Markets
FR

The Dividend Strategy for Safe Returns Up to 437%

By Brett Owens

Just because youaEURtmre a dividend investor doesnaEURtmt mean youaEURtmre fated to aEURoegrind outaEUR income 3% and 4% at a time. With a slight change to your current (dare I say pedestrian?) strategy, you can keep your dividends and enjoy 81% to 437% price upside or more.

These types of life-changing returns are easily achievable within a few years. You just need to employ the aEURoeultimate contrarian dividend strategyaEUR aEUR" and buy select born again payouts.

The strategy is two-fold:

  1. Find the stocks with rock-bottom sentiment around them, and
  2. Only buy them when a cheery outlook is guaranteed.

First, Find Firms Burdened With This aEURoeStigmaaEUR

Contrarian investing works because it capitalizes on over-negative sentiment to find value. In the income world, this means buying when yields are abnormally high aEUR" and prices abnormally low aEUR" thanks to popular yet incorrect beliefs.

Corporate bankruptcies can be particularly profitable events for strong-willed because they extinguish any and all hope.

And hereaEURtms the best part aEUR" we donaEURtmt even have to invest during the depths of despair. You and I can wait a few years until a successful turnaround is basically guaranteed. And we can still bank triple-digit returns then, with less risk than a typical stock purchase.

All thanks to the shame that lingers longer than it should.

While firms may emerge from bankruptcy in a matter of months, the associated stigma can last many years. An academic study published in the Journal of Finance studied the stock returns of 131 firms emerging from Chapter 11 bankruptcy aEUR" and found they outperformed the broader market over the next 200 days by a large margin.

Another study published by the International Journal of Business and Social Research studied 59 companies filing for Chapter 11 protection. It also found that these stocks beat the market handily over the next 250 days.

ThereaEURtms nothing special about the 200 or 250 day threshold the academics picked. The stocks they studied crushed the market for the simple reason that they were aEURoetoo cheapaEUR thanks to the bankruptcy black eye they carried.

But IaEURtmm risk averse aEUR" and IaEURtmm not interested in buying firms as they emerge from bankruptcy. I only want to buy stocks in companies that are going to make it, so that I can hold them for many years. I also want them to pay me a dividend.

ThataEURtms why I employ this income-twist on bankruptcy buying. It helps me avoid the losers and bank safe double and triple-digit returns aEUR" while collecting yield to boot. (And by the way, it works whether or not the firm officially filed for bankruptcy aEUR" or simply got in enough trouble that it had to eliminate its payout.)

Next, We Buy the aEURoeReborn DividendaEUR

How do we know when a turnaround is working?

Simple aEUR" management reinitiates the dividend.

LetaEURtms take the case of legendary REIT (real estate investment trust) CEO Bruce Duncan, who inherited a mess at First Industrial Realty Trust ( FR ) . His first order of business when he took the helm in 2009 was to eliminate the firmaEURtms dividend to preserve cash and pay off debt!

First Industrial leases distribution centers. And Bruce, as he described it, went aEURoeback to basics.aEUR He had his team focus on increasing occupancy across his current facilities. Then, he started raising the rent on his tenants.

HowaEURtmd investors know for sure that BruceaEURtms strategy was working? The clear signal came in 2013, when he reinitiated the firmaEURtms dividend. Investors who bought then have enjoyed 82% returns in the four years since:

The aEURoeAll ClearaEUR Signal Precedes an 82% Gain

Theme park provider similarly found itself in trouble in 2009, and filed for bankruptcy. The firm cleared its debt load, brought in a new CEO, and soon reinitiated its dividend in 2011.

Theme park provider Six Flags Entertainment ( SIX ) similarly found itself in trouble in 2009, and filed for bankruptcy. The firm cleared its debt load, brought in a new CEO, and soon reinitiated its dividend in 2011.

The result? 437% total returns for investors!

Every turnaround story (and bankruptcy case) is a separate situation. HereaEURtms what to look for when considering a reborn dividend:

  1. A new CEO . In my experience, a new leader (and new way of thinking) is essential.
  2. Low or no debt . Most distressed firms simply owe too much money.
  3. A new dividend . Preferably one that is starting on an upward trajectory.

As you can see in our examples, you could have bought these stocks anytime after their dividends reappeared and done quite well.

How to Bank 25.3% Yearly: Buy These 7 Dividend Growers

How much money should you allocate to dividend growth - which includes the aEURoerebornaEUR variety?

As you can see aEUR" as much as possible. This strategy is such a aEURoeslam dunkaEUR for investing returns that thereaEURtms no reason to collect more current yields than you need right now. If you can aEURoeforegoaEUR some amount of income today, I would encourage you to consider investing that capital into dividend growers.

ItaEURtms a simple three-step process:

Step 1. You invest a set amount of money into one of these aEURoehidden yieldaEUR 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 youaEURtmre 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 20% or more on average with almost no effort or active investing at all.

Which aEURoehidden yieldaEUR stocks should you buy today? Well you know me aEUR" IaEURtmve got seven best buys that should safely double your money every three to five years .

ItaEURtms a simple formula aEUR" their dividends are doubling every three to five years, which means their prices will rise in tandem. At the same time, weaEURtmll collect their dividend payments today and enjoy an even higher income stream tomorrow .

This dividend growth strategy has produced amazing 25.3% annualized returns for my Hidden Yields subscribers since inception . In two-plus years, weaEURtmve crushed the broader market (the S&P 500 returned 15.9% over the same time period.)

If you achieve returns of 25.3%, youaEURtmll double your money in less than three years. So if you havenaEURtmt been following this strategy, why not? The best time to get started is right now aEUR" before the seven dividend growers I mentioned begin to move. Click here and IaEURtmll share their names, tickers and buy prices with you right now .

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


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

In This Story

FR SIX

Other Topics

Options

Latest Markets Videos