The Three Things You Need to Look for in a Stock

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Yesterday was one of the most anticipated Fed meetings of all time and the big takeaway was what I have been saying for some time now — that the Fed’s hands are tied and rates are going to remain dismal for years.

And the issue isn’t so much as when the Fed makes its first rate hike; rather, it’s the trajectory of future rate hikes that comes into question.

And the answer is that the Fed will remain extremely accommodative for an extended period of time.

How does this impact you?

Well, it will hold rates at historically low rates for years, maybe even another decade. In short, your desire for yield will only grow. But this non-action by the Fed tells you one important thing — where you want to invest.

When Fed chair Janet Yellen was asked if she still expects a rate hike by the end of the year, which was an expectation she has laid out before, her stumbling response had a different tone. Instead of giving a straight answer, she decided not to give her own expectations, and recommended reviewing the data plots that were released after the meeting.

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There is just one problem with those data plots — they have signaled for a rate hike since 2012. Clearly, this is a poor data set to focus on.

In short, it has been nine years without a rate hike, and we should expect at least one more. That means traditional yield opportunities such as bonds, Treasuries and bank CDs will continue to be dismal.

But it also means one area of the stock market will continue to thrive — dividend-paying stocks, and I know a great one that is trading at a discount.

What Makes a Good Dividend Investment?

Dividend-paying stocks are the key to growth in stagnant stock markets. Yield from dividend-paying stocks continue to pile up while other investors’ returns remain in a rut. Plus, with the traditional income world stuck with minimal yields, investors will maintain demand for dividend-paying stocks, keeping them elevated higher than other stocks.

But not all dividend-paying stocks are a good investment.

In fact, before I ever recommend a stock, I have a checklist I run through first to determine if it’s a great stock to buy.

There are three basic check marks to make before I get excited about going into a new stock. All three demonstrate a company’s commitment to growing shareholder wealth — which is the ultimate goal. Here they are:

  • Long history of dividend payments.
  • Rising dividend payments in each of the last three years.
  • And companies that conduct share buybacks each year.

Once these three boxes are checked, I start to get excited, but my research isn’t done.

You also want to see stocks that are growing revenues, not just the bottom line. The company is displaying that it is generating solid cash flows by consistently returning cash to shareholders, but in order for this to continue, revenues need to keep pace.

And lowering debt levels is a good trait as well.

Some debt is fine, as long as the company is using it for growth. It’s important to compare the company’s debt relative to its industry, but you don’t want to see stocks issuing debt to stay alive.

On the Right Track for Higher Gains

One stock that has these traits and looks cheap today is CSX Corp. (NYSE: CSX), a leading rail-based transportation company.

The shares have been punished due to worries about global growth and the health of the economy. But now the security looks extremely cheap. The stock trades at just 13 times forward earnings, and the company is expected to grow earnings by 9% and 10.7% in the coming two years.

Plus, the stock yields a modest 2.5% today, compared to just 2% a year ago — which is a product of the falling stock price. And take a look at this chart: It shows just how stable the company has been at both increasing its dividend and buying back shares.

Shares Outstanding

This is a chart readers of Pure Income have become familiar with. CSX has raised its dividend and reduced its shares outstanding every year for nearly a decade.

That’s what I call consistent. And it’s a trait I continuously strive to find in stocks.

Once you find dividend-paying stocks with these characteristics, you know you have found a good investment.

Regards,
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Chad Shoop
Editor, Pure Income