A Rich Quant’s 61 Favorite Dividend Growers for 2019

Shutterstock photo

By Brett Owens

Eric Ervin was making his wealthy client so much money that he suggested: aEURoeHey, why donaEURtmt you just quit your job?aEUR

The investor saw the opportunity to scale EricaEURtms aEURoesecret strategyaEUR aEUR" and he wanted to help fund a new venture to bring this brilliance to the financial masses!

Both guys knew the power of dividend growth investing. But EricaEURtms second-level insight is what made them both a boatload of cash. He figured out a way to bet purely on the higher payouts aEUR" as close to a aEURoesure thingaEUR as youaEURtmll ever see in stocks. HereaEURtms what I mean.

Blue chip stocks tend to raise their dividends every year. Even if itaEURtms a token increase, it keeps shareholders happy. S&P 500 dividend growth is the reason that index investing aEURoeworks.aEUR Its collective payouts are almost always rising and they pull 500 share prices along with them:

This Orange Dividend Line Powers 500 Stock Prices

Problem is, traditionally thereaEURtms been no way to bet on the orange line above. YouaEURtmd have to buy the index and hope its price (blue line) appreciates in tandem. That might be OK if you have a multi-decade timeframe, but if you need your money in a few years then manic market plunges (like we saw in December) might derail your retirement hopes.

Well, Eric figured out that he could buy aEURoeswapsaEUR on S&P 500 dividend growth itself. This was an innovative way that he and his rich clients could bet on dividend growth only , without being exposed to price fluctuations.

He eventually launched the Reality Shares DIVS ETF ( DIVY ) in 2015 to bring this strategy to individual investors (and was kind enough to walk through the specifics with me on the phone at the time).

The genius of DIVY is that it capitalizes on the underappreciated annual tradition of dividend raises. For 43 of the last 46 years, S&P 500 companies have increased the total dividend payout. This results in steady gains that track payout growth rather than price action.

DIVYaEURtms aEURoeheartburnaEUR levels aEUR"price ups and downs that cause digestive difficulty - are closer to that of bond funds. HereaEURtms how its volatility (measured by standard deviation, a statistical measure of price fluctuation) stacks up with two bond funds (left side below) and the price of the S&P 500 itself (right side):

Dividend Growth Itself Causes Less Heartburn

So should we buy DIVY and call it a day? With S&P 500 growth projected to be 8% in 2019, itaEURtms not a bad idea. But Eric has a newer fund that should provide us with even more upside.

One Click for the 61 Best Dividend Growers in 2019

Since launching DIVY, Eric and his team created a five-tier rating system called DIVCON that provides a snapshot of dividend health for individual companies. It combines and weights seven factors (such as cash flow, earnings growth, and shareholder payouts) to provide a comprehensive snapshot of a companyaEURtms dividend health.

DIVCON 5 is the best bucket. It means the dividend is in good shape, and thereaEURtms a 97.4% likelihood that itaEURtmll be increased in the next year.

DIVCON 1 is the danger zone. It means the dividend is more likely to be cut than increased in the next 12 months.

Over the past 15 years, investors who would have traded off DIVCON ratings aEUR" buying the fives, and selling or shorting the ones, would have done quite well:

DIVCONaEURtms Dividend Prescience

By now you probably know that higher payouts drive stock prices up. But we canaEURtmt look in the rearview mirror to predict future dividend growth and stock returns. We need a leading indicator aEUR" like DIVCON.

And Eric is making outperformance easy for us individual investors. Thirteen months ago he launched the Reality Shares DIVCON Leaders Dividend ETF ( LEAD ) to buy DIVCONaEURtms top stocks and hold them for a year. Many of them boast dividend charts like these beautiful staircases:

Stairway to Payout Heaven

Everyone loves dividends, but dividend hikes are often underappreciated. Not only do they increase the yield on your initial capital, but they also reflected in a price increase for the stock.

LetaEURtms say a stock pays a 3% current yield and then hikes its payout by 10%. ItaEURtms unlikely that its stock price will stagnate for long. Investors will see the new 3.3% yield, and buy more shares. TheyaEURtmll drive the price up, and the yield back down aEUR" eventually towards 3%. This is why your favorite dividend aristocrat never pays a high current yield aEUR" its stock price rises too fast!

Heck, Visa ( V ) has never yielded even 1%! But that hasnaEURtmt stopped its stock from appreciating 892% over the last decade, thanks to a dividend that increased an equally amazing 852%:

Life Takes Visa (and its Dividend)

The LEAD ETF is a convenient way to get exposure to stocks that are aEURoeat-riskaEUR of becoming the next Visa thanks to rapid share price appreciation. With DIVCON looking ahead, you can use this fund to create a diversified portfolio of the 61 blue chip stocks most likely to raise their dividends over the next 12 months.

My #1 Pick From LEADaEURtms Screen

As Eric improved on the aEURoedumbaEUR yet effective dividend growth screen, we can further improve on his by cherry picking DIVCONaEURtms best. After all, he has to own 61 names so that his ETF has enough liquidity aEUR" but we individual investors can buy only the very best!

Texas Instruments ( TXN ) is a great example of an underappreciated stock weaEURtmve profited from in my Hidden Yields research service (+16.7% yearly returns while weaEURtmve owned it).

Since 2012, its share price (blue line below) as consistently lagged its payout (orange line below). Try as it might, TXN the stock (+358%) hasnaEURtmt been able to catch up with TXN the dividend (+464%):

TXNaEURtms Magnetic Dividend Drives 358% Stock Gains

Since dividends follow their share prices higher, we can make the most money by buying when these payouts are most likely to aEURoesnap higheraEUR towards their runaway dividend curves.

In other words, we buy the price dips when the dividend appears to be running away . Anyone who says you canaEURtmt time stocks hasnaEURtmt used this surefire strategy for buying shares ready to aEURoecatch upaEUR to their runaway payouts.

ItaEURtms simple:

  1. Plot a stock price versus its dividend,
  2. Look for a aEURoelagaEUR between the shares and the payout, and
  3. Buy any big lags you see.

And thanks to the Q4 pullback in stocks, we have plenty of great snapback candidates. IaEURtmll share my favorite pick with my Hidden Yields subscribers this Friday.

Its next dividend hike is likely to be huge, and will place the stock in serious aEURoesnap backaEUR territory. Which means the best time to buy it is today, before Wall Street wakes up. IaEURtmll be emailing my full analysis to my Hidden Yields subscribers this Friday aEUR" click here if youaEURtmd like to sign up to receive it.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Options
Referenced Symbols: DIVY , LEAD , V , TXN

More from BNK Invest


BNK Invest

BNK Invest

Market News, Investing

Research Brokers before you trade

Want to trade FX?