A REALLY Overlooked Source for Great Dividend Stocks

| June 2, 2014 | 0 Comments

nasdaqThe NASDAQ usually isn’t the first place that comes to mind when looking for a great dividend stock. After all, we think about NASDAQ as the home of growth stocks and upstart tech companies.

It’s where we figure we’ll run into young firms reinvesting their profits in future growth… and companies that aren’t quite mature enough to pay dividends.

But like most generalities about investing, some companies are exceptions to the rule.

Consider these three companies… they’re probably in your neighborhood, and also listed on the NASDAQ.

Costco (COST) is a NASDAQ-listed company that has been paying growing dividends for ten years.

Starbucks (SBUX) has been paying dividends since 2011.

And there’s probably an Apple (AAPL) store at the mall. Apple turned a historic page when it comes to paying dividends, restarting their dividend payouts in mid-2012.

So when you look at the companies listed on the NASDAQ, you see well known firms making the shift from young, exuberant growth companies to more established organizations.

Because they’re transitioning into a more mature phase of their business cycle, they are building the financial ability to reward shareholders with dividends.

So you don’t have to look far for NASDAQ stocks that pay good dividends, do you?

But here’s something you do need to look for.

The Challenge for NASDAQ Dividend Investors

Even though some of these maturing companies are in a position to pay a dividend, many don’t. This is common practice in the technology sector.

Google (GOOGL, GOOG), Adobe Systems (ADBE), Amazon (AMZN), eBay, (EBAY) and Netflix (NFLX) don’t pay dividends.

What should a NASDAQ dividend stock investor do when you see strong profits and a strong balance sheet… but no dividends?

The big challenge is to sift through the data and decide when a company will start to pay dividends. There are good clues to watch for. Key benchmarks to keep an eye on:

  • A healthy profit margin, 15% or higher, so it can produce solid cash flow.
  • Low debt with a debt-to-equity ratio below 1.
  • Revenue growth, with a track record of 10% sales growth going back five years.

But even when you have these three benchmarks in place, a company might decide not to pay a dividend. You’re still rolling the dice. The organization’s strategy and its culture could influence this. It’s just not the way they operate.

Whatever the situation, when we look at these NASDAQ stocks, we keep running into the history lessons. The problem with NASDAQ is there’s just not a lot of history to bank on.

The NASDAQ isn’t a senior living community.

Why Long Track Records Are Hard To Find

When you look at all the brief histories of relatively young companies on the NASDAQ, you discover that there’s strength in numbers. However, the big dividend numbers are really generated by big companies.

NASDAQ’s large cap companies are the stocks likely to pay dividends… For example:

But a long track record of dividend growth is hard to find.

Why?

It’s just the nature of the neighborhood. It’s a great reminder of one of the big differences between the NASDAQ and the New York Stock Exchange.

Keep in mind that many of these NASDAQ listed stocks are not the hundred year old firms we find on the NYSE.

Here’s an example.

Intel was founded in 1968. But they’ve only been really growing their dividend since 2010. Microsoft is another NASDAQ stock that has only been able to provide four years of dividend growth.

These two technology companies, both leaders, compete in a business defined by warp speed change. It wasn’t long ago we couldn’t even imagine an operating system other than Windows, or chips other than Intel.

What year did you buy your first desktop computer? What year did you buy your first cell phone?

Did you ever think your cell-phone would do the job of your computer?

This kind of innovation is what we see with companies on the NASDAQ.

Innovation is a must. It’s essential for technology firms to grow their profits and it comes with a hefty price. And as a result, many companies forgo a dividend payout to focus their reinvestment dollars on growth!

But there are lots of companies that don’t have this costly competitive challenge. There are all sorts of NASDAQ stocks where the “innovation expense” doesn’t get in the way of dividends.

Want To Check Out NASDAQ Stocks That Aren’t In Tech?

There are plenty of them, and Starbucks and Costco are probably the best known.

But you’ll also find quite a few ETFs trading on the NASDAQ, and many of these pay nice dividends.

There are also opportunities to invest in real estate, through REITs, and energy, through trusts.

But here’s the thing…

No matter what sector you’re exploring, it’s important to identify companies that can be counted on for profitability that is strong and stable. You also want to see the opportunity for strong earnings growth, and a low valuation compared with similar companies.

What happens when you see a high yield?

What’s the best way to get your arms around the risks and the rewards?

Proceed With Caution When You Find Higher Yields

Just like any stock with an above average yield, a careful look at the balance sheet is a good idea, and the payout ratio should also be checked.

In the spring of 2014, Vodaphone Group (VOD) paid a dividend yield of 7.93%. On the surface, very attractive. But behind the scenes, the company may have been struggling to achieve this by directing an unhealthy share of its revenues to pay the dividend. The Vodaphone payout ratio was 68.1%.

By comparison, Intel (INTC) offered a yield of 3.38% and a payout ratio of 47.6%.

A safer route to take when you explore the NASDAQ for dividend stocks is to drive down a more familiar road. One of them is the road that leads to a group of stocks with a track record of dividend growth.

NASDAQ Dividend Achievers

The NASDAQ Dividend Achievers are stocks that have increased their dividend payout each year for the past 10 years. In 1979, Moody’s Investor Service built a model to identify strong dividend-paying stocks. This model is now owned and marketed by NASDAQ OMX, and there are ten different sets of achievers.

These different indexes are specialized, focusing on different types of dividend paying stocks such as UK stocks, Canadian stocks, or preferred stocks. Each one is an index and is tracked by an ETF.

How can you invest in the NASDAQ Dividend Achievers?

These two ETFs reflect two of the broader indexes:

  • NASDAQ Dividend Achievers (DIVQ)
  • NASDAQ US Dividend Achievers Select Index (DVG)

Keep in mind that a stock doesn’t have to actually be listed on the NASDAQ to be a Dividend Achiever. But it does need a track record of growing annual regular dividends for at least the past 10 years.

And don’t forget about the built-in benefits of investing in NASDAQ dividend stocks. There’s an additional advantage you’ll capture.

The Extra Upside Of A NASDAQ Dividend Stock

Investing in a NASDAQ stock that pays dividends can provide your portfolio with some built in diversity. It’s a way to position your portfolio for capital appreciation in the growth of the actual share price, along with the opportunity to collect income from dividends.

 

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Category: Dividend Stocks

About the Author ()

Michael Jennings writes and edits DividendStocksResearch.com showing how you can profit from dividend stocks. His passion for stocks and especially Dividend Stocks began at an early age. Now he shares his knowledge and wisdom with anyone who asks... He shows beginning investors, retirees, and even trading pros how to create regular income by investing in dividend stocks, easily, step-by-step! You can Sign up for his free Dividend reports and dividend newsletter at http://www.dividendstocksresearch.com/free-sign-up

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