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Even With Income Stocks, It's Smart To Time Moves

Seventh In A Series Plenty of dividend investors say you shouldn't worry about market timing or technical analysis.

IBD begs to differ, arguing that they're even applicable when it comes to income stocks.

Consider what happened with Citigroup (NYSE:C) in October 2007.

In the week ended Oct. 19, the giant bank sliced through its 10-week moving average. (1) That occurred as the stock drew its biggest-ever weekly (2) For anyone with basic skills in chart analysis and timing, the stock's action provided a clear sell signal.

Getting out then would have prevented an investor from enduring further losses. Citi's drop accelerated, and in early March 2009 the stock briefly traded as low as under $1 per share.

Could you really have ignored the stock's terrible chart at that time? When the action is calm, it's easy to say you don't care about a dividend stock's price, because you're just interested in the dividend. But it's hard to hold that view as a stock craters.

You're better off not putting yourself in a position where you've suffered steep losses.

After all, companies can opt to stop paying their dividends when things really head south for them. You can avoid these situations by learning to use charts to time your buys and sells.

IBD has long maintained that you shouldn't treat dividend stocks all that differently from growth stocks. That means names with strong fundamentals that show constructive chart action. Seek dividend payers that also have growth potential.

Stocks that match this description generally are profiled each day in the Income Investor column, which today appears on Page B12. Cable giant Comcast (CMCSA), retailer Home Depot (HD) and railroad operator Canadian National Railway (CNI) are among the companies that recently have been featured in the column.

In the last couple of years, the Income Investor column has focused in particular on stocks with an annualized dividend of 1% or more, as well as a strong three-year EPS Stability Factor.

This factor runs from 0, the strongest and steadiest level, to 99, the worst and wildest level.

You want to see an EPS Stability Factor that's on the steady side, because that suggests the company should be able to keep earning a profit and thereby pay a dividend to its shareholders.

The same IBD sell rules apply to income stocks. Cut your losses short when they reach 7% or 8% — no exceptions, no hesitation. You can always buy the stock back at a better time.

That rule also would have helped Citi holders. In 2007, the banking giant had been providing a quarterly dividend of 54 cents a share (before a pre-reverse-split). The payout didn't last long.