NEW YORK (TheStreet) -- What a marvelous feeling to buy a stock and watch it rise in value.
I love checking my portfolio after I see a stock I own moving higher. Even more electrifying is when the stock is a dividend payer.
Historically, dividend stocks outperform non-dividend payers, but knowing which ones to buy is no easy task.
I spend a lot of time trying to help you avoid buying the dogs known as dividend traps. Dividend traps are the seemingly attractive high-yield, low-cost stocks that have a tendency to go even lower right after you buy them.
With careful research of sectors, costs in relation to earnings, technical analysis and spending time reading SEC filings, you can shift the odds.
Normally, I don't venture far from highly liquid names everyone knows. However, I'm finding other under-the-radar names that industry insiders know about, but the overall market doesn't. The potential gains are much greater if you're willing to sit and wait for others to discover the hidden value.
Of course, playing the waiting game isn't so tough when you're receiving checks in your mailbox every 90 days.
First is a stock you may see often because I'm tremendously excited about its income-generating ability. This is not the first time I've highlighted Simulations Plus (SLP), and I doubt it will be my last. The company is a California-based, $100 million (market cap) software firm with massive gross and net margins. It's debt free, and it's small enough that most have never heard of it or the products outside of the pharmaceutical industry.
Customers love the cost savings from using the software compared to actual laboratory research. The top 20 pharmaceutical companies in the world are customers. Simulations Plus is a leader in the simulation software space that counts the FDA and MHRA (U.K's equivalent of the FDA) as clients.
The stock doesn't offer enough liquidity to trade it, but for long-term investors preferring dividends over daytrading, its 3.4% yield is hard to beat. I wrote a Real Money Pro post with exact entries and profit targets, and I bought this one myself.
From a cost of earnings perspective, the stock isn't expensive relative to its growth. The pharmaceutical space is in full merger mania, and I wouldn't be shocked if it spills over onto Simulations Plus. That said, the bull thesis doesn't require takeover speculation and I'm not betting on it.
Two analysts track Simulations Plus. Both share my opinion that the stock is a buy, but only one proffers a price target of $6.10.
During the last 12 months, the stock price has popped 52%.
Merck (MRK) is a $169 billion global research-driven pharmaceutical company established in 1891.
Price to Book: 3.2
Forward Estimated Earnings Payout Percentage: 42%
Last week, the stock set a new 52-week high and is within bullish trend for the monthly, weekly and daily price charts. Trend followers love this type of price action and will stick with it until the trend changes.
Fundamentally, the company is an industry leader with an incredible revenue tailwind. The dividend remained at 38 cents per quarter from 2004 until 2011, when it was raised to 42 cents. Since then, the dividend has increased each year and is now 44 cents ($1.76 annualized) for a 3.1% yield.
Merck's pipeline of drugs include cancer (anti-PD1 immunotherapy for oncology) candidate MK-3475. Pfizer (PFE), Amgen (AMGN) and Incyte (INCY) signed three separate collaboration agreements with Merck earlier this year to study MK-3475.
The company's merger with Schering-Plough is paying off and accretive. According to the CEO Ken Frazier, $2.5 billion in further cost savings by 2016 is expected.
Merck's international sales are growing at a double-digit rate and produce about half of the revenue, diversifying the revenue stream across every significant market.
Analysts as a whole like this stock. Currently, Merck has 11 buy recommendations out of 20 analysts covering the company, along with 9 holds, and no analysts recommend selling. Analysts overall have called this one correctly. In the last 12 months, the shares have increased 21%. The average analyst current target price for Merck is $56.78.
Almost zero desire by short sellers to move against this stock. Short interest hardly moves the needle, with only 1% of the float.
Procter & Gamble (PG) manufactures and markets a broad range of consumer products in many countries throughout the world. Products fall into five business segments: fabric and home care, paper, beauty care, health care, and food and beverage.
Price to Book: 3.2
Forward Estimated Earnings Payout Percentage: 54%
From a technical analysis point of view, the chart is in a solid bull trend. The initial decline on Wednesday after posting earnings is a buying dip and should fully become priced in by Friday.
While not initially favoring the slight miss on revenue, the market will brush it off quickly. $20.56 billion actual revenue vs. $20.6 billion estimated is so slight that it's little more than a rounding error. Of greater importance to shareholders is the beat on earnings, generating $1.04 per share, 2 cents above estimates.
Shareholders receive $2.41 annually in dividends. The yield is now slightly north of 3%.
Analyst opinion is mixed. Most of the analysts surveyed don't believe a buy or a sell should be made at this point. Currently, Procter & Gamble has 13 buy recommendations out of 26 analysts covering the company, 12 holds, and 1 recommends selling. The average analyst target price for Procter & Gamble is $86.95.
Almost zero desire by short sellers to move against this stock. Short interest hardly moves the needle with only 0.9% of the float. When short sellers aren't interested, you should be.
Altria Group (MO) is a Virginia based $75 billion market cap tobacco marketer trading 8 million shares on a typical day.
Price to Book: 18.3
Forward Estimated Earnings Payout Percentage: 81%
Altria trades at a substantial discount compared to most industries because of its sin factor. You may not like cigarette smoke, but I can assure you that your portfolio doesn't care.
Your portfolio's only concern is profits and Altria's chart is moving from the bottom left to the upper right. In fact, this week marked another multi-year high while also offering a dividend yield above 5%.
The company is expected to report earnings before the open on Thursday, so if you're reading this before the earnings report, I suggest waiting until after it reports before entering, so you won't get blindsided right at the start.
Analysts have not reached a consensus. All else being equal, it's generally a bearish indication when the majority of analysts don't get behind a stock. Analysts love to push stocks, and no accord is almost the same as a sell rating. 6 out of 12 rate a hold. 6 recommend buying and no analysts recommend selling. The average analyst target price for Altria Group is $39.70.
Short sellers hate this stock. Every single short seller that has held for more than a month is underwater. There's isn't many short sellers, though, with only 0.8% of the float shorted.
At the time of publication, Weinstein had no positions in securities mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.