By Brett Owens
If your mattress is a bit heavy on cash these days, youaEURtmre probably grinding your teeth every day as the markets tick higher. Should you be in the market? ShouldnaEURtmt the market pull back eventually ?
HereaEURtms a solution thataEURtmll get your aEURoebuy and hopeaEUR friends out of your face: buy some dividend machines thataEURtmll pay you while the markets levitate and hold up just fine if we do see the dip weaEURtmre overdue for.
IaEURtmm talking specifically about three mighty aEURoepullback-proofaEUR dividends (yields up to 7.5%) perfect for the aEURoecliff-edgeaEUR market weaEURtmre seeing now. More on those in a moment.
Beware the aEURoeDumbaEUR Money
First, when I say aEURoecliff edge,aEUR IaEURtmm not kidding around.
As I just wrote in my Contrarian Income Report service , IaEURtmve recently grown wary of the marketaEURtms short-term outlookaEUR"and my unease goes well beyond first-level panic about the aEURoe inverted yield curve .aEUR
The real reason to be wary is simpler: the aEURoedumb moneyaEUR hasnaEURtmt been this confident of further market gains since January 2018! Dumb was dumber back then, because stocks promptly collapsed:
A A A A A A A A Source: Sundial Capital
(By the way, many individual investors would be categorized as aEURoedumb moneyaEUR because they get greedy when markets are hot and tend to buy high. ProfessionalsaEUR"and savvy contrarian income-seekers like usaEUR"on the other hand, smartly buy the dips.)
This does not mean weaEURtmre going to cash. We need to keep our income and our nest egg growing, so weaEURtmre going after what I call aEURoepullback-proofaEUR dividends.
These high-yield aEURoeunicornsaEUR have three weapons to deploy against the next market brushfire:
- BigaEUR"and growingaEUR"dividends. I like to see a stock throwing off a yield of at least 4% (double the current average S&P 500 payout), backstopped by explosive payout growth.
- Bargain valuations: For stocks and real estate investment trusts (REITs) , this means low price-to-free-cash-flow ( FCF ) ratios; for high-yield closed-end funds (CEFs) , weaEURtmre talking huge discounts to NAV (or market prices well below the value of the fundaEURtms portfolio).
- Rising sales to keep driving those dividends and gainsaEUR"no matter what.
WhataEURtms the endgame on stocks like these?
Simple: theyaEURtmll hold their own in a meltdown, and when markets rise, their attractive payouts and cheap prices nicely set them up to outperform.
3 aEURoePullback-ProofaEUR Dividend BuysaEUR"and 5 More Bonus Buys
With that, letaEURtms move on to the three aEURoepullback-proofaEUR plays I have for you now. Then IaEURtmll wrap by telling you about five aEURoebonusaEUR dividend payers hardwired to push back against the next crash. These five boast even bigger payoutsaEUR"IaEURtmm talking massive cash hits all the way up to 8.5%!
Put it all together and youaEURtmre actually getting a free aEURoe8-packaEUR of dividend-payers to protect and grow your nest egg here. LetaEURtms get going, starting with our three leadoff hitters:
Prudential: aEURoeCheap by any MeasureaEUR
The 21% surge from Prudential Financial ( PRU ) this year might make you think the easy money has been pocketed here. No way. Because this stock still ticks all three of our aEURoepullback-proofaEUR boxes.
For one, the insurer is cheap by any measure. Right now you can buy shares for 82% of book valueaEUR"or less than what PRU would sell for if it were broken up and sold off! WhataEURtms more, PRU trades at a silly two times free cash flow ! Downright insulting for a management team thataEURtms grown sales 52% in the last five fiscal years.
Then thereaEURtms the dividend, which yields a nice 4.1% now and is growing like a weed:
PRUaEURtms Supercharged Payout
If youaEURtmve been following my articles on Contrarian Outlook, you know IaEURtmve written before about a dividendaEURtms power to yank share prices higher as it grows.
PRU is a textbook example. As you can see above, the share price has jumped up to meet its payout over and overaEUR"until early 2018, that is, when the pair parted ways. ThataEURtms even more proof weaEURtmve got a nice buy window now, before the stock gaps back up.
Zoetis: A Classic Megatrend Stock
My aEURoeunofficialaEUR fourth requirement for a pullback-proof payout is a tie-in to a soaring megatrend . One of the biggest (and most overlooked)? The growing pile of cash weaEURtmre doling out on our furry pals.
Consider this: in 2009, total US pet spending clocked in at $45.5 billion. This year? An estimated $75.4 billionaEUR"a 66% rise in just a decade!
And Zoetis ( ZTS ), a maker of medicines for pets and livestock spun off from Pfizer ( PFE ) in 2013, is grabbing more than its share of that spending:
A Cash Machine
There are, however, a couple places where Zoetis does come up a bit short on our aEURoepullback-proofaEUR checklist.
LetaEURtms deal with those now.
First, the dividend looks lame at 0.7%. But thataEURtms because investors bid up the price with each hike, keeping the current yield the same (because you calculate yield by dividing the yearly payout into the share price).
But if youaEURtmd bought in early 2013, the yield on your original investment would already be up 200%, to 2.1%. Going hand in hand with that increase are managementaEURtms stock buybacks, which have propelled the shares to a very speedy triple.
Share Count Down, Share Price Up
Second, Zoetis seems pricey at 34 times free cash flow. But as you can see below, thataEURtms on the low end historicallyaEUR"another sign that nowaEURtms the time to move:
When Expensive Is Cheap
Finally, letaEURtms aEUR