HereaEURtms the funny thing about the inverted-yield-curve talk weaEURtmre getting hit with lately: most people are looking at the wrong numbers!
IaEURtmm going to show you how we savvy dividend investors can jump on this mistake to bag total returns of 69% and upaEUR"fast. First, hereaEURtms what I mean when I say investors are looking at the wrong numbers.
These days, all we hear about is the yield-curve inversion weaEURtmve seen a couple times over the last few weeks, where the yield on the 10-year Treasury note fell below that of the 2-year.
ItaEURtms certainly worth paying attention to, because the inversion of the 10- and 2-year Treasury yields does predict recessionsaEUR"though the timeline tends to be around 18 months and maybe even longer than that.
ThataEURtms far too long for you to sit on a mattress loaded with cash and miss out on gains (and dividends!).
These aEURoeInvertedaEUR Yields Delivered a 310% Return
This is where the aEURoeotheraEUR inversion I want to show you today comes in. IaEURtmm talking about the aEURoeinversionaEUR between the yield on the 10-year Treasury note and the yield on the average S&P 500 stock.
And that ignored indicator is telling us one thing: buy! Especially if youaEURtmre after stocks with fast-growing dividends. Check out this chart:
Cash in on the aEURoeOtheraEUR Yield Inversion
WeaEURtmre looking at the yield on the 10-year (blue line) and the yield on the average S&P 500 stock (orange line) since the financial crisis. And you can see that, from time to time, the blue line wanders below the orange line.
If youaEURtmd bought in any of those periods (during the 2008 financial crisis, in 2012, 2013 and 2016), youaEURtmd be sitting on big gains today.
Say you bought the benchmark SPDR S&P 500 ETF (SPY) stocks at our first aEURoeinversion,aEUR in November 2008. YouaEURtmd now be up 310% (including dividends). Heck, even if you held off till the start of our last aEURoeinversion,aEUR in January 2016, youaEURtmd have bagged a nice 67% total return in about three-and-a-half years.
As you can see at the end of that chart, the aEURoeinversionaEUR has swung our way again, with the 10-yearaEURtms yield at a three-year lowaEUR"positioning stocks for another leg up.
How WeaEURtmll Play This Unusual Indicator for Big Gains (and Dividends)
The logic behind this indicator is simple: as the yield on the 10-year falls, investors go hunting for higher income, which leads them to dividend stocks. Then, as they buy, they drive stock prices up and dividend yields down.
And remember, this happens even with the pathetic 2% (or less) dividend the typical big-cap name dribbles out! YouaEURtmll do better if you grab a stock whose payout is growing at an accelerating pace.
ThataEURtms because these payout hikes are a shiny lure to investors looking for income. As they dive in, they drive these stocksaEURtm prices up, tick for tick, with the dividend.
How Our aEURoeInvertedaEUR Yields Ignited a Fast 69% GainA
To give you a sense of the gains available, consider the last time our yields aEURoeflipped,aEUR back in mid-January 2016. I pounced, recommending CoreSite Realty (COR), a real estate investment trust (REIT) that owns data centers, in the March issue of my Hidden Yields service, which IaEURtmd launched a few months earlier.
It was the perfect bait: even though CoreSite only yielded 2.6% when I recommended it, its dividend had exploded 308% in the a little over five years since the REITaEURtms IPO.
In other words, due to that payout growth, folks who bought COR when it started trading in September 2010 were already yielding 12.9% on their money!
A Runaway Dividend
Our aEURoeinvertedaEUR yield buy paid off: when we exited our position just under three years later, CoreSiteaEURtms dividend had soared another 108%, and weaEURtmd bagged 68.9% in gains and dividends, crushing the market in the process.
Income-Seekers Snap Up COR
And we werenaEURtmt done yet.
This aEURoeInverted Yield CurveaEUR Buy Tripled the MarketaEURtms Return
By July 2016, the gap between the yield on the 10-year fell further below the typical S&P 500 yield than it had in years. That summer, the average S&P 500 stock looked like a dividend-investoraEURtms dream compared to the 10-year, with a 2.1% yield, compared to the long bondaEURtms 1.4%.
(Even though 2.1% only gets you $21K in dividends a year on a million bucksaEUR"less than your local Starbucks barista makes aEUR
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.