Dividend Stocks With Rising Earnings/Low Valuations Better

We’re all fans of dividends now. Record low interest rates are here to stay and as a result, many investors have jumped on the dividend bandwagon. I don’t blame them, companies that have predictable revenue streams, great balance sheets and a history of rising dividend payments should be the cornerstone of any portfolio. But many of these names are clearly overvalued. North American REIT’s, pipelines, utilities, consumer discretionary stocks and even some telcos are trading at record valuations and well above the overall market P/E ratio. Investors should use caution buying stocks in these sectors. Sure you’ll get the dividend but you could be in for a capital loss if the market starts to reward riskier companies.

Instead of chasing yield, it’s time to look for growth at a cheap price. We think the winning formula is to buy companies with a dividend yield of at least 1.5%, a P/E ratio of 12 times this year’s earnings expectations or less, forward earnings growth of at least 10% for 2012 and a track record of raising dividends over time. Three names that fit this bill are Teva Pharmaceutical, Home Capital Group and CSX Corporation.

Source: Forex Pros

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