Think it’s impossible to bag 852% gains and a 6% dividend in one stock?
It’s not only possible—it’s easy! I’m going to give you the three (and only three) simple steps you need to do it yourself today.
Let’s start with the one thing we’re not going to do: follow the “buy and hope” crowd into a fanboy (and girl) favorite like Netflix (NFLX).
In search of big gains, first-level investors crowd into a non-dividend-payer like Netflix, simply because it’s delivered stunning growth in the past. And they almost always dive in when the stock is at the height of its popularity, like last July, when NFLX was scraping all-time highs.
By this point, our “buy and hopers” give up, tear up their lottery tickets and lock in a double-digit loss.
There’s a better way—and it comes back to one word: dividends.
“The Biggest Investing Mistake You Can Make”
I can almost guarantee that your friends aren’t paying much attention to their portfolio’s dividend stream these days.
It’s easy to see why: with the average S&P 500 stock yielding a pathetic 1.8%, it’s tough for the “buy and hope” crowd to get worked up about dividends. Especially when they’re distracted by the quick gains promised by the likes of Netflix, Tesla (TSLA) and, heaven forbid, pot stocks and cryptocurrencies.
But ignoring dividends is, hands down, the biggest investing mistake you can make.
The truth is, a dividend is crucial, especially in this twitchy market. And as I’ll show you shortly, a stock’s current dividend yield doesn’t mean as much as everyone thinks.
3 Keys to Big Gains (and Dividends) in Any Market
In my Contrarian Income Report service, I stress three key ways a stock can reward shareholders. Find a company that’s doing even one of them and you’ve already got a leg up on the buy-and-hope crowd.
Find one that’s doing all three and you’ve hit the sweet spot—a stock that can power your income (and gains) in any market.
Here they are:
- Paying a dividend today.
- Raising the dividend tomorrow (which lifts the share price right along with the payout, as I’ll show you shortly), and …
- Repurchasing shares: Buybacks leave fewer shares outstanding on which the company must pay dividends, driving fatter payout raises in the future. Fewer shares also mean higher earnings per share—another clear share-price driver.
To show you the profit-making power of doing all three, let’s look at a stock you undoubtedly know well: Visa (V).
The payment giant ticks all three of our boxes: starting with paying a dividend now (though the current yield of 0.6% seems lame, it’s anything but—I’ll explain shortly).
852% Dividend Growth
When it comes to growing dividends, few companies can match Visa: its payout has exploded 852% since the financial crisis.
That massive payout hike is great on its own, but there’s more here than meets the eye.
How a 0.6% Yield Became a 6% Cash Gusher
For one, payout hikes increase our yield on cost, which is far more important from an income standpoint than the stock’s current yield (the one you see on Google Finance or Yahoo Finance—and the one everyone obsesses over).
Because while Visa’s current yield is just 0.6%, its explosive dividend growth means you’d be pocketing a fat 6.0% yield on a buy made just 10 years ago!
That’s because you calculate yield on cost by dividing your current annual dividend rate—$1.00 in Visa’s case—by your per-share purchase price (around $16.60 a decade ago, just 10% of the $165 a Visa share sells for now).
But this “true” 6% yield is hidden, because Visa’s share price moved up with its dividend (more on that in a moment), keeping the current yield roughly the same.
I think you’ll agree that our yield on cost is what really matters for your retirement income stream.
There’s more, though.
Because what almost no one pays attention to is the crystal-clear connection between dividend hikes and rising share prices.
There’s no way you can’t see the pattern here! Name the crisis: the panic over rising rates, the Chinese stock-market meltdown of early 2016 and, lately, (wildly overdone) trade war fears.
None of it matters: Visa’s stock always “snaps back” to its rising dividend. And this pattern is far from unique to the Visa: I’ve seen it happen over and over.
If that’s not a proven pattern, I don’t know what is. And Visa is doing one more thing that will keep this “dividend up, share price up” cycle going for years to come.
Buybacks: The Straw That Stirs the Drink
Finally, let’s talk about the “invisible hand” pushing up Visa’s dividend and share-price growth: share buybacks.
To see how potent buybacks can be, let’s add the number of shares outstanding to our chart showing the company’s dividend and share-price growth. We’ll start when Visa started wisely buying back its own beaten-up stock in November 2009, in the wake of the financial crisis.
Visa has effectively bought up 22% of itself in the last decade or so, triggering this virtuous cycle. Fewer shares mean higher dividends on the stocks that remain—and that, in turn, powers the share-price rise.
Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, click here for his latest report How To Live Off $500,000 Forever: 9 Diversified Plays For 7%+ Income.
Disclosure: none
