Value Investing News

’Tis the season for stock predictions! Virtually every financial writer will pen an article selecting his or her top picks for the upcoming year. I enjoy reading them and the logic behind the picks and sometimes there is a gem to be found.

Most investors believe that successful dividend investing consists of identifying the highest yielding stocks in the market and then generating double digit returns on investment each year. The problem with this strategy it that it often overlooks the fact that such dividend yields are most often unsustainable in the long run.

Looking for the perfect dividend stock? In an utopian world, the perfect dividend stock would be one that is both high-yield and provide a high dividend growth rate. Its share price would appreciate with its increasing dividend. All of this would be driven by increasing earnings and cash flow.

The Dividend Aristocrats index measures the performance of S&P 500 index members that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. (Source: S&P)

Since its inception 20 years ago, the dividend aristocrat’s index has outperformed the S&P 500.

One way in which to uncover stock investments is to run stock screens. Once resulting stocks are uncovered, one should track the performance of the screen before investing any real dollars. Additionally, conducting fundamental and detailed research on each stock is recommended before investing. This article contains a stock screen that incorporates some of Warren Buffett's criteria.

 These are the results of a stock screen that looks for companies that produce consistent free cash flows over the past seven years and are trading at low prices relative to their normalized earnings. The goal here is to find cheap stocks in companies that are easier to value.

I am taking a contrarian stand on Baxter International (BAX), a global diversified healthcare company. Baxter is a major manufacturer and distributor of medical devices, pharmaceuticals and biotech products. Products are used in healthcare facilities of all types including hospitals, nursing homes and specialized medical centers such as rehab centers and kidney dialysis centers.

Last week the markets continued their roller coaster ride, sending most investors accounts to new five year lows. On Thursday the S&P 500 broke through its October lows and reached its lowest level since 2003, before recovering the very same day.

In an utopian world, the perfect dividend stock would be one that is both high-yield and provide a high dividend growth rate. Its share price would appreciate ratable with its increasing dividend. All of this would be driven by increasing earnings and cash flow.