Many stock analysts will tell you the basic strategy in the market is to buy low and sell high. While I’ve done that successfully for years, it’s not as easy as it sounds. What’s more, it’s a lot more difficult in bear markets and markets bound in trading ranges, which are two distinct possibilities going forward.

So an alternative might be to PARTNER with companies — and you do that by buying stock in companies that pay you regular cash dividends.

That’s the basic principle behind dividend paying stocks, one that is absolutely crucial — they pay YOU to own THEM.

Do dividend-paying stocks outperform non-dividend paying stocks over time?

The answer to this question is “it depends on your time frame.” If you compared the two during the go-go days of the tech bubble, dividend paying stocks were left in the dust. However …

In most markets, dividend paying stocks do at least as well as non-dividend paying stocks, once you add dividends back in, and in bearish or underperforming markets, dividend paying stocks can really outperform.

In 2008, Ned Davis Research published a chart showing just this going back to 1972. It clearly shows that stocks that are dividend payers outperform the non-payers over a longer time period.

The return differences result in dramatic differences in the absolute dollar growth of investment portfolios as well. The growth of a $100,000 portfolio invested in 1972 through September 2007 would equal:

• Non-dividend paying stocks: $240,000
• Dividend paying stocks: $3,223,000
• Dividend growers and initiators: $4,059,000

So, over a 35-year period, non-dividend paying stocks posted an average annual return of 2.5%. That’s less than T-bills. But dividend-paying stocks averaged an annual return of between 8.9% and 10.9%. That’s a huge difference.

The combination of hefty dividends and share price appreciation is called “Total Return.” In the decade of the 2000’s, dividends contributed 56% of total return, according to research from Dividend Growth Investor.

I like high-yield stocks as much as the next man. But while you don’t want to put stocks with minimal yield in a dividend portfolio, you may not want to chase yields that are too high, either.

Why? Because at the very least, a stock with an elevated yield suggests that the market is discounting SOME kind of risk in the stock. A potential investor should be very sure he or she fully understands what those risks are before investing.

There are all sorts of dividend stocks of course. But you can find some really nice dividends in natural resources — royalty trusts and master limited partnerships (MLPs) can pay very nice dividends indeed.

Before you buy, here are 7 “Do’s” to consider when buying a dividend stock …

1. Look for a good history of dividend growth, with the potential for dividend growth over time. After all, dividends are what this service is about. I like stocks with average annual dividend growth of 5% or more.
2. When it comes to the actual dividend, we want at least 3% and preferably higher. Higher is better, as long as the dividend is safe. How do you know that? Read on …
3. Find a company with strong financial performance in the past, and the potential for even better financial performance in the future.
4. Look for good free cash flow. Strong free cash flow helps a company grow its dividend and its business.
5. Target stocks with below-average debt. The financial leverage ratio, which is total assets divided by shareholders’ equity (book value), is a good all purpose debt measure. A leverage ratio of 1.0 means that the company has no debt, and the higher the ratio, the more debt, with leverage ratios below 5.0, and lower is better. Some industries carry more debt as part of their business models, so look for stocks with below-average debt compared to their peers.
6. An advantage in the company’s business model, something that will protect them in the bad times and help them outperform in the good times.
7. A good entry price. If a stock has already run up, consider entering it in stages. Because one truth of the market is that stocks go down as well as up, and we may get a better price later on. That said, you want to avoid stocks trading below $5 a share. They’re probably in trouble, and that means their dividend probably is, too.
8. These are guidelines, not the clasps on a straightjacket. There will be exceptions. But it’s a good start.

Some Picks to Get You Started

Over the past couple months, I’ve been adding dividend paying stocks and funds to Red-Hot Global Small-Caps and Red-Hot Commodity ETFs. I like the added cushion that a nice dividend gives us.

One pick I’ve added to Red-Hot Global Small-Caps is MarkWest Energy Partners (MWE). It gathers and processes natural gas and other gases, as well as natural-gas liquids, from the Appalachian Basin, the Texas Panhandle, the Woodford Shale in Southern Oklahoma, The Haynesville Shale in East Texas, and the Marcellus Shale in Pennsylvania. It is one of the largest processors of natural gas in the Appalachian region and also has the largest intrastate crude oil pipeline in Michigan.

