Monday, December 19, 2011

Dividends

Today's column was about how two telecoms stocks - AT&T and Verizon - could provide a place to hide at the same time getting paid a healthy dividend to to so. I tried to make the point that just because you find a big name stock with a big dividend yield does not mean you can buy just anything.

Being the technician I am, any stock with a low P/E and high dividend yield still has to pass muster (or does it have to cut the muster, or mustard?). The chart cannot be in a big ol' bear trend. It cannot be at a new high with a bearish momentum divergence. And it cannot be breaking down below support.  Getting the picture? The chart has to be at least stable.

Telecoms from around the world now sport some mouth watering dividend yields. Surely, a 10% yield not only cushions the downside but also gives off at least a little - and rare - current yield.   But what happens when the stock falls 10%. Bye, bye yield.

Check this chart of Philippine Long Distance.
It is now near the top of a giant range and looking a bit overbought in this weekly time frame. Although it sports a hefty 4.6% dividend it can still fall 15% and remain in the range.  Dividend no mas, three times over. But at the bottom of the range it would look tasty indeed.

Then there is Frontier Communications, mentioned in the column. The stock lost more than half its value this year and is well below its 2007-2009 bear market low.  yet, it sports a 15.2% dividend!  Wow, what a deal!


 

Not so fast. While fundamentally oriented investors might say there is enough cash flow to keep paying it, the charts suggest something entirely different. After all, bad news often shows up in the technicals before it shows up in the quarterly earnings report. Somebody always knows something and acts. Then the ripples in the pond spread out, causing more people to act until the bad news emerges. Its not the charts that drive the fundamentals. Rather, it is the market sensing what is coming.

So, if you are looking for a nice cash cow to keep your wallet stuffed, make sure the cow is not dead and just bloated with the escaping gasses of decay. Find these stocks using fundamental screens but buy them only when the chart says Bossie is mooing contentedly in the fields.

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