1.WHAT IS INVESTMENT QUALITY TRENDS?
2.WHY INVESTMENT QUALITY TRENDS?
3.WHAT IS A SELECT BLUE CHIP AND WHY ARE THEY IMPORTANT?
4.HOW DO I KNOW IT WORKS?
5.HOW DOES INVESTMENT QUALITY TRENDS WORK?
6.HOW DO I BUILD A PORTFOLIO?
7.WHAT IF I STILL HAVE A QUESTION?
WHAT IS INVESTMENT QUALITY TRENDS?
Investment Quality Trends is an investment tool and newsletter that focuses exclusively on dividend paying blue-chip stocks. Founded in 1966, IQ Trends is recognized worldwide for our expertise and performance in the arena of quality and value investing. Our advice is highly valued because we are an independent source of information, not beholden to advertisers or brokerage divisions churning trades.
WHY INVESTMENT QUALITY TRENDS?
The Dividend Connection
Investors put their money in the market with the hope of earning a good rate of return. Hope is not an investment strategy however so investors need a way to determine whether the price of a stock is high, low or just about what it should be. Of the three fundamental measurements of a stock’s value; price to earnings ratio (P/E), price to book ratio (P/B), and dividend yield, it is the dividend yield that best reveals a stock’s true value.
Earnings, as everyone knows all too well, can be manipulated. Book values are also hard to nail down as many companies carry assets on their balance sheet at cost instead of marking them to market. Dividends on the other hand are real money paid to the investor! A dividend cannot be altered, manipulated or faked; it is either paid or it isn’t. A consistently rising dividend trend is also the best way to determine whether a company is making profitable progress because dividend trends are more reliable and less erratic than earnings. If analyzed properly, dividends are one of the most powerful diagnostic tools available for investors.
WHAT IS A SELECT BLUE CHIP AND WHY ARE THEY IMPORTANT?
Most definitions of blue chip will mention stability, profitability, size, and history of a company. We use the term Select Blue Chip in reference to all of the stocks we follow, because they all meet a specialized quality screen we developed over 40 years ago.
When does a common stock become a “Select Blue Chip?” According to our method a stock will deserve such a designation after it has met at least 5 of the 6 following qualifications and may remain with 4 criteria:
1. Dividend increases five times in the last twelve years
2. S&P Quality ranking in the "A" category
3. At least 5,000,000 shares outstanding
4. At least 80 institutional investors
5. At least 25 years of uninterrupted dividends
6. Earnings improved in at least seven of the last 12 years
The reason this Criteria is important is simple. We evaluate stocks for purchase and sale according to repetitive cycles of dividend yield. If a dividend is reduced or eliminated, these historic trends become meaningless and a big part of a company’s tangible value to the investor disappears. By using these criteria we have found it possible to very reliably identify the types of companies best suited for our analysis. These are liquid, high-quality operations, with an institutional following and solid record of profitability. These are companies that have made it through depressions, recessions, and everything in between.
HOW DO I KNOW IT WORKS ?
Our many decades of experience have brought us notoriety across the world. Our founder, Geraldine Weiss is the author of two acclaimed books on dividend investing; Dividends Don’t Lie and The Dividend Connection. Our Managing Editor, Kelley Wright is a frequent guest on radio and CNBC as well as a featured speaker at The Money Shows and other investment forums. Our articles and research have been featured in Barron’s, BusinessWeek, The Economist, Forbes, Fortune, MSN Money, The Wall Street Journal, and Marketwatch.com, among others.
Behind this recognition is a solid track record of performance. Since 1986, The Hulbert Financial Digest has monitored the recommendations and research of Investment Quality Trends. Among our competitors we are ranked #1 for risk-adjusted total return in the 20, 15, and 10 years categories. Since 1986 our model portfolio as tracked by The Hulbert Financial Digest has averaged over 13.0% per year with 25% less risk than the DJ/Wilshire 5000 Total Market Index. In January 2000, we began publishing a list of our top 13 picks for the upcoming year. Dubbed “The Lucky 13”, these selections have generated an average total annual gain of 15.18%.
