This single chart (from Yardeni Research) reveals the secret to 55.8% dividend yields:
The Power of Dividend Growth
Source: Yardeni Research
What are we looking at here?
Simply this: if you’d invested in the average S&P 500 stock back in 1970, you’d be yielding 55.8% on your original buy today. (And in just a few minutes, I’ll reveal 5 stocks whose strong payout growth will get you there a lot faster than that.)
Even if you didn’t buy in till 1990, you’d still be yielding a hefty 14.6% today.
And I know I don’t have to tell you that discovering a stock with a safe 14.6% current dividend yield is a lot like the hunt for Captain Ahab’s white whale.
Usually you have to roll the dice on a basket case like Frontier Communications (FTR) to get a payout like that.
The telecom operator, which I’ve warned you about more than once, boasts a ridiculous 32.3% yield that’s a spring-loaded trap if I ever saw one.
Because that yield stems entirely from an 85% year-to-date drop in FTR’s share price (remember, you calculate yield by dividing the annual dividend payout into the current share price). And with the massive debt the company’s carrying (more than 30 times FTR’s market cap!), that stock price could easily go to zero.
The One Safe Way to Get a 55.8% Dividend
Which is where the chart I showed you off the top comes in. Because it says one thing loud and clear: when it comes to investing for the long haul, it’s dividend growth you need to focus on.
Consider Amgen (AMGN), a biotech stock I pounded the table on in April (and again in November). Over the last 6 years, the company’s dividend payouts have exploded.
A Surging Dividend
So even though the stock yields 3.0% now, you’d be pocketing 9.96% on your original buy today if you’d bought as recently as 2011, thanks to that soaring payout.
And Amgen has all the tools it needs to keep growing its dividend faster than the market average, getting you to our 55.8% yield much more quickly than the 47 years it’s taken the typical S&P 500 name to do so.
For one, Amgen’s payout is backed by rising earnings (as I’ll show you below).
Its profits are also set for soar in the future thanks to its healthy pipeline, which boasts 11 treatments in Phase III trials for conditions like heart failure and Alzheimer’s. Amgen also spent a high 20.7% of sales on R&D in the last 12 months.
The topper: its payout ratio (the percentage of earnings paid out as dividends) is just 40%, well below the 50% “safe zone” I demand in a dividend payer.
Snapshot of a Healthy Dividend
Lastly, Amgen is sitting on a $41 billion cash hoard, which it can pour into R&D or make major acquisitions.
2018: “The Year of Dividend Growth”
The next 12 months will be perfect for buying dividend growers, according to Howard Silverblatt, who keeps tabs on dividends over at S&P/Dow Jones Indices.
He recently said that the S&P 500 is on track to crank up dividends by 6% to 8% this year, and possibly double digits due to the corporate tax cut coming in with the new GOP tax plan.
I think he’s right—and when you consider that the S&P 500 boasts a low average payout ratio of 43%, companies have lots of fuel to light a fire under their payouts.
But we can do much better than buying an index fund like the SPDR S&P 500 ETF (SPY) and calling it a day.
Instead, we’ll set ourselves up to clobber the market by targeting companies with faster-than-average payout growth fueled by safe payout ratios and rising earnings—just like we did with Amgen.
To do it, we’re going to add 4 more stout dividend growers to our list as we enter “the year of dividend growth.”
They are: Cummins (CMI), Legg Mason (LM), NextEra Energy (NEE) and Penske Automotive Group (PAG); I just named Penske as one of 4 cheap dividend growth stocks to buy now and hold forever.
We’ll start by stacking them up using the 3 main factors we’ve touched on so far: dividend growth, current yield and payout ratio. (We’ll include Amgen here too, just so you can see how it compares):
An Instant 5-Stock Dividend Growth Portfolio
Right away, we can see that all 5 stocks top the average S&P 500 name in dividend growth (with each one well ahead Silverblatt’s 2018 forecast); average yield (2.5%, ahead of the index average of 1.8%); and payout ratio (all 5 are below the S&P 500’s 43%).
All 5 also have long histories of earnings per share (EPS) growth, with almost all doubling up their EPS since the financial crisis—and Penske, Cummins and Amgen doing a lot better than that:
Strong Earnings Growth
You can expect that growth to continue, as Wall Street has all 5 of these stocks pegged for higher EPS in their next calendar or fiscal year.
Finally, let’s talk valuation: none of these stocks has a P/E ratio above 17.8, and their average P/E is just 15.8! That’s way lower than the market’s nosebleed 25—and it gives us some nice upside potential (and downside protection), too.
— Brett Owens
To see what aggressive dividend growth can really do for your portfolio, let’s swing back to NextEra for a minute.
Take a look at the 5-year return the company’s shareholders pocketed including dividends (in the orange line below) vs. without:
Dividend Growth Drives a 36% Bigger Return!
That’s a major difference … and you’ll see it again and again if you look at the same chart for each of the 4 stocks other I named above.
But what if I told you I’ve found a way to tap into even stronger dividend growth than you’ll get from these 5 companies, with even greater safety, to boot?
All we have to do is shift our focus over to the 7 ultra-conservative stocks I want to show you now. I handpicked each one to hand you 12% in safe, annual returns for life.
Because that’s more than enough to double your portfolio in 6 years and give you 3 times more income than experts say you need in retirement.
What stocks am I talking about?
Picks like these:
- A stock that has already boosted its dividend payments more than 800% over the past 4 years and has at least another decade of double-digit growth left in the tank!
- A “double threat” income-and-growth stock that rose more than 252% the last time it was anywhere near as cheap as it is right now!
- A 9%-plus payer that raises its dividend more than once a year—and will double its payout by 2021 at its current pace!
These 7 stocks are the perfect retirement buys because they give you the best aspects of numerous types of investment strategies—income, growth and even nest-egg protection!
And as I said before, they deliver 3 times more income than most retirement experts say you need!
Let me show you the way to double-digit returns you can depend on for life. Click here and I’ll GIVE you the names, tickers, buy prices and my complete analysis of these 7 sturdy dividend growers today!
Source: Contrarian Outlook