MarkWest has a current dividend yield of 8.6%, and pays $2.56. Over the past five years, its dividend has averaged 12.9% growth. MarkWest has racked up more than 10% gains since I recommended it in November, and I think it has the potential for more. Combined with an 8.6% dividend — a dividend that is also growing — this company’s potential for total return is outstanding.

Another excellent payer is pipeline and storage company Kinder Morgan Energy Partners (KMP). Its current dividend yield is 6.6%, and it pays a dividend of $1.05. Its dividend growth has averaged 7.8% over the past five years.

Dividends are an area where you may want to choose individual issues, rather than funds, because the dividends on some individual stocks, trusts and MLPs are so outstanding. There are good funds, but they don’t yield as much. For example, the PowerShares ETF High Yield (PEY), a perfectly nice fund, has a current dividend yield of just 2.4%. There are higher-yielding funds, and my Red-Hot Commodity ETFs subscribers are holding some of them.

In a market correction, the prices of the stocks and funds I’ve mentioned will probably go down, and their yields will likely go up. And that’s when you want to buy dividend stocks with both hands.

Be aware — a market correction could come at any time. And if you’re doing this on your own, you have to have a plan in place of not only when to get in, but when to get out.

Yours for trading profits,

Sean

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.

Sean Brodrick graduated college with a journalism degree, and experienced the Internet boom and bust firsthand as the personal finance website he worked for suffered a spectacular flameout. The experience of being dumped on the curb with a handful of useless stock options gave him an appreciation for real assets, something he followed up when he joined Weiss Research as an analyst.

He is a weekly guest on Market Matters Radio, a frequent commentator on one of Canada’s premiere financial websites, HoweStreet.com, and from time to time he makes appearances on various U.S. radio and TV news programs. He contributes semi-regularly to Dow Jones Marketwatch.

Be sure to catch Tyler Bollhorn’s presentation at the World Outlook Conference this January 22, 23rd/2010

Do These Sound Familiar?

Stockscores.com Perspectives for the week ending January 17, 2010

Stockscores Founder Tyler Bollhorn will be a featured speaker at the 2010 World Outlook Conference in Vancouver Jan 22 and 23. This is a great conference and this year, Tyler will be demonstrating the new Money Talks/Disnat Trading Challenge game.

Those interested in attending this conference should Click Here to visit the World Outlook website for more information and to register.
As a trader, I have done a lot of stupid things to lose money. My only saving grace is that I have learned something from the mistakes and so now, when I see others doing the same things, I can say, “Hey, you are making a stupid mistake!” Here is a list of the stupid things that most of us do as we work our way through the learning process it takes to be a successful stock trader.

Fail to Limit Losses – I have not yet met someone who is always right in the stock market. That means you and I are going to be wrong some of the time. What is important is what we do when we are wrong. When the stock market shows that your analysis was incorrect, sell! Move on, get out, forget about it. Small losses won’t hurt you, using hope to justify holding a loser will.

Averaging Down – averaging down on a loser is buying more at a lower price, expecting the inevitable bounce that gets you out without a loss. This strategy will actually work a lot of the time, you just keep averaging down until the market reverses. However, when it fails to work, and you keep buying in to a stock’s bungee jump that fails to bounce, you can lose everything. Without capital preservation, you are just a spectator.

Get the $3,600 StockSchool Pro Free by just opening an account at:

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Buying in to Emotion – it is tempting to buy more of a stock that is moving quickly higher. It is important to remember that when everyone is doing this, investors will inevitably pay too much. A simple rule is to not buy stocks that have run away from their trend line. You can buy stocks that have momentum, just wait for them to pull back to the trend line and buy them on short term weakness. Never chase.

Believing in Public Information – the stock market is efficient, it prices in all available information. That means the news release that you are reading has no value. The annual report has no value. So long as the general public has the same information as you, your decisions based on that information will provide random results.