HOW DOES INVESTMENT QUALITY TRENDS WORK?
Originally started as a service geared towards the professional financial and banking community, Investment Quality Trends has always appealed to what we call “The Enlightened Investor.” This type of individual investor recognizes the importance of dividends and a long-term approach. Market timing even if initially successful, is by nature subject to eventual failure. Such an approach if perfected would destroy the bid-ask system on which the markets are based. Short-term trading, also known as day-trading, is another risky approach, which leaves most investors frustrated and behind where they started. In fact without a return on an investment, such as a dividend – one is really not investing at all, but involved in speculation.
Our process is based on the twin pillars of quality and value. The first part of the process is to identify quality stocks that meet the Criteria for Select Blue Chips detailed previously. This eliminates approximately 97% of the over 13,000 tradable stocks in the domestic universe. We then analyze each company individually to determine the repetitive areas of high and low dividend yield where investors make the majority of their buying and selling decisions. We then divide the companies into one of four categorizations based on their long-term dividend yield profile and current statistics. Although the category names may seem mostly self-explanatory, we find that some elaboration is often useful.
Undervalue stocks are those which have declined to areas of historic high yield. Our research shows that at these high yields, investors will be attracted to the dividends and will eventually initiate a new trend of buying. An important distinction to be made is that high yield alone is not a complete indicator for investment suitability. This will be elaborated further when we discuss how to build a portfolio.
Rising Trend stocks were previously at Undervalue but have risen in price sufficient enough to move their yields more than 10% from historic high levels. These stocks have the benefit of both momentum and investor interest. Stocks in a Rising Trend are expected to continue increasing in price until they reach Overvalue.
Overvalue stocks have risen from low prices and high yields, to high prices and low yields. Companies within this category historically have very little remaining upside potential. Short of a dividend increase adding additional upside, selling in this area is considered a prudent way to reap hard earned profits and reallocate money into new unexhausted stocks.
Declining Trend stocks have risen to Overvalue and now declined more than 10% away from it. This secular trend will continue until a company reaches Undervalue again, at which point new buying will be initiated. These declines are often drawn out as investors return to their former favorites. In certain instances they may even briefly return to Overvalue.
HOW DO I BUILD A PORTFOLIO?
Investment Quality Trends provides information targeted towards subscribers with varying levels of portfolio building experience. Unlike many other newsletter services we do not construct and maintain model portfolios. Because we have such a wide variety of companies that are dynamically moving in price, along with a steady influx of new subscribers, such an approach would be impractical for our particular application. In general we recommend that subscribers hold no more than 25 stocks in a portfolio so as to avoid over diversification. Also, no single company should represent more than 10% of an overall portfolio. Finally, some attention to diversifying between sectors is also a necessity if one is to minimize the effects of market volatility.
The Lucky 13
As mentioned previously, the Lucky 13 are a set of stocks which we select in the First-January issue of each year and feel are the best overall combination of stocks for the upcoming 12 months. Although our recommendations are based on the prices listed in the First-January issue, new subscribers may still find some of these selections near to our recommended price. Near or close to these prices these stocks will continue to represent good current value. This list is a great starting point for building a portfolio.
In the Mid-August 2006 issue of Investment Quality Trends we initiated The Timely Ten feature to compliment The Lucky 13.
Whether you are looking to build a portfolio from scratch, are partially invested and looking to add new positions, or are fully invested and merely in need of some affirmation and hand holding, The Timely Ten presents our top ten recommendations as of each issue.
