It is that time again, time to look at the top US dividend stocks. We’ve done this in past months and it’s been gaining popularity every time as many are like us, trying to build passive income through a dividend portfolio. The same stock is back on top of the rankings, although there are some challengers and I would expect things to change in the near future. That being said, I think many other criteria need to be considered when picking dividend stocks and that is why I will be narrowing down the list later this week for our mailing list members. If you are interested in finding out what are top dividend stock picks are, simply join our mailing list it’s free! I expect to send it out later this week.

What to look for

Last month, we were looking for stocks that have been able to grow their dividend payouts for many many years which yielded some interesting results. This time we will simply be looking at which companies show the most promise in terms of profitability which should help them raise dividend payouts in the future.

In terms of dividend yield only, the top yield is once again held by Frontiers Communications Corp which currently yields close to 10%. The easiest thing to notice is that FTR pays more in dividends than it makes in earnings. No doubt, they will not be able to keep it up. Here is the chart:

We will be filtering out the top 100 list to find the ones that fit all of these criteria! In the meantime, here is the list!

To regulars here, this stock pick might look very familiar as being short Blue Nile (NILE) is kind of a tendency for me. So far this year, I have made a short trade on Blue Nile against Netflix in January (+63%) and also in April (+19%). Then, I went short again in May against Apple (+21%). Going short 4 times on the same stock in a year is certainly a record. I also was long on Apple earlier in the year (+27% against Amazon). You could say that these are two of the stocks that have been most “kind” to me. Eventually it will end right? Maybe… but maybe not.

Every time I look for a trade, I use the same approach, looking at my dashboard looking for opportunities. If the same pair comes up every time, I will generally go ahead (unless it fails a few straight times). It’s not about being original and making new trades all the time, it’s just about making money. And once more, Blue Nile seems to be overvalued. It is incredible really that a stock could be down 34% this year and still look overvalued right? And yet it does.

It would be easy to consider Apple (AAPL) as being overvalued. After all, could a company have more hype around it than Apple? Unlikely. But facts remain facts and the Iphone 4 problems seemingly behind the company, it’s back to sales and new products and no one is better at the moment. Dell just released a 300$ tablet pc to compete with the more expensive Apple Ipad. Have you heard many friends and family discussing their future “Dell streak” purchase? Neither have I…  Which helps Apple maintain decent margins thanks to reasonable prices.

I took all the names on my dashboard that do not have live trades on them and Blue Nile was the 6th most expensive in terms of Price/Earnings ratio. How can a stock with almost no growth continue to get such a high ratio? It is beyond me. Especially when you compare it with the ratios that Apple has. I’m not certain that Apple’s growth can keep up and it probably won’t. But can it maintain higher growth than Blue Nile? No doubt in my opinion. We do live in an Apple world after all. So their P/E’s should reflect that, and they don’t.

Here are the numbers for the 2 stocks:

I would say that it’s’ pretty unanimous. Current earnings, growth, analyst ratings and trend analysis all indicate the same direction. I never like to go short on a stock that has lost so much because of the possibility of a fight back but in this case, the decline is warranted. Just to return on the trend analysis for a second, it is actually the first time since we’ve been tracking this factor that it’s been so clear cut.  Sometimes when everything looks too perfect, it is. But I am staying disciplined and will go with my feeling on this trade.

Not a big surprise following the bad earnings release last week by Blue Nile but I’m still happy to announce that I am closing the trade on Apple (AAPL) / Blue Nile (NILE) from May 24th. The trade sits at +20,68%  as of the close and will be closed out at tomorrow’s opening.

The trade had some tougher times during the whole Iphone 4 antenna debacle but in the end, the overvalued company lost enough value to make this trade worthwhile. And yes this does mean that a new trade will be coming on Monday. Our premium members have a good idea what is coming..:)

Last week, when looking at some charts, I got an email about IAC Interactive having gained as much as Apple (AAPL) so far this year. It seemed like some type of typo when you know that IAC Interative continues to deliver sub quality websites. But it is true, both have returned between 20 and 25% and that just does not look right.

Knowing that, I tried looking for a superior company trading at a similar P/E ratio and the best fit looked liked Ebay which is looking more and more like an online bank. Competition is coming from Facebook among others but I still believe it can maintain higher growth than IAC Interactive.

Valuations

Both stocks are trading close to 25$ and while IAC has been very volatile with its earnings and I just don’t think it can compete with Ebay which has been generating close to 2$ of earnings per share. I just do not see how IAC could compete with Ebay in terms of revenues, profits or growth so there is no logical reason for these two stocks to trade at similar valuations. You can take a look at the numbers for yourself.

