The “Extra Dividend” Payment That Could Save Your Portfolio

There’s no other way to put it. If you’re a dividend investor, chances are you have been duped…

As an experiment, I ran a simple stock screen. Out of 14,266 stocks and ADRs listed on U.S. exchanges, just 181 offer yields above 9%.

[ad#Google Adsense 336×280-IA]And most are questionable companies like over-the-counter stock Xstelos Holdings, which, incidentally, has lost 47% of its value over the past year.

That means 14,085 stocks pay less than 9%.

In other words, less than 1% of stocks are double-digit yielders today.

But that’s just the start…

Right now the average dividend yield of a given stock trading on U.S. exchanges is 2.2%.

That’s less than half of the historical average, which comes in at 4.45%.

See for yourself…

Where have all the dividends gone? While it wasn’t easy to find, months of research finally led to an answer.

Most investors aren’t being told about the two “extra” payment methods a handful of dividend-paying companies are using.

Unlike dividends, these extra payment methods are under the radar, buried in company financial statements. But find the right companies that pay them, and you could get returns up to three times higher than you could from dividends alone.

In the April 15 issue of Dividend Opportunities, I told you about one of these extra payment methods which I nicknamed “tax-free dividends.”

Today, I want to tell you about the other extra payment method that dividend-paying companies don’t tell you about. It’s one that could actually prevent an investor from taking heavy losses in the event of a market downturn.

Of all the stocks on the market, companies that give out this type of extra payment have some of the lowest statistical probabilities of collapse. Here’s why…

If you go back throughout history, what was the common link between all the great collapses — whether it was General Motors… the 2008 crash… or the Great Depression?

Debt.

Yes, there were other problems as well, but if you look at root causes, most of the companies that collapsed had colossal amounts of debt. General Motors, for example, racked up $100 billion in debt by the time it needed a bailout.

During tough economic times, a heavy debt burden can be crippling because bank lending dries up. Companies can’t raise the funding required to operate their business or pay off their existing loans.

That’s why you need to not only seek out companies that pay dividends, you also need to find the ones that are paying down debt.

You see, every time a company makes debt payment, it’s like an indirect payment to you. It frees up money that can later be spent in a number of ways.

For example, if a company reduced a $100 million debt to $10 million, no longer would it have to pay interest on the debt. Now it can spend that money on other things — like you, the shareholder — in the form of dividends or share buybacks.

And even if a company uses that extra money to grow the business, that’s still essentially an indirect payment to you.

See, there’s a strong correlation between debt reduction and share price gains.

Going back to 1982 we figured out how the top 25% of debt-reducers in the S&P compared to the market.

As you can see, the debt-reducers outperformed the market by more than 2% per year.

A good individual example is a company called Fortress Investment Group (NYSE: FIG). Since 2009, it’s been on a mission to reduce debt. In fact, in just five years it has spent a little over $1 billion paying off debt.

Over the same time period (from January 2009 to today), Fortress Investment Group is up over 700% — crushing the S&P 500 index.

And it’s not the only one. Take Xerox Corporation (NYSE: XRX). Xerox is of course known for its Xerox copiers and its steady dividends, but in recent years it’s also become a market mover because of its debt reduction.

Xerox has managed to decrease the amount of annual interest paid on its debt from $592 million to $243 million over the last three years. On top of that, Xerox also spent over $1.6 billion on share buybacks over the last two years.

It’s no coincidence that the stock has been on a tear. It nearly tripled the market in 2013 — a period when the market grew at one of its fastest clips ever.

For experienced investors, it may be obvious that debt-reducers beat the market. But it’s amazing how many people — even Wall Street “experts” — become blind to debt as long as share prices keep rising.

And this “debt-blindness” is a recipe for disaster — we all remember how it started the Great Recession of 2008 and 2009.

If you’re going to buy a dividend-paying stock, invest in companies that pay down debt. The less money a company is obligated to pay creditors, the less volatile the stock tends to be during market downturns and the more money it has to line your pockets.

While no single-strategy can protect investors from all market turmoil, my latest research finds that investing in dividend-paying companies that pay down debt and pay “tax-free dividends” (which I talked about earlier this week) would have helped shelter investors from even the worst downturns.

Because it looks at companies that pay more than just dividend yields, I call this the “Total Yield” strategy. This strategy outