Searching For Dividends With Big Price Upside

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September 20, 2018 5:58am NYSE:VIG

From Contrarian Outlook: If you’re not yet as rich as you hoped you’d be by now, don’t worry – we still have plenty of time to get you there.


And I’m not talking about investing your “growth capital” into risky fly-by-night names like Tesla (TSLA) and Snap (SNAP).

We can scale our money more securely – but just as spectacularly – by purchasing sound dividend payers that happen to be growing their payouts rapidly. Here’s why.

The Most Lucrative Way Shareholders Get Paid

There are three – and only three – ways a company’s stock can pay us:

  1. A cash dividend.
  2. A dividend hike.
  3. By repurchasing its own shares.

Everyone loves the dividend, but investors usually don’t give enough love to the dividend hike. Not only do these raises increase the yield on your initial capital, but also they often are reflected in a price increase for the stock.

For example, if a stock pays a 3% current yield and then hikes its payout by 10%, it’s unlikely that its stock price will stagnate for long. Investors will see the new 3.3% yield, and buy more shares.

They’ll drive the price up, and the yield back down – eventually towards 3%. This is why your favorite dividend “aristocrat” – a company everyone knows and has paid dividends forever – never pays a high current yield. Its stock price rises too fast!

If you don’t believe me, consider 3M (MMM), a “stodgy” company with a ho-hum 2.6% yield. So once inflation bites, you’re left with almost no actual income!

But don’t forget that 3M is a charter member of the Dividend Aristocrats, having hiked its payout for 60 straight years. The connection between its rising dividend and its rising share price is unmistakable.

Check out how the payout drives up the share price at almost exactly the same rate over just about any time period you can imagine, starting with 3 years:

Dividend Up 33%, Shares Up 36%

And then 5 years:

Dividend Up 114%, Shares Up 109%

10 years:

Dividend Up 172%, Shares Up 173%

Since share prices move higher with their payouts, there’s a simple way to maximize our returns: Buy the dividends that are growing the fastest.

The Path to Fast 162% Gains From Safe Blue Chips

Have you always wanted to buy a safe blue chip stock like Coca-Cola (KO) and get rich from it like Warren Buffett?

It’s doable. But most investors “live in the past” and fixate on dividend track records rather than a payout’s forward prospects. And looking ahead is the key to yearly gains of 12%, 27.1% or even 54% or more with blue chip stocks.

(Yes, that’s no exaggeration. It is possible to make 54% annualized gains on a safe blue chip stock. I’ll share an example in a moment.)

Let’s first consider the case of Coke, which achieved its dividend royalty status in 1987 (its 25th straight year with a dividend hike). The firm hit its coronation with a head of steam, rewarding investors with a 362% payout hike in just five years (from 1986 to 1991). Its stock price raced to keep up with its dividend, rising 234% over the same time period:

Great Dividend Growth, Great Returns

It didn’t really matter if you bought shares before or after the company was officially a dividend aristocrat. The driving factor for profits was the dividend’s velocity – it was moving higher quickly, so its stock price followed.

Fast forward to the last five years, and we see that Coke’s youthful exuberance has slowed considerably. The firm still hikes its payout every year, but it’s a slower climb – totaling 45% over the past five years. Which means its stock price merely plods along too (+25% in five years):

Average Dividend Growth, Average Returns

Why is Coke’s dividend slowing down? Simple – just look at the top line.

Shrinking Business is Bad for Payouts

It sounds obvious, but income investors often wade so deep into the dividend weeds that they ignore obvious cues – such as shrinking sales.

Let’s add Coke’s top line into the last chart, and we’ll see that the fact that the payout is growing at all is an act of financial wizardry:

Shrinking Sales Slow the Dividend

Coke’s top line has shrunk by 22% over the last five years. Which makes its dividend growth quite the feat!

Contrast this with the 1986 to 1991 period, when the company was younger and still growing. It boosted its sales by 30% over that time period.

Of course it’s possible to grow payouts faster than profits and sales. In fact, this is what often happens with dividend payers. But even the most gifted managers can only squeeze so much in payouts from a shrinking pie. It’s better to focus on businesses with the winds at their backs.

And That Can Include Spry Blue Chips, Too

Two-and-a-half years ago I told my Hidden Yields subscribers to buy Boeing (BA) because:

  • Its business was booming,
  • Its stock was quite cheap with respect to cash flow, and most importantly
  • Management was plowing profits into payout growth.

Boeing wasn’t a dividend aristocrat like Coke. But it was a much better buy. Here was the tale of the tape in December 2015 (pay special attention to the last column, because it’s the most important):

Boeing vs. Coke (December 2015)

If you want to make real money with stocks, you should always put your money with the faster dividend grower. Boeing was no exception – its two massive dividend raises in the last two years have sent the stock soaring to 150% total returns:

Boeing Soars With Its Payout

Our secret, as usual, is we purchased the payout that was growing the fastest. We enjoyed a 57% cumulative “raise” from Boeing, which in turn rocketed its stock price higher.

Since share prices move higher with their payouts, there’s a simple way to maximize our returns: Buy the dividends that are growing the fastest.

7 Dividend Growers to Buy Now (for 162%+ Upside)

How much money should you allocate to dividend growth?

As you can see – as much as possible. This strategy is such a “slam dunk” for investing returns that there’s no reason to collect more current yields than you need right now. If you can “forego” some amount of income today, I would encourage you to consider investing that capital into dividend growers.

It’s a simple three-step process:

Step 1. You invest a set amount of money into one of these “hidden yield” stocks and immediately start getting regular returns on the order of 3%, 4%, or maybe more.

That alone is better than you can get from just about any other conservative investment right now.

Step 2. Over time, your dividend payments go up so you’re eventually earning 8%, 9%, or 10% a year on your original investment.

That should not only keep pace with inflation or rising interest rates, it should stay ahead of them.

Step 3. As your income is rising, other investors are also bidding up the price of your shares to keep pace with the increasing yields.

This combination of rising dividends and capital appreciation is what gives you the potential to earn 12% or more on average with almost no effort or active investing at all.

Which “hidden yield” stocks should you buy today? Well you know me – I’ve got seven best buys that should safely double your money every three to five years.

It’s a simple formula – their dividends are doubling every three to five years, which means their prices will rise in tandem. At the same time, we’ll collect their dividend payments today and enjoy an even higher income stream tomorrow.

This dividend growth strategy has produced amazing 27.1% annualized returns for my Hidden Yields subscribers since inception. In two-plus years, we’ve crushed the broader market (the S&P 500 returned 16.1% over the same time period.)

If you achieve returns of 27.1%, you’ll double your money in less than three years. So if you haven’t been following this strategy, why not? The best time to get started is right now – before the seven dividend growers I mentioned begin to move. Click here and I’ll share their names, tickers and buy prices with you right now.

The Vanguard Dividend Appreciation ETF (VIG) was unchanged in premarket trading Thursday. Year-to-date, VIG has gained 9.59%, versus a 9.57% rise in the benchmark S&P 500 index during the same period.

VIG currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #5 of 150 ETFs in the Large Cap Blend ETFs category.


This article is brought to you courtesy of Contrarian Outlook.


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