I will be writing on Thursday or Friday about how I value Ebay, as it has changed over the past few years.

The main points that stick out when looking at the numbers are:

-The main numbers that favor IAC are the trends and analyst ratings. I am obviously aware of the trends since that is one of the main reasons why I am entering this trade. I am a bit surprised by the analyst ratings but it’s fairly equal between the two companies so I’m not too concerned about it.

In case you are wondering, there is no P/E ratio for IAC Interactive this year, it is of course because the company has been losing money. It is expected to get back to profitability next year but still far from the more reliable Ebay. Apart from AOL, IAC is the most attractive company to short among the companies that I follow so I obviously feel very happy with this trade.

Well, we have a big winner to close after Priceline shot up following grat earnings. The trade on Long Priceline (PCLN) and Short Travelzoo (TZOO) is currently up 44,49% and will be closed tomorrow morning on the open… so yes, there will be a new trade on Monday!

If you are wondering how it did so well, just take a look at Priceline’s chart just below and you will understand!

With all of the momentum that Apple has experienced in the past few months, it becomes easy to forget that the PC remains the king of computers and while Apple has made progress, PC remains the pick for all but a small minority. Among PC users, Microsoft is the king that provides Windows, Office and many other types of software. And while Microsoft’s web initiative has been losing money, it has been gaining market share, which it has been doing even more successfully in the gaming business. Microsoft & Facebook are doing their best to compete with Google and become credible alternatives to searching the world wide web.

So no, Microsoft is not only about Windows & Office and its last earnings report certainly showed that things were going well. Its cash reserves also remain very high which will end up helping investors either through additional investing or increased dividends. That is why, as we had indicated in last weekend’s Premium Newsletter, we are now ready to go long Microsoft based on current valuations. Microsoft might not be the undisputed King in terms of market cap in the technology sector but we strongly believe that Apple’s emergence is actually a good thing for Microsoft as it will help it battle Google on other fronts.

The Irony…

Of course the ironic part is that Microsoft has been partnering up with Yahoo for its web strategy but we are now more than ready to go short on Yahoo. We have been public about our dismay for companies such as Yahoo that try to be good at everything rather than very good at just a few things and how Yahoo seems like it is trying to model AOL. Yahoo has been doing much better lately making several deals with other leaders such as Zynga that will help the company refocus on its core. But the problem is exactly that, what is Yahoo’s core? It used to be the top US publisher in terms of pages viewed but that is no longer the case. We have been patient with Yahoo this year only going short once (it did not turn out so well) and even discussed the possibility of buying the internet media company but this time around, its valuation just looks expensive when we compare it with Microsoft.

The numbers

The main points that stick out when looking at the numbers are:

-P/E ratios do not make much sense when taking in perspective current earnings and sales growth
-INO Trend analysis certainly favors Microsoft greatly
-Analysts also agree!

The charts

It is that time again, time to look at the top US dividend stocks. We’ve done this in past months and it’s been gaining popularity every time as many are like us, trying to build passive income through a dividend portfolio. Those who have been following this list know that we can probably expect the Communications sector to do very well here. They have been the highest yielding stocks for some time now. That being said, I think many other criteria need to be considered when picking dividend stocks and that is why I will be narrowing down the list later this week for our mailing list members. If you are interested in finding out what are top dividend stock picks are, simply join our mailing list it’s free! I expect to send it out later this week.

What to look for

Last month, the priority really was on finding a fairly reliable high dividend yield stock. This time however, we will be putting more emphasis on the consistency of dividend growth as the impact it will have on your dividend portfolio is critical.

Thus, we are looking for stocks that have increased yearly dividends in the past 5 and even 10 years!

In terms of dividend yield only, the top yield is once again held by Frontiers Communications Corp which currently yields close to 10%. Anytime you see a stock that yield that much higher than the others, you know there probably is something wrong! Here is the chart:

We will filtering out the top 100 list to find the ones that fit all of these criteria! In the meantime, here is the list!

Unfortunately, this trade did not turn out well for us after Rosetta Stone was crushed in its last earnings report, the trade now stands at -22,45% and will be closed at the market’s open!

Again this week we do not have a stock pick to do because our 5 live trades have stayed clear of our stop limits for now. A few of them are now at +10% or better so the odds of closing a trade this week are much better. Fingers crossed!

Since we have already gone by the mid-year (it goes by sooo fast), we decided to take a look into how things have gone so far to see what we did right and what could have gone better. It is always a very useful exercise to learn from mistakes. We had learned a few things last year but this year decided to publish our thoughts on here as we always receive many questions regarding our trades, the reasons behind them, etc.

60% return

WOW! Honestly, our annualized return being over 60% at this point is far beyond expectations. Being long/short means that the general direction of the market has limited impact on our picks as we start trades “dollar neutral” so if stocks all moved down or up, there would be no impact. The return comes from the spread between the return of our long and short picks.

Just a recap to start off. We do not hold more than 5 trades at a time and have stops at +20% and -20% returns (except for very rare exceptions when we pick more volatile trades). Since the trades are only done at the opening, reaching the stops during the day has no impact as long as the trade moves back into that range. We have done 17 trades so far this year and considering the 5 trades at a time, that means our trades have. Last 2 months or so on average which is about what we’d expect for these trades.

The most important metric for us is the number of winning trades compared to losing trades. Since gains and losses are usually close to 20% (except for more violent intra-day trading before we can close out the trade), it is all about getting more trades right than wrong. And we have done that so far. While 4 of the 5 current live trades are winners, I will for now only look at the 12 closed trades:

Winners:

Jan 12 -PCLN/EXPE
Jan 18 –NFLX/NILE
Feb 8 –AAPL/AMZN
Feb 22 –EBAY/KNOT
March 8 –DHX/MWW
April 26 –NFLX/NILE
May 17 –PCLN/TZOO

Losers:

Jan 25 –GOOG/BIDU
March 2 –RIMM/YHOO
March 14 –GOOG/VCLK
March 22 –EBAY/IACI
June 8 –SNDA/KNOT

As you can see 7 winners and 5 losers, nothing incredible but more than enough in this case, especially when we also consider the live trades (11 winners & 6 losers). So we have generally been more right and that is thanks to a few trades that have been easier to trade.

Why are some stocks easier to trade?

I always consider that some stocks are easier because they do not trade at the right ratios. Many factors must be considered but all things being equal, stocks with high revenue and profit growth should trade at high Price/Earnings (P/E) ratios while stocks with little or no growth trade at smaller P/E’s. Some stocks fall outside of these rules for reasons beyond me:

-Priceline (PCLN): Priceline has displayed strong growth for many years now but because it is mature company and an industry leader, the online travel company often trades at what I consider low PE’s. I did two successful trades going long on Priceline this year.

-Blue Nile(NILE): it operates in an industry (online jewelers) with little competition but has struggled to get more consumers to buy their diamonds online. That and a slow economy have made Blue Nile show slow revenue growth in recent years. Yet, the company continues to trade at very high P/E’s.  I’ve also enjoyed two successful trades on Blue Nile this year.

Obviously, stocks like Blue Nile and Priceline are not always good trades as they are fairly volatile but we have generally found good entry points for these stocks.

A big challenge

We have written about how we fell for Google, how it has stronger growth than many think but the stock continues to struggle and we have struggled with it causing us 2 big losses so far this year. At some point we will have to either give up on trading Google or the market will finally see what we see in the search company.

Logic behind our trades

To be honest, we consider many different factors when making our picks. If you want more information about these factors, our opinion about the stocks and which stocks we plan on trading next, your best bet is to join our Premium Newsletter, which is sent out every week! Basically, we consider mostly fundamentals but also look at momentum indicators and also “news momentum”.

I might be getting some complaints about my lack of originality but honestly, why would I change something that is working. I have already done 2 successful trades on Priceline this year (+20,91% vs Expedia & +25,75% vs Priceline) but I still see an opportunity to trade the name against its competition. Priceline has by far the most efficient business model and while I can see more interesting aspects to Expedia, Travelzoo continues to look very expensive in my opinion. You will see a lot of the same arguments I used the last time but basically here it goes:

No matter what the size, Priceline is the growth stock among these two and has shown that for quarter after quarter. You can also take a quick look at the traffic stats of the two websites and easily see which one is rising and which one is losing traffic. So why Travelzoo is still trading at a higher P/E ratio is beyond me.  There are some more worrying trends regarding online travel websites when you consider that Google looks set to offer its own services but that will affect both websites in different but fairly equal ways. Priceline is about much more than flight searches which is for now the main way that Google will get involved in the market.

I think that Travelzoo is similar to BlueNile in many different ways mostly because while they are good businesses, they always seem to trade way ahead of their actual value and represent good shorts because of that.

P.S: Since US markets are closed today (Independance day), this trade will be opened tomorrow.