I think now is a great time to buy dividend paying stocks.
Even Bill Gross, the largest bond investor in the world, is advising investors to look at dividend paying stocks for income. The dividend stocks Gross likes can be boring and most traders prefer the excitement of a tech company.
This week, I found the best of both worlds -- a stock that combines dividends and high tech growth potential.
While scanning large cap stocks this week, I spotted an electric utility company with amazing high tech potential. You see, energy is an evolving market. Utility companies are being forced to deliver cleaner energy and this requires smarter engineering.
This also creates an opportunity for innovative companies. Electricity companies already have a wire into each house and they can use this to capture useful information and transmit it easily along their existing power lines. This is the idea behind the Smart Grid that will help meet the energy needs of the future. The infrastructure is already in place for smart electric companies to become giants in their industry.
We could see Southern Company (NYSE: SO) evolve into that kind of company. SO provides a standard company description talking about electricity generating capacity and the number of customers they serve... and then they add "In addition, the company offers various wireless communication options, such as talk, cellular service, text messaging, wireless Internet access, and wireless data services; and wholesale fiber optic solutions to telecommunication providers under the Southern Telecom name." Cable companies compete with phone companies by offering package deals and in the future we may see SO offering these kinds of deals to customers.
SO might have a bright future, but they also have a long history of delivering returns to their share holders. This boring utility has outperformed the S&P 500 over the past year, the past five years, the past ten years and over the past thirty years. Over the last thirty years, SO has delivered an annual gain of 16.3% a year.
It also pays a current dividend of about 4.2%. The company has paid a dividend for 257 consecutive quarters (over 64 years) and has increased it in each of the last ten years. There are no guarantees for investors, but this dividend seems safe, and it is paying about twice the yield investors can get with ten-year Treasury notes.
It is important to consider alternative to Treasuries. The interest rate on those notes is fixed and if inflation accelerates, investors will face losses. With dividend paying stocks, the dividend can rise with inflation and investors may be able to maintain their income. This could lead to increased demand for dividend stocks, and that would help SO.
We are already seeing some buying demand in SO. This is a relatively long-term trade so the monthly chart will be used to evaluate the potential reward and risk. Based on the depth of the decline into the 2009 bottom, SO should be expected to encounter resistance near $46.33. This price is equal to 62% of the size of the decline added to the breakout point. The stock has been consolidating near that level since December.
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Once the initial resistance level is broken, SO could reach $51.02 based on that pattern. That price target is found by first identifying the depth of the decline - $38.75 was the closing high in December 2007 and the March 2009 low was $26.48, a difference of $12.27. This difference ($12.27) is added to the breakout point (the old high of $38.75) to obtain a target of $51.02. Markets often display a pattern of symmetry in declines and advances. That old high also serves as a stop on the trade and traders should assume the trend in SO has reversed if the price closes below $38.75.
Momentum, shown here as the rate of change (ROC) indicator, is moving higher and looks ready to break above its moving average. That buy signal has delivered consistently profitably and low risk trades in SO in the past. This has been a winning trade almost 70% of the time for long term traders willing to hold the stock for at least a year.
This is a trade that can be considered as a substitute for fixed income investments. Bonds offer significant risk relative to their yield and dividend paying stocks have more potential upside than Treasury securities for now.
The portfolio for my "boring" 26-week ROC strategy continues to be unchanged again this week. That strategy continues to be holding Vanguard REIT (VNQ), SPDR S&P 500 ETF (SPY) and Vanguard Small-Cap ETF (VB).
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