* Measuring Dividend Stocks Investment Risk Profile

As part of defining your investing process, don't forget to spend some time understanding risk. Seasoned investors will tell you that you should know your risk profile before starting to invest. There are several tools available on the web to help you gauge your risk profile. Here are a few:

• Determining Risk And The Risk Pyramid
• ING Financial Services
• AOL Money and Finance

Once you know your investment risk profile, how do you gauge the risk of individual securities in your portfolio or your portfolio as a whole? I tend to weigh the risk on my portfolio as a whole and make adjustments through the selection of more or less risky investments. For my dividend stocks I look at these measures:

1. S&P Qualitative Risk Assessment + S&P S&P Quality Ranking
My broker provides S&P reports on individual securities and most ETF/CEFs. As part of this report S&P includes a Qualitative Risk Assessment and Quality Ranking. They define these as such:

• Qualitative Risk Assessment: The S&P equity analyst's view of a given company's operational risk, or the risk of a firm's ability to continue as an ongoing concern. The Qualitative Risk Assessment is a relative ranking to the S&P U.S. STARS universe, and should be reflective of risk factors related to a company's operations, as opposed to risk and volatility measures associated with share prices. The rankings include Low, Medium and High.
• S&P Quality Ranking: Growth and stability of earnings and dividends are deemed key elements in establishing S&P's Quality Rankings for common stocks, which are designed to
  capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings from highest to lowest: A+, A, A, B+, B, B-, C, D and Not Ranked.

For my tracking purposes, I combine the two into a RQ (risk/quality) rating and assign A (low), B (medium) or C (high) for the Qualitative Risk Assessment and 1 (A+) to 8 (D) for the Quality Ranking. Thus a company such as Coca-Cola (KO) that has a Low Qualitative Risk Assessment and a Quality Ranking of A would be represented as an A2 company in my system. Here are some combined rankings on several popular dividend company's:

• General Electric (GE): B1
• U.S. Bancorp (USB): A3
• Johnson & Johnson (JNJ): A1
• United Technologies Corp (UTX): A1
• Procter & Gamble Co. (PG): A1

Currently, I don't have any C stocks. My most risky stocks have a rating of B4. I like use this metric to evaluate my dividend stock portfolio in total. The weighted average of my dividend stock portfolio is A3. I am comfortable with that rating, but under the right circumstances I would be willing allow it to fall to B2. If the overall portfolio fell to a B (moderate risk), I would limit the S&P Quality Ranking to a 2 (A). I would never want the overall S&P Quality Ranking to drop below a 3 (A-). Click here to see the RQ rating for all my dividend stock holdings.

2. Current Dividend Yield and NPV of MMA Differential
All things being equal, higher risk stocks command a higher dividend yield. Consider these two extremes:

• Wal-Mart (WMT) - 1.81%
• CenturyTel (CTL) - 11.30%

If you had to invest your life's savings in only one of the above stocks, which would you choose? Your answer will reveal something about your risk tolerance. Obviously, the market believes that WMT is less risky than CTL.

When judging risk I like to look at current dividend yield in conjunction with

NPV of MMA Differential. A high yield and a high NPV of MMA Differential could indicate a risky stock. Here are some risky stocks and ETF/CEFs that I am holding based on a high current yield and NPV of MMA Differential:

• Alpine Total Dynamic Dividend Fund (AOD) - 29.8% yield - $1.9 Billion NPV of MMA Differential
• Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) - 17.3% yield - $115,498 NPV of MMA Differential
• CenturyTel (CTL) - 11.3% yield - $3,487,677 NPV of MMA Differential
• Paychex Inc (PAYX) - 4.94% yield - $531,399 NPV of MMA Differential

Many of the recent companies that I sold after a dividend cut resided at or near the top of this list when they cut their dividend. Of the two methods, I have found the second one to be a better indicator of future performance.

In addition, I also look at the current market price vs. my calculated Buy Below price. A large disparity indicates the market believes the stock will perform much differently in the future than it has in the past. As with any forward looking exercise, it is a mixture of art and science.

Full Disclosure: At the time of this writing, I was long in GE, USB, JNJ UTX, PG, WMT, AOD, ETO, CTL, PAYX

Tags: [AOD] [CTL] [ETO] [GE] [JNJ] [PAYX] [PG] [USB] [UTX] [WMT]