You won’t find a single person more bullish than your editor here in the Port Phillip Publishing office in Albert Park.
But as positive as we are about the outlook for the market, we’ll admit that yesterday’s 123 point, 2.63% gain even took us by surprise.
Not that we’re complaining. We’ll take a 123-point gain any day of the week. So, what was behind the big triple digit gain?
We’ve got no idea…and we don’t care. Here’s why…
As we explained last Friday, it’s pointless trying to figure out which way the market will turn based on big picture macro-economic events or data.
We showed you this diagram to illustrate how crazy things had become:
Source: Port Phillip Publishing
That’s why we prefer to stick to the basics. We know that macro-economic news will impact stock prices. We know stocks will rise and fall based on comments from the Reserve Bank of Australia.
But we also know something else. If you buy a quality dividend-paying stock, regardless of what happens in the short term, longer term you should make money on the investment.
Higher Dividends Means Higher Stock Prices
The thing is, how do you know whether a stock is a quality investment or not? One method is to run a stock through a simple checklist. This is a method we use to filter small-cap dividend stocks for Australian Small-Cap Investigator.
But it’s not just useful for small-cap stocks. You can adapt it and use it for blue-chip dividend stocks too.
We break the checklist down into six simple questions:
- Is it a genuine business? Here we need to know if the company makes a product or provides a service. If it doesn’t then it’s unlikely the company has revenue. If it doesn’t have revenue then it probably doesn’t make a profit. And if it doesn’t make a profit then it can’t pay a dividend.
- Is it a project-specific company? In other words we need to make sure it isn’t a one trick pony. A mining company with a single project, or a medical company with a single drug doesn’t fit into this investment strategy. While those stocks are great for speculation, they’re not great for long-term reliable investment income.
- Does it have solid cash flows? In order to pay a sustainable dividend, a company needs strong cash flows. A company with strong cash flows can more accurately predict cash inflows and outflows. That means the company is more likely to pay a regular and ongoing dividend.
- Can the business grow? If the company can grow its business by introducing new product lines or diversifying its services, that should lead to increased revenue…
- Does it have revenue growth? If the business can grow revenue in a growth industry, that should lead to increased profits…
- Does it have profit growth? If the company can grow profits and if the profit growth is sustainable, it should allow the company to increase dividends.
And if a company can increase dividends in this low interest rate environment, that spells good news for the share price. Because all else being equal, higher dividends will translate into a higher share price.
We’re Happy to be an Insider
We know, stock market investing isn’t that simple. Even though companies are increasing dividends, the main Aussie index still fell 10% from May through to the end of June.
But that’s to be expected. Share prices never rise in a straight line. On any given day investors will worry about the future – they’ll worry about the RBA, or the US Federal Reserve, or the latest economic numbers out of China.
That’s why you get a volatile market.
And that’s why it’s more important than ever that you have a checklist to run a stock through before you click the ‘buy’ button.
If you don’t like our list, make up your own. That’s OK. The key is to make sure that big bullish days like yesterday don’t cause you to panic into buying any old stock.
In fact, often the best thing to do with blue-chip dividend stocks is to just buy more of stocks you already own…or to take part in the company’s dividend reinvestment program (DRP). That’s especially useful if you don’t need to live off the cash income.
It remains a great time to buy stocks. Even some of the small-cap stocks that have taken a pounding in recent months are starting to rebound. It’s too early to tell if they can keep up this momentum, but we know one thing for sure…
With a well laid out plan of how to play this market, we’re much, much happier being on the inside of the market looking out, carefully buying stocks, than we would be if we were on the outside of the market looking in…missing out on the chance to make some pretty spectacular gains.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: Just What are ‘Turbo Cap’ Stocks?
Daily Reckoning: How the Power of Tweets Saved Tesla Motors
Money Morning: Don’t Get Caught in the Market Crossfire
Pursuit of Happiness: Is Technology the Most Exciting Industry in the World?
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks
