform, which can be thought of as sort of a collaborative social media for investing, is popular with do-it-yourselfers and professionals alike.

An underappreciated selling point of TD Ameritrade is that they are a little more accommodating than most discount brokers when it comes to housings non-traditional assets. If you invest in hedge funds, private REITs or other non-traded investments, TD is more likely than most of the rest to be able to actually hold them.

TradeKing

TradeKing is unique in that they were the first broker to really take a “mobile first” approach to design. Every broker I review here has at least functional smartphone and tablet apps, but in every other case the mobile experience is considered something of an afterthought. Not so with TradeKing. So, if mobile trading is a critical need for you, TradeKing is one you should seriously consider.

TradeKing also competes with TD Ameritrade’s thinkorswim in its social sharing capabilities.

Pricing is very reasonable at $4.95 per trade with no minimum to open an account. International trading is somewhat limited.

TradeStation

TradeStation is a popular option for active stock trading and day trading, and its users tend to be sophisticated investors. As with Interactive Brokers, TradeStation is definitely built with a professional trader in mind. TradeStation’s trading software is arguably even better than that of Interactive Brokers in terms of its customization, capabilities and tools. And TradeStation has the best backtesting tools on the market, hands down. If you want to build a trading system, TradeStation is generally your best option.

Commissions are very reasonable at $4.99 per trade, and investors have access to stocks, options, futures and forex all in a single brokerage account. But TradeStation can get very expensive if you have less than $100,000 in your account. Smaller accounts are subject to a $99.99 per month platform fee to use the trading software.

Access to international markets is also limited to ADRs.

But overall, if you have an account with at least $100,000 and you want a sophisticated trading setup, TradeStation is a very strong competitor.

Disclosures: I currently use Interactive Brokers and TD Ameritrade as my primary custodians.

Charles Sizemore is the principal of Sizemore Capital Management.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.