Dividends Still Don't Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market

Chapter 7. Finding Undervalued and Overvalued Stocks

The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.

—Marcel Proust

One need not be a market wizard to understand that for every stock there are optimum times to buy and sell. For the investor whose primary objective is to maximize capital gains and to capture as much dividend income and growth possible, it is imperative to establish the repetitive areas of undervalue and overvalue.

Although capital gains can be achieved in stocks that are not purchased at undervalued levels, the potential for upside is reduced and the downside risks are increased. In a rising market, an investor may get away with this practice for a time, but one too many trips to that well and investment capital can disappear in a hurry. That is to say, there is a higher probability for consistent growth of capital and income when the investor maintains a buying and selling discipline based on the understanding of values.

In our experience, the most reliable way to identify stocks that offer good values is to limit investment considerations to only the highest-quality stocks and then establish the repetitive patterns of dividend yield, which reveals the areas of undervalue and overvalue. For some, this process, which you know now as the dividend-value strategy, can be viewed as overly mechanical or perhaps even rigid, but there is a method to the madness. Even seasoned investors can be seduced by the energy and momentum of ...