By Brett Owens
If you want to clobber the stock market aEUR" and double your money every two or three years aEUR" then buying companies with accelerating dividends is an absolute must.
And IaEURtmve got good news for you: thereaEURtms never been a better time to buy them.
ThataEURtms because dividend growth is on a sugar high: research firm IHS Markit recently predicted that global dividends would jump 10% this yearaEUR"a new record.
WhataEURtms more, if youaEURtmre looking to grow your nest egg fast, youaEURtmre in luck, because accelerating dividends are the beating heart of my personal 3-step system for banking 12% annual returns for life.
IaEURtmll tell you all about this safe, simple approach, and why that 12% number is vital, in just a moment. First, letaEURtms talk about why IaEURtmm so focused on an accelerating payout.
Getting a fatter income stream is an obvious reason, but itaEURtms just the start. Because as I wrote in December , a rising payout acts like a lever on a companyaEURtms share price, prying it higher and higher with every single dividend hike.
The pattern is plain as day in this chart of NextEra Energy ( NEE ), a supposedly aEURoeboringaEUR utility thataEURtms been quietly sending its shareholders bigger and bigger dividend checks over the past five years.
Look at how NEEaEURtms stock has jumped with each and every dividend hike NextEra has deliveredaEUR"and how its latest monster payout hikes have magnified those gains:
Bigger Dividend Hike, Fatter Share Price Pop
NextEra just delivered a 13% dividend hike earlier this year. But you and I can do even better .
WeaEURtmll start by looking at each part of my 3-step aEURoeaccelerating dividend strategy,aEUR designed to uncover the stocks that will deliver that 12% annual return weaEURtmre craving.
Why 12%? ThataEURtms because, as I show you in my in-depth investment report, aEURoe The Simple (and Safe) Way to Earn 12% Every Year From Stocks ,aEUR itaEURtms enough to double your portfolio every 6 years and throw off a dividend stream thataEURtms 3 times larger than the experts say you need in retirement.
ThataEURtms more than good enough for a risk-averse dividend fan like me. So letaEURtms get going, starting with…
Step 1: Build Your Own High Yields
Plenty of dividend hounds simply run out and find the stock paying a high current dividend yield (6%, 7%, 8% and more) and call it a day.
But that can be a recipe for disaster.
Take telecom provider CenturyLink ( CTL ), which is getting a lot of headlines these days because of its ridiculous 12.3% yield. But thataEURtms entirely because, as I told you back in November , the shares have been walloped (as you calculate dividend yield by dividing the annual payout into the current share price). Check out how the dividend yield has risen as the share price has dropped through the floor.
CTL: The aEURoeDividend TrapaEUR Is Set
This is a textbook example of why youaEURtmre often safer with a lower-yielding stock that grows the yield on your initial buy over time.
LetaEURtms again consider NextEra for a moment, if youaEURtmd bought that stock five years ago, youaEURtmd be pocketing a nice 5.5% on your original buy today, thanks to the companyaEURtms accelerating payouts. ThataEURtms more than double NEEaEURtms current yield of 2.8%.
Or better yet, you could go with a stock like Lam Research ( LRCX ),which dropped a fat 120% dividend hike on shareholders in March and has plenty of room for even bigger raises, thanks to another misunderstood measure (2, actually) IaEURtmll show you now.
Step 2: Know Your Ratios
If youaEURtmve been buying dividend stocks for a while, you probably know about the payout ratio. You calculate it by dividing the total amount of dividends paid out by the companyaEURtms last 12 months of net income.
If the result comes out to, say, 50% or less, youaEURtmve got a safe dividend thataEURtms likely to grow. As you get climb closer to 100%, the noose around the payout gets tighter.
Problem is, earnings are an accounting creation and can be easily manipulated to overstate cash flow generation. But they can, at times, understate it, too.
Right now, for example, Lam has a net incomeaEUR"based payout ratio of 15.9%. That sounds great, but it doesnaEURtmt tell the whole story, because the companyaEURtms free cash flow payout ratio clocks in at a minuscule 12.3%!
Why the difference?
Because free cash flow ( FCF ) tells you how much cash a company is generating once itaEURtms paid the cost of maintaining and growing its business. You calculate it by subtracting capital expenditures from cash flow from operating activities.
The bottom line is that FCF is a much better snapshot of how much cash a company is truly making. And while Lam gets a fantastic grade on both ratios, its higher net incomeaEUR"based payout ratio masks its even-higher dividend-growing power. And thataEURtms why I expect more massive payout hikes out of this stock for years to come.
