Some Summer Parking Spots for Your Capital
Stockscores.com Perspectives for the week ending June 18, 2011
In this week's issue:
During the summer market slowdown, traders are challenged to find a place to put their capital to work. With fewer trading opportunities, what can traders do to get some return without taking on the risk of a market that is in pull back mode?
One answer is to buy stocks that pay a dividend and have a chart that shows a lower risk of capital loss. Owning a stock that pays a 15% yield but goes down 20% in year is not a good trade; we need to find stocks with a combination of good yield and good potential to at least go sideways but possibly higher.
We want to avoid stocks that may seem appealing when you look at their yield but whose charts demonstrate a high probability of going lower in the months ahead. For example, on the Toronto Stock Exchange, T.YLO has a historical yield of 20%. That means for every $1000 you put in the stock, you will earn $200 in dividends each year. This assumes the company continues to pay the same dividend that they have historically paid.
For companies like T.YLO, this is a big if, at least if you trust the message of the market. The chart on T.YLO shows how the stock has fallen from about $6.50 to $3.50 in the last year. This is one reason why the yield is so high since yield is calculated by dividing the annual dividend payments by the price of the stock. The lower the price of the stock, the higher the dividend, assuming the dividend stays the same.
If T.YLO continues to pay the dividend that they have been paying, then you will get 20% on your money based on Friday's close. However, the fact that the chart has been dropping so much implies that the market expects the dividend payment to be reduced in the future. Thus, the yield you actually earn will be less.
We can use the stock chart to help us determine whether our future yield will be as good as the historical yield. If the chart looks more likely to go up than down, then the market is telling us that the expectation is for the dividend to go up in the future. A negative chart is a vote of non-confidence for that dividend to remain strong.
Consider T.ARF, a stock that has a historical yield of 43.84%! However, it is far from good as the company announced on June 8th that they would be suspending their dividend. The future expected yield is now 0%.
A simple and useful way to assess the potential for the stock, and of maintaining the dividend, is to consider the Sentiment Stockscore indicator. You can see this indicator for any stock that has traded 200 days using Stockscores.com. I like to see a Sentiment Stockscore of at least 60. On T.ARF, the Sentiment Stockscore fell below 60 early in March, long before the news of a suspended dividend came out. T.YLO has had its Sentiment Stockscore below 60 since early January, early in the stock's slide downward.
There is one caveat that you have to keep in mind when reading the chart of a dividend paying stock. On the day after the dividend is paid, the stock's price should fall by the amount of the dividend. This is because the pay out of the company's cash to shareholders lower the value of the company's assets. Therefore, the stock price should fall but then slowly rise over the next few months as the market anticipates the next dividend payout.
These price drops can make the chart look more negative that it really is. On a dividend paying stock, I will discount the effect of these typically quarterly price drops and ignore them if they cause a break of support or another technical break down.
Stockscores.com displays the historic yield for all North American stocks that pay a dividend. You can see it by bring up the chart and looking in the Trading tab where you should see Dividen/Yield. Remember, this number is the historic yield based on what was paid out over the past year. The future yield could be different.
That is why we also want to look at the chart and apply basic chart reading skills to determine whether the stock is more likely to go higher or lower in the near term. The Sentiment Stockscore is a helpful indicator for this analysis, but so too is using the concepts of Support, Resistance, Optimism, Pessimism, Price Volatility and Abnormal Activity that are taught in the Stockschool course material.
Summer is a traditional slow time for the market. If you need a place to park your capital, consider the high yielding stocks with good Stockscores indicators and chart patterns.
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This week, I set out to find those stocks with a good yield and a positive price chart. Using some screening techniques on Stockscores and Stockhouse, I was able to build a list of stocks that were relatively liquid and had a yield of 6% or better. I then created Sectors in the Chart Watch area of Tradescores.com for you all to take a look at.
Go to Tradescores.com, log in and go to the Chart Watch area. Under Sectors, you will see a section called High Yield where there are two groups of stocks; Canada and US. Those are the charts I looked at to find some stocks that have a good chart.
Once I found a chart I liked, I went back to Stockscores.com to see what the actual historic yield was. Below are three stocks that have good yields and good charts, give them some consideration if they suit your investment goals.
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1. CMO
This company recently announced a raise in their dividend which likely helped the stock break out of an ascending triangle pattern. I bought some earlier this week and have watched it rise a little bit but the yield is still a healthy 14% (based on the $0.48 dividend that will be paid out on July 20 to shareholders who own the stock on June 30th).
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2. T.PKI
The historical yield here is 8.33% and the stock has a pretty good chart. Rising bottoms over the past year are a sign of optimism among investors and make the stock more likely to go higher than lower in the months to come. The stock will find some resistance at $13.50 but a gain up to that point would be a nice compliment to the dividend.
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3. T.CRR.UN
T.CRR.UN made a little upside break on Friday and looks like it may try to break out of the optimistic chart pattern that it has been building over the past 8 months. This one yields 6.87% and is one of the better yields from the real estate investment trust space, which looks strong right now in an otherwise weak market.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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