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Would you like to find the "perfect" stock at the "perfect" moment? You know the one that will not only bring in a solid dividend payout but will also show a profit over 20% within a year or two. You know these stocks exist. Just this year, I was able to catch 10 stocks (out of 20) on the U.S. market that went up by more than 20% in my Best 2013 Dividend Stock List:

Results as at October 1st 2013:

CompanyTickerYTDCurrent Div Yield
Safeway IncSWY76.84%2.50%
Walgreen CoWAG45.36%2.34%
Seagate Technology PLCSTX43.85%3.47%
Western Union Co/TheWU37.10%2.68%
CA IncCA34.99%3.37%
Autoliv IncALV29.67%2.29%
Genuine Parts CoGPC27.23%2.66%
Microsoft CorpMSFT24.60%3.37%
Johnson & JohnsonJNJ23.67%3.05%

On the Canadian Market, I was able to catch 2 stocks (out of 10) doing over 20%:

Andrew Peller (ADW.A) at 36.63%

Black Diamond Group (BDI) at 22.28%

I guess you will claim that's easy to pick stocks doing +20% when the S&P 500 is almost there anyways. But the key is that dividend stocks (without their dividend return) should not beat a bullish market. They are supposed to be more conservative and perform well over time since they pay dividends and they will suffer less during bearish market. But just to give you an idea, last year, my 2012 Best Dividend Stock List finished with 5 U.S. stocks (out of 20) over 20% (STX, HRS, FLO, SXL and HAS) and 2 (out of 10) Canadian stocks (MG and CRJ.B at 19.60%). My batting average is still pretty good in a year where the S&P 500 did 11.52% and the S&P TSX did 4%.

Last week, I discussed how important your core portfolio is. This is the skeleton of your investments and how you will go through any storm. I also mentioned how boring the core portfolio is since you buy a stock and rack up the dividend payments over several years, read until retirement! There is nothing very exciting about this even though your average investment return will make you smile 10 years from now. This is why I'm adding a few "satellite" stocks to my portfolio to make sure I have fun and can expect a sky rocketing dividend stock once in a while. How can you find dividend stocks that are ready to fly? This is a tough question to answer considering you will have to take more risk to find them as well. Based on my experience, I pulled out a few common metrics to watch for in picking one of these all-star dividend stocks that will make you look like a rock star during Thanksgiving (Happy Thanksgiving to all Canadians, eh!)

1 It All Starts With a Trend

If you look for a rock star dividend stock but don't want to risk too much, the first step is to look for companies within a trend. I remember that back in 2011-2012, several techno stocks were sitting on billions of dollars and decided to increase their dividends. Techno stocks were hot in general and many of them had a good ride on the market. I'm thinking of Intel (INTC), Seagate Technology (STX), Microsoft (MSFT) where it was relatively easy to pick them in 2011 at a low price and sell them with more than 20% profit within 12-18 months.

Early in 2013, the trend was FOOD! I actually called it right with my 2013 Best Dividend Stock List including 5 stocks related to the food industry. They don't show a YTD return over 20% now but they were a few months after Warren Buffett bought Heinz (HNZ) and took a great dividend stock out of the public market. If you are able to identify the right trend in the right sector, picking a great dividend stocks from the list will definitely make it a rock star in your portfolio.

2 Find Beaten-up Stocks

Finding beaten-up stocks is definitely riskier than looking for a trend in the market. Stocks are getting beaten-up for a reason! You need to be able to see if there is any possible upside over the long haul. A good example from my current holdings is Apple (AAPL). The stock is far from being as popular as it was 2 years ago. But I believe the company will be able to show reasonable growth over time. The company is sitting on billions of dollars. It can easily buy back more shares or increase the dividend over 3% later on. These are two moves AAPL can do that will push the stock over $500. I don't think Apple will break records as it used to do in its golden years, but I'm convinced the stock is undervalued right now that the hype is gone. This is why I've taken a chance with this investment.

I've successfully bought Johnson & Johnson (JNJ) after their recall problems and Seagate Technology (STX) after the major flood. Both stocks showed awesome profits. I've sold STX but I'm still holding JNJ.

However, I tried the same strategy with RIM a while ago and should have sold it when it had bounced back over $70. I held the stock thinking its next tablet and smartphone would gain solid market share but the opposite happened. I sold my shares around $43 and took the loss. Buying beaten-up stocks is not that easy.

3 Look For Cold Hard Cash

When a company has a lot of liquidity, there is always a chance it will make a huge move with it. Moves like massive share buybacks or dividend increases year after year will catch the attention of investors. Therefore, the demand for this company will increase and you will see the stock price go up faster than the rest of the market.

Therefore, if you can find companies with high cash flow and a relatively low P/E ratio (under 15 is perfect!), you are on the right path to find a company that could become a rock star later on. Cash is always king.

4 Solid Growth At a Reasonable Price

When I look for a new stock to add to my portfolio, I always start with a stock screener using my metrics (described in Dividend Growth - Freedom Through Passive Income). From that list, you get stocks showing constant growth in both sales and profits along with a good habit of dividend increases. Many of these companies could be part of a core portfolio instead of the small portion of rock star wannabes.

However, some companies show great metrics but are traded at a reasonable or ridiculously low P/E ratio. It's very important to understand why a stock is traded at a low P/E ratio. If you just pick-up the stock because it is traded at 8 times its profit, you might be buying a dying cow instead of getting the next cash cow.

Once you have found why the value is not reflected in the stock price, you can take the decision to buy this stock and hope that you are right.

One More Thing About Buying Rock Star Dividend Stocks

While I repeat it all the time; building your core portfolio is a bit boring. However, I find it easier than finding a gem in the middle of a haystack. When you look for rock star dividend stocks, you look for stocks that are undervalued. With the number of investors and the amount of information we receive daily, it's hard to find that hidden beauty. You often need to take a leap of faith in the company and hope that your expectations will be materialized over time.

The other touchy topic is to know is when to sell these rock star stocks. Some of them skyrocket for a while and then drop back to a "normal level" once the hype is over. This is why it's important to fix a selling price or to follow these companies closer. I dropped my shares of INTC and STX for the same reason: the hype was slowing down as their sales stagnated. Most rock star dividend stocks won't be held in your portfolio too long. Don't make the mistake of falling in love with your holdings!

Chances are you will lose money on some of these stocks. The key is to be able to find a few great picks that will compensate it and boost your portfolio return.

Source: Find The Rock Star Dividend Stock With These 4 Tips