As I’ve mentioned in prior issues of Inside TradeSmith, stock market euphoria has gotten extreme recently – even bordering on bubblelicious at times!
Institutional and retail investors alike are reaching for risk in ways I haven’t seen since 1999, and very briefly in 2021… but when it comes to going risk-on, retail has the lead. Here’s exhibit A:
As you can see, retail investors are currently buying money-losing technology stocks hand over fist, at near-record high levels. And at least so far, they’ve been well rewarded for it.
In fact, a Goldman Sachs list of unprofitable tech stocks is up over 69% since the April lows. That compares to a ho-hum gain of only 29% for the S&P 500 index!
But despite the warning signs, times of rampant speculation in the stock market don’t have to end anytime soon. In the late 1990s, for example, it went on for several years.
That said, the rampant market euphoria always comes to an end eventually, and it ends in the same way every time: badly for investors going out of their way to reach for risk.
That’s why now is a good time to reexamine a bedrock wealth-building strategy: dividends!
I know what you’re probably thinking: Dividends are for widows and orphans. They can’t bring quick riches like the next hot AI stock.
And that may be true: Compared to the breakneck speeds and wild highs of speculative tech, dividends are downright boring. But as the graphic below clearly shows, dividend growth investing can still deliver riches – just more slowly (but steadily!) over the long run:
Over 50+ years, dividend growth stocks have beaten the average S&P 500 stock by more than 3-to-1 – and paid investors plenty of income in the process.
That’s a steady and superior long-term wealth building strategy, if you ask me. And it’s particularly well suited for today’s uncertain markets.
But that’s not to say that it’s just as easy as picking a dividend-issuing stock and dumping your portfolio into it: You have to be selective.
Some dividend investors even make a mistake similar to one frequently made by investors speculating on money-losing tech stocks.
Instead of reaching for risk, these misguided dividend investors all too often stumble by reaching for yield. Slow and steady wins the race, folks – there’s not many shortcuts to take.
History clearly shows that it’s not the stocks with the highest dividend yield that provide the most bang for your investment buck. Instead, it’s stocks that consistently grow their dividends year after year, like clockwork, that win out in the end.
But how should you identify these top-of-class dividend stocks? Well, TradeSmith developed a strategy to do just that: Dividend Growers, which is one of our most selective stock strategies.
You can find details by signing into your TradeSmith Finance account and clicking on Invest from the main menu bar, then selecting Strategies from the sub menu:
This will bring you to the Strategies dashboard. Here, TradeSmith Platinum, Trade360, and Ideas by TradeSmith members can access up to 10 of our proven stock strategies, depending on subscription level:
- Dividend Growers
- Growth
- Best of the Billionaires
- Value
- Kinetic VQ
- RSI Precision
- Bollinger Bands
- Snapback
- Timing RSI Rebounds
- Trade Wave
And if you don’t see this page on your platform (or if you’re missing some of these strategies), but would like to, simply call 888-623-0858 to speak with our Customer Care team and find out more about getting access.
You can fully rearrange the order of these investment strategies on your page by simply dragging and dropping them to move around. But I like to keep Dividend Growers right at the top, as shown above.
At TradeSmith, we’re always innovating and adding new strategies, such as recent additions like Snapback and Bollinger Bands. And our team of analysts constantly monitors the viability of all our strategies – to be sure they measure up before you trust them to guide your own trades and investments.
To make that task easier, we recently added performance measures to each of the strategies on this page – allowing you to easily compare the results of each strategy to the S&P 500. You can see this for yourself in the screenshot above: These details are shown on the window to the right.
Plus, we’ve also added more detailed descriptions about what makes each of our strategies tick. Simply click on the circled arrow to the right of each strategy to learn more.
Shown below are the details for the Dividend Growers strategy:
It’s neatly arranged by topics of interest to investors, including:
- Why you might use the strategy…
- Who should consider using it…
- The entry criteria for each strategy, telling you when a stock qualifies…
- And the exit criteria for each strategy, that tells you when to sell.
I mentioned that Dividend Growers is one of our most select strategies. It’s so selective, in fact, that it currently has no applicable stocks on deck, as you can see in my earlier screenshot.
