STOCK TO STUDY: T. Rowe Price Group, Inc ... - BetterInvesting

Between the Lines | Random Walk
the range of trading, open and close,
and direction of price movement.
Many specific candlestick patterns
provide strong reversal signals as
well, and technicians rely on candlestick
charts along with other tools in
an attempt to improve their timing
of both entry and exit.
4. Dividend Yield and Timing
Some investors overlook dividends
as part of their overall profit from
stock investing. This is a mistake.
Dividend yield may represent a substantial
portion of total return. It also
provides a strong test of a company’s
cash management as well as longterm
profit ability.
The yield is calculated on the
price per share you paid for stock.
As stock prices change, the dividend
yield also changes every day. As the
price of a stock falls, dividend yield
rises, and vice versa. This can be -
come quite distracting until you
understand the reasons for a stock’s
change in price.
The best way to judge and compare
dividend yield is over the long
term. A company that’s increased its
yield every year for the past decade
(a so-called “dividend achiever”) is
mostly likely to be exceptionally
well-managed and profitable.
Com panies that reduce dividends
or even skip dividend declarations
and payments are likely to be expe -
riencing cash flow problems.
Also, compare the dividend payout
ratio and how it changes every
year. If the dividend grows by only
5 percent while profits are growing
by 15 percent each year, this means
the payout ratio is declining.
This isn’t obvious if you look only
at the dividend declared per share
year after year. But the payout ratio
should accompany yield as a key test
of how well the company manages
its capital. If you have a long-term
investment in your portfolio and you
notice that the payout ratio is starting
to slip, this could be an early
warning sign that fundamental
strength is on the decline.
5. Reaching Profit Goals or Loss
Bail-Out Points
The final decision point is when you
reach goals or limits. This is where
so many investors or traders make
their greatest mistake.
Some investors set profit goals
and bailout points, especially if they
plan to hold shares for a limited
period. But if you plan to buy and
hold for many years, the profit goal
is a long-term matter, so a short-term
profit target doesn’t matter.
But the average holding period
has been declining in recent years.
Half a century ago, that was more
than eight years; today, it’s closer to
eight weeks.
Therefore, you set a goal based
on how long you plan to hold stock.
Once you meet that profit goal, you
study the stock for sale. You may further
decide to sell a portion and let
the rest ride depending on what
your Stock Selection Guide says.
Another goal actually is a bailout
point. You decide you will consider
selling when the price declines by a
specific percentage. Although no
decision should be automatic, targets
are a good starting point.
So many investors, however, have
trouble not with setting goals, but
with following through. If the price
rises, that voice inside your head
tells you to wait awhile longer
because the price might keep rising.
If the price goes down, that same
voice tells you not to sell, because
you must get back to your starting
point. This voice is destructive
because it violates your goals. So
maintain discipline by looking into
reasons for prices that go below
your estimated low price and complete
SSGs for stocks periodically.
Dangers of a Short-Term Bias
Investors with a short-term bias tend
to look for chances to take profits.
This is a trend contrary to traditional
buy-and-hold investing, but it’s a
real ity. The danger of taking profits
merely because they develop may also
mean you end up with a port folio full
of depreciated stocks, because you
took those profits at the wrong time.
If you do take profits earlier than you
intended, consider offsetting them
with other portfolio components that
have declined in value. That frees up
more capital to invest elsewhere and
also keeps your portfolio vibrant and
enables it to evolve.
It comes down to a matter of
knowing what should generate action
on your part. Entering a position is
“
A company that’s increased its dividend yield
every year for the past decade is most likely to be
exceptionally well-managed and profitable. ”
relatively simple because you base it
on sound criteria. But exiting is an -
other matter and for many, knowing
how and when is much more difficult.
Remember, though, if you have a
clear view of how and why to enter
and exit positions, you will improve
your rate of profits over losses.
■ ■ ■
Michael C. Thomsett, Thomsett -
Options.com, is the author of more
than 70 published books. Among
these are Getting Started in Stock
Investing and Trading (Wiley), which
includes practical suggestions for
picking stocks based on fundamental
analysis. He is also the author of
Annual Reports 101 (Amacom Books),
Getting Started in Fundamental Anal -
ysis (Wiley), and Investment and
Secu rities Dictionary (McFarland).
He lives in Nashville, Tenn., and
writes full time.
March 2013 | BetterInvesting | 37