Selling on Pull Backs – it is easy to be nervous with our winners because the feeling of having a winner turn in to a loser is not a nice one. So, we tend to sell our winners too early, getting out at the first sign of weakness to lock in the profit and give ourselves the congratulatory “you never go broke making a profit” speech. You have to maximize gains and learn to distinguish between the minor pull backs that are part of long term, money making trends and actual trend reversals. A trade is not successful until you have doubled your risk.

Taking Too Much Risk – emotion is the enemy of the trader. Cold hearted people, or at least those who do not care about the risk of the trade, are the best traders. To make sound decisions, you can not risk more on a trade than you are willing to lose. If you do, you will break your trading discipline and avoid selling losers when you are wrong or sell your winners too early.

Going Against the Mood of the Market – it is not easy to paddle a canoe up a river, against the current. It is also not easy making money on a stock when the mood of the market is against you. When considering a stock, I always first assess who is in control of the stock, buyers or sellers. To make money, you either have to trade with the group that is in control or pick the point where control changes from one group to another. Don’t go against the mood of the market.

Trade Possibility, not Probability – I remember an advertisement for a lottery, it said, “Think of the Possibilities!.” What if the lottery company suggested we think of the probabilities? We have all heard that we have a better chance of getting struck by lightening than picking the right numbers to win the lottery, but because we think of the possibilities, we continue to buy tickets. A lot of people approach the market the same way. They may look at a stock and describe all of the thing that could happen, how the company could find gold on a long shot mining exploration and how the stock could go rocketing higher. However, when you trade against probability, you are on the path to poverty.

The Canadian speculative stock markets have been the best performers in the past few months and continue to bring a lot of good trading opportunities. It is very important to not fall in love with the companies in this area because they often fizzle out quickly, but so long as you listen to the market for exit signals, you can do well trading them.

This week, I scanned the Canadian market for low priced stocks trading abnormal volume and with abnormal price action. I then inspected their charts for good pattern set ups.

1. V.SSE
V.SSE is breaking out from an ascending triangle pattern that has been building for six months and broke to the upside with very abnormal volume on Friday. There will be some selling pressure at the $0.15 price range but the volume was so abnormal on the break that I think it will have the power to move through resistance. Support at $0.065.

2. T.WES
T.WES has been building optimism over the past few months and Friday broke through resistance. Support at $2.50.

Click HERE for the Speaker Lineup at the World Outlook Financial Conferance and click  HERE if you want to learn from some of the timeless advice from some of worlds best traders including the very successful Tyler Bollhorn.

Tyler Bollhorn started trading the stock market with $3,000 in capital, some borrowed from his credit card, when he was just 19 years old. As he worked through the Business program at the University of Calgary, he constantly followed the market and traded stocks. Upon graduation, he could not shake his addiction to the market, and so he continued to trade and study the market by day, while working as a DJ at night. From his 600 square foot basement suite that he shared with his brother, Mr. Bollhorn pursued his dream of making his living buying and selling stocks.

Much of Mr Bollhorn’s work was pioneering, so he had to create his own tools to identify opportunities. With a vision of making the research process simpler and more effective, he created the Stockscores Approach to trading, and partnered with Stockgroup in the creation of the Stockscores.com web site. He found that he enjoyed teaching others how the market works almost as much as trading it, and he has since taught hundreds of traders how to apply the Stockscores Approach to the market.

References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.

Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.

Peter Grandich, chief market commentator, Agoracom.com, shares his top picks.

BNN takes your calls and emails on North American resource stocks with Peter Grandich, chief market commentator, Agoracom.com.

On Major Moves, Grandich has been very right and not only saved many investors fortunes, but expanded them dramatically. On November 3, 2007 at the MoneyTalks Survival Conference, Peter Grandich of the Grandich Letter warned that “an unprecedented economic tsunami will hit American beginning in 2008”.   Peter advised publicly to short the US market two days from the top in October, 2007 and stayed short until the last week of October, 2008. He began to buy stocks in March 7th,  2009. He also bought oil and oil related investments near the lows after the dive from $147.
….go to visit Peter’s Website.