Much of our content from pages 2-10 is designed to provide extensive statistical and fundamental data for our more sophisticated subscribers. These items once mastered can give insight into the stability of earnings, dividend safety, and even potential downside risk and upside potential. A brief summary of each table section and its significance is included below:
Stock - Contains the current stock name. An adjacent "G" stands for "Growth" and denotes a remarkable 10% average annual dividend growth rate over the past 12 years. The "U, R, O, D" that appears to the right of the stock name simply represents the first letter of the current category, e.g. Undervalued, Rising Trend, Overvalued and Declining Trend.
Price – the current price.
Dividend – the current annual cash dividend.
Yield – the current yield represented as a percent - (dividend/price) X 100.
Yield is more than a statistic; it represents the annual return on a share that an investor can expect in the form of dividends. High yields can translate into income and a safety cushion to comfort investors (even when the price may drop slightly). There are no black and white guidelines on what yields are acceptable. A good way to get an approximate idea is to look at other companies operating in the same sector; there should an obvious rough range. A yield that is unusually high may indicate a company has a problem and is being sold off. Likewise, a very low yield will be a good indication that a company is being over-purchased and doesn’t have a lot of remaining value or upside.
Pts Dn - Points down, or dollar amount down to the Undervalue price. A negative number indicates how many points the stock is below its theoretical Undervalue price.
% Down - Represents the percentage points to the Undervalue price. This is also sometimes referred to as "theoretical downside risk."
Undervalue Lo Pr - This is the low price (Undervalue price) that the stock will reach when undervalued based on its historical high yield profile.
Hi Yld - This is the historical yield at Undervalue (or high yield).
Pts Up - Points up, or dollar amount up to the Overvalue price.
% Up - Represents the percentage points to the Overvalue price. This is also sometimes referred to as "theoretical upside potential." Higher upside potentials should naturally translate into higher long-term gains.
Overvalue Hi Pr - This is the high price (Overvalue price) that the stock will reach when overvalued based on the current dividend and its historical low yield profile.
Lo Yld - This is the historical yield at Overvalue (or low yield).
S&P - This is the current S&P Earnings and Dividend Quality Ranking, a widely recognized benchmark of corporate quality. Rankings in the “A” range are preferable as they represent a history of high earnings and dividend quality.
52 wk lo - This is the lowest price the stock has reached within the last 52 weeks.
52 wk hi - This is the highest price the stock has reached within the last 52 weeks.
Bk val - This is the current book value (sometimes also called net asset value). Book value is the value of a share based on the company’s total assets minus liabilities (debt etc.) Ideally the share price should be less than 2 times the current book value of a company.
12-mo Earn - This figure represents the trailing 12 months earnings per share.
P/E - This is the price-to-earnings ratio (price/earnings). For the purposes of our newsletter, a figure of 15 or below is preferable.
Payout - This figure represents the Payout Ratio; the percentage of earnings paid out in the form of a cash dividend. A lower payout helps to insure a safe dividend and thus our Undervalue price. A stock is flagged as having a “Dividend in Danger” when its payout meets or exceeds 100% (i.e. earnings do not cover the dividend currently being paid out). Under ordinary circumstances a payout should be between 30% and 60%, or around 75% for utilities.
Debt - This figure represents long term debt. A lower debt adds a certain amount of security to a company’s position and assurance that its business has been successful. Look for a debt close to 50% or below (75% for utilities).
BC - This figure represents how many of our Blue-Chip criteria (listed on the top of pg. 2) the stock currently meets.
TIC - This figure represents the current ticker symbol.
An important part of value investing is to identify value through the use of fundamental statistics such as those mentioned above. Over our forty plus years of experience, we have found these fundamental statistics to be a good starting point for the value minded investor that is researching investment considerations. Many of our subscribers tell us that they combine these fundamental statistics with their own proprietary screens. We invite readers to experiment and use whatever works for them!
WHAT IF I STILL HAVE A QUESTION?
Our website is equipped with an up to date listing of our most Frequently Asked Questions. It can be accessed in the “FAQ’s” section of the Member’s Area.
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E-mail us at: email@example.com
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