This can happen sometimes, when multiple factors must be met to add stocks to a strategy. In this case, the Dividend Growers strategy requires stocks to meet five distinct health and financial criteria to qualify – and these criteria are designed to be exclusive.
After all, as I noted earlier, you don’t want to invest your hard-earned money in just any dividend paying stock…
But when there are limited strategy results, you can always turn to our popular TradeSmith Screener tool to generate your own list of ideas for more research.
To access our handy dandy Screener tool, simply click on Invest at the top of your TradeSmith Finance Dashboard, then Screener from the sub menu to get started.
Like with the Strategies dashboard, members already subscribed to Trade360, TradeSmith Platinum, or Ideas by TradeSmith have access to this powerful tool – and you can build your own dividend stock screener with just a few clicks.
This screener relies on just four filters, which you can quickly and easily add by clicking on the + Add Filter button near the top of the Screener page:
- Business Quality Score: Set to “> 90” – to select only the top 10% of stocks ranked by quality,
- Dividend Growth Streak: Set to “> 2” – meaning we’re searching only for stocks with 3+ years in a row of dividend growth,
- Trailing Dividend Yield: Set to “> 1.5%,” to find dividends above the S&P 500’s average yield,
- And Free Cash Flow Yield: Set to “> 3%,” which is twice the dividend yield.
In other words, to help ensure a dividend is sustainable, we’ll start our search with high-quality, cash-rich stocks. Our Business Quality Score (BQS) indicator considers a stock’s growth, payout, profitability, and safety fundamentals to determine a comprehensive rank.
Next, Free Cash Flow Yield measures how much cash (relative to a stock’stotal worth) is left over after paying all the company’s costs, investment expenses and dividends.
So, if the Free Cash Flow Yield is twice the value of the dividend yield or more, it typically means there’s plenty of spare cash to keep growing our dividend payouts!
When set in our powerful TradeSmith Screener tool, these factors can help you find cash-rich, high-quality stocks that pay above average dividends – and consistently grow their payouts, year after year.
It’s a great way to prospect for stocks that may qualify for our Dividend Growers strategy.
But you don’t have to limit yourself to just these filters alone. Click on the + Add Filter button and you can include additional filters.
You can add your own mix of preferred fundamental, valuation, and market classification filters to make your screener unique – or even include other TradeSmith exclusive filters to keep leveraging our world-class research.
When I ran this screener today, with just the four filters above, I got 32 results. That’s a good starter list for additional research.
Due to limited space, the top 10 results are shown below, sorted by BQS descending:
This list includes many familiar blue-chip stocks that also present cheaper valuations than many of the overhyped tech stocks making headlines today.
These stocks may not be as exciting, but they are a much lower risk – and higher yielding – alternative to those flashy, money-losing tech companies.
Bottom Line: When markets turn frothy and there’s rampant speculation, it’s a good time to return to tried-and-true strategies like Dividend Growers.
Not only will you sleep more comfortably with lower risk stocks in your portfolio, but you’ll also get paid regular cash payouts from those stocks – that are likely to grow over time.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith
P.S. I may not be a fan of the market’s current euphoria, but I can’t ignore that we’re in the middle of a major market melt-up. Institutional and retail investors seem eager to go risk-on, pushing through as many headwinds as headlines and economic data can throw at them – and pushing prices higher all the way.
We can’t say for sure when this market euphoria will end… but here at TradeSmith, we follow the data. And the data provided by our market-scanning algorithms says that there’s something major rumbling just beneath the market.
Patterns are reappearing and lining up in ways that we haven’t seen since the ’96 tech boom… and they suggest that we may not just see a shift in the market in the coming weeks, but the start of a trend that could create incredible wealth over the next few years.
According to our data, we may not see another event like this until 2077.
That’s why TradeSmith’s CEO, Keith Kaplan, is going online with a special presentation: He’s determined to share the warnings provided by our algorithms, and he’s even prepared to share the data and research that allowed us to identify this upcoming market shift in the first place.
What’s more – Keith has identified 10 stocks that are primed to rise in the wake of this major market shift. He’s calling it “The Last Melt-Up…” because it could be the last one of this type we see in the next 50 years.
Click HERE to get all the details from Keith, and make sure you’re prepared.