As market volatility seems to increase, dividends can become more valuable to investors. Safe dividends provide income to investors and, perhaps more importantly, they provide funds that an investor can reinvest in the stock market trading.
It is possible to reinvest the dividends from a company directly into the stock. Some companies offer dividend reinvestment programs directly to individual investors. Additionally, some brokers provide this capability at little or at times no cost.
While individual dividends are often just a small amount, the power of reinvesting these small amounts should not be underestimated. The chart below shows that an investor would have increased their total return by more than 65% if they had reinvested dividends.
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Source: Fidelity Investments
Similar studies yield similar results. Reinvesting dividends can be the most significant factor in building wealth in the long run.
Increasing Payouts Could Provide More for Reinvesting
Of course, the wealth achieved by reinvesting dividends comes from two sources. One is the increase in value of the new shares bought with the reinvested dividends. Another is the increase in the value of the dividend which allows for purchasing an ever increasing amount of shares.
The fact that both of those factors are important means investors should look for several characteristics when selecting dividend stocks.
Dividends require earnings so a company that is increasing dividends should, ideally, be increasing earnings. The dividends should also be rising, and the dividend should be sustainable which means it should be less than the amount of the company’s reported cash flow from operations.
This week, we quantified and screened for stocks that meet those criteria. Specifically, we searched for stocks priced under $20 with dividends that have increased over the past five years, show gains in earnings and strong financials.
Five Stocks to Consider
Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long term investment opportunities but any individual stock in the list could be a winner or loser.
Hennessy Advisors, Inc. (Nasdaq: HNNA) is a publicly owned investment manager. The firm launches and manages equity, fixed income, and balanced mutual funds. The firm primarily invests in growth stocks of companies. It conducts in-house research to make its investments.
HNNA offers a 2.2% dividend yield and is trading with a price to earnings (P/E) ratio of about 8.5 based on 2018 expected earnings. The long term chart below shows that the stock has been forming what appears to be a consolidation pattern over the past year.
The fact that the stock has been in a trading range and is trading at a low P/E ratio could indicate there is little risk in the stock.
New Ulm Telecom, Inc. (NULM: Other-OTC) is a diversified communications company that engages in local telephone exchange and telecommunications businesses, providing landline and cellular phone service along with internet access to customers in several Minnesota communities.
NULM offers a dividend yield of about 2.3%. The stock trades an average of just 1,900 shares a day. If you decide to trade this stock, or any other thinly traded stock, remember that low volume could be an indicator that the stock can be difficult to exit. Consider using limit orders to enter and exit the trades to reduce trading costs of stocks like this.
The Hackett Group, Inc. (Nasdaq: HCKT) operates as a strategic advisory and technology consulting firm primarily in the United States and Western Europe. It offers executive advisory programs, benchmarking services and business transformation programs.
Its products are designed to help clients to develop a coordinated strategy for achieving performance improvements across the enterprise.
The long term stock chart shows a consolidation, once again a factor that could indicate lower than average risk in a stock. The consolidation shows that buyers have been attracted to the stock after relatively small declines.
HCKT offers a dividend yield of almost 1.9%. Its average trading volume of less than 100,000 shares a day indicates it could be best to consider the stock as a long term holding rather than as a short term investment tips / opportunity.
Marine Products Corporation (NYSE: MPX) manufactures, and sells recreational fiberglass powerboats for the sportboat, deckboat, cruiser, sport yacht, jet boat, and sport fishing markets worldwide.
It provides Chaparral sterndrive pleasure boats, including SSi and SSX sportboats, Sunesta sportdecks, Signature cruisers, SunCoast sportdeck outboards, Vortex Jet Boats, and Robalo outboard sport fishing boats, as well as H2O Sport, and Fish and Ski boats.
The company sells its products to a network of 147 domestic and 90 international independent authorized dealers.
MPX’s dividend yield of nearly 2.8% and the existence of support in the stock chart indicate there could be lower than average risk in this stock.
The stock appears to be reasonably valued at about 17 times next year’s projected earnings of $0.80 per share.
Chico’s FAS, Inc. (NYSE: CHS) operates as an omni-channel specialty retailer of women’s private branded, casual-to-dressy clothing, intimates, and complementary accessories. The company’s portfolio of brands consists of the Chico’s, White House Black Market (WHBM), and Soma.
The company operates approximately 1,500 retail stores in the United States and Canada. Brands target specific demographics.
The Chico’s brand primarily sells private branded clothing focusing on women 45 and older. The WHBM brand sells private branded clothing and accessories, such as shoes, belts, scarves, handbags, and jewelry focusing on women who are 35 years and older.
The Soma brand sells designed private branded lingerie, sleepwear, loungewear, activewear, and beauty products focusing on women who are 35 and older.
The monthly chart of CHS is shown below. The stock was once a favorite of momentum traders who pushed the price to more than $40 a share which was well above what fundamentals could support.
In recent years, the stock has been range bound, indicating bargain hunters seem to enter positions on selloffs. The stock trades at about 12 times next year’s expected earnings and offers a dividend yield of about 3.5%.
Any of these stocks could be a potential winner and all worth further research. For those unsure of their ability to dedicate the time to researching the market, the stock trading tips service, PPK System, is designed to exploit patterns associated with market clues by looking for value and momentum in stocks.
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