By the way, this is precisely the opposite of the almost certain payout cut our long-suffering CenturyLink investors can expect. That companyaEURtms FCF payout ratio is 128%aEUR"so itaEURtms paying out way more in dividends than it generates in FCF.
Step 3: Buy Growth Instead of aEURoeBond ProxiesaEUR
Lazy financial writers like to say that higher bond yields will hurt dividend stocks. This blanket statement may sound reasonable, but itaEURtmll cost you money if you take it at face value.
Pundits have called sleepy dividend stocks like General Mills ( GIS ) aEURoebond proxiesaEUR in recent times. GIS has paid 3% (more or less) over the last three years. That compared favorably with the 10-year Treasury note, which paid 2% (more or less) over that time period.
So, the story goes, investors had been buying stocks like GIS instead of safe bonds like Treasuries to scrape an extra 1% or so. But with Treasuries rallying to 3%, these same investors have aEURoedemandedaEUR a higher yield from GIS. It now pays 4.6%, which means its stock price has dropped as the TreasuryaEURtms price has risen:
Bonds and Their Proxies: Like Oil and Water
Who the heck was buying GIS for an extra stinking percent per year? Not contrarian income seekers.
Green Giant peas? Cheerios? Seriously? This company dominates food staples of yesterday . GIS is behind the curve on every current food trend. The numbers donaEURtmt lie aEUR" itaEURtms been evident in the firmaEURtms slowing dividend growth and falling revenue:
Beware the Slowing Dividend
What does GIS have to do with dividend growth tomorrow ? Not much.
Remember, share prices tend to move higher with their payouts. So thereaEURtms a simple way to maximize our returns and hedge against higher interest rates: Buy the dividends that are growing the fastest .
LetaEURtms take internet landlord CoreSite (COR) . Its dividend has aEURoelappedaEUR GIS over the last three years. No matter how much trash the bond market talks, it will never catch this runaway yield:
When Hidden Yields subscribers bought CoreSite on my recommendation in March 2016, it paid a $0.53 quarterly dividend. That was a 3.1% starting yield for us based on our purchase price.
In less than two years, the firm has nearly doubled its dividend. It now pays $0.98 per quarter, which means weaEURtmre earning more than 5.8% on our initial capital .
Plus as our income stream was rising, other investors were bidding up the price of our shares to keep pace with the increasing yields.
This combination of rising dividends and capital appreciation is what earned us73%total returns in just 26 months aEUR" with no active trading beyond our initial purchase.
CoreSite Cooks the Bond Proxies
And there are plenty of dividend growth stocks like CoreSite ready to run 70%, 80% and even 100%+ higher in the year or two ahead. Seven are particularly compelling buys today, to be specific!
7 More Buys to Double Your Nest Egg Fast
Of course, you can use the 3 steps I just showed you yourself, by using an online stock screener and poring over corporate earnings reports on your own.
But it can take hours to run an analysis like that on just a handful of stocks (and of course, youaEURtmll also want to take a peek at dividend, earnings and FCF history, as well as valuation measures like price to book value and price to free cash flow).
Plenty of folks (myself included) love the challenge! But if youaEURtmd rather just cut to the chase and start pocketing your 12% annual return for life now, IaEURtmve got you covered there, too .
Because my team and I have discovered 7 stocks set to deliver that steady 12% yearly return. All 7 boast an explosive mix of accelerating dividends, timely buybacks, strong current dividends and absurdly low valuations that just canaEURtmt last.
HereaEURtms a glance at 3 of the 7 dividend-growth plays IaEURtmll reveal when you click here :
- The US company thataEURtms cashing in on surging Chinese water demand. This is one of the most boring businesses youaEURtmll findaEUR"making water heatersaEUR"but its dividend hikes are anything but: the payout has soared 167% in just 4 years! And there are far bigger payout hikes to come!
- The 800% Dividend Grower. This unsung company has boosted its dividend eightfold since a new management team took over just 5 years ago! This stock is a complete no-brainer for anyone looking to get bigger and bigger dividend checks from here out.
- And a aEURoedouble threataEUR income-and-growth stock that rose more than 250% the last time it was anywhere near as cheap as it is now!
All you have to do is CLICK HERE NOW and IaEURtmll give you all the research I have (in plain, easy-to-follow English) on these 7 bargain aEURoedividend accelerators,aEUR including their names, ticker symbols, buy-under prices and more .