I’m sitting here in the airport and every station here is talking about the Facebook (FB) IPO. You can practically taste the excitement, and anytime investors get excited about a single stock, it’s usually a good sign for the overall market.
However, because I’ve already covered my thoughts on Facebook—you can find them here —I want to take today and answer some of your questions.
On Thursday, I opened my inbox so I could read your most pressing investing questions.
And if you haven’t had a chance to send me a question yet, please do so by clicking here:
I’ve had a few days to read through every response, and I’ve selected five questions that really hit at the heart of what’s going on in the markets.
"Is the European crisis an opportunity to increase your equity exposure in companies who do most of their business in the U.S. or do you think it is time to increase your cash position?"
Absolutely—the debt drama across the pond has created a unique buying opportunity. The trick is to increase your equity exposure to only the fundamentally strongest companies with limited exposure to Europe. The fact remains that plenty of big multinational companies are posting better-than-expected earnings growth, but so many investors are fixed on Europe that they’re not noticing the bargains. So, instead of increasing your cash position, I recommend that you continue adding to your positions in fundamentally strong stocks—just please stay clear of financial stocks!
"Which metrics (in addition to yield, payout, and return on equity) are most important in selecting income stocks?"
This is a great segue from the earlier question—how do we determine high-quality stocks, particularly income stocks? Well, this is where my Portfolio Grader tool is so helpful. Whether you’re dealing with a growth stock like Apple Inc. (AAPL ), or an income stock like Reynolds American Inc. (RAI ), you really want to pay equal attention to the eight fundamentals I list in Portfolio Grader, including sales growth, earnings growth and return on equity. Now, in the case of dividend-paying stocks, I have a few other criteria I keep in mind:
- A dividend yield over 3%—so that we really can maximize profits.
- A dividend yield that isn’t substantially higher than competitors’—this is a red flag for fundamental problems.
- At least a B rating—there’s no point in looking into it if it’s a C-rated stock, which makes it an automatic hold.
- A significant increase in dividend payments over the years.
Plain and simply, no. Stops may help short-term performance and can be used effectively by active traders, but rarely hold a place in a long-term buy and hold strategy.
Stop losses can lock investors out of a stock prematurely—you can get bounced out on a sharp dip, and miss out on the rally afterwards. And let me tell you, it’s not a good feeling to see a strong stock surge right after you stopped out. So in my Blue Chip Growth service, I follow a precise strategy designed to limit risk even in a dangerous market.
That is a fantastic question, Bhargavi. It’s no secret that AAPL is a Wall Street darling, and I agree that this company has stunning growth prospects. This stock currently receives an A-rating in Portfolio Grader due to its top-of-the-line fundamentals and consistently high buying pressure.
And, even as the company continues to smash through the $400, $500 and $600 price thresholds, there are plenty of reasons to continue to buy this stock. First, this company has a cult-like following when it comes to its products, and I fully expect demand to remain firm for the next wave of gadgets. Additionally, the company is preparing to pay its shareholders a 1.8% dividend later this year, for the first time in the company history. Finally, the company is flush with cash so it is headed towards a massive $10 billion stock buyback program that will continue to boost earnings per share in the quarters to come.
There is just so much going for this company, so it’s no wonder that some analysts expect the stock to blow past $1,000 in the next few years!
Thanks, Bob—in fact, there are a handful of stocks that balance solid growth potential with hefty dividend payments. I’m talking about a special group of stocks that stand in a league of their own: The Big Three Tobacco players: Altria Group (MO), Reynolds American Inc. (RAI) and Lorillard (LO). Each of these companies brings something different to the table:
- RAI has a 5.8% dividend yield and is the second-largest tobacco manufacturer in the U.S. This company is doing quite well in terms of its American Snuff line.
- MO pays a 5.1% yield and is the largest U.S. tobacco company. This company has just announced a whopping $1 billion stock buyback program and is clearly committed to its shareholders.
- LO pays a 4.9% yield and its more affordable brands are a big hit with blue collar customers. This company is also in the middle of a sizeable $700 million share repurchase program.
If you’re looking for other great dividend plays, my Blue Chip Growth Buy List includes no less than 23 well-balanced stocks with an average dividend yield of 2.7%.
Thank you to everyone who submitted questions—even if I didn’t get to yours today, I will keep your questions in mind as I continue to cover the latest market developments.