Value Stock-Picking, Week 1: How to Find Top Dividend Plays

Editor's note: The Value Stock-Picking Training Program is a series of four weekly assignments. Each assignment is based on one of James Altucher's strategies in his book, Trade Like Warren Buffett. To get a copy of the book, click here.

This assignment was written by Stockpickr member Ira Krakow.

As James Altucher points out in Trade Like Warren Buffett (Stockpickr Portfolio), Buffett's goal is to find the stocks that are most likely to go up, but which also have a "margin of safety." In other words, the greatest reward for the lowest risk . Altucher quotes Benjamin Graham and David Dodd's book Security Analysis -- the bible of value investing -- as follows: "A safe stock is one which holds every prospect of being worth the price paid except under quite unlikely circumstances." That's the real Buffett strategy.

A "value strategy" combines income and growth . The first week of this edition of The Stock-Picking Training Program will focus on companies that consistently pay out an increasing dividend , combined with the prospect of price appreciation . Why? A dividend provides a "floor" for the stock price. If the price of the stock goes down, the dividend percentage increases because the denominator (the stock's price) decreases relative to the dividend amount. This attracts investors who might buy the stock for the dividend alone.

For this investment strategy to work, the dividend cannot be merely a small token. Many companies, particularly in the technology sector , pay a tiny dividend so that they can pass a screen like "companies that pay a dividend." For example, Microsoft(MSFT Quote) pays 1.5% and IBM (IBM Quote) pays 1.7% -- not much to write home about.

With payouts like that, we're really relying more on growth in the stock price for our profit . Instead, this week, look for companies that pay a substantial dividend that's comparable to (or better than) the yield of a CD or a money market fund (currently in the 4% to 5% range). At the right stock price, companies like these could attract income-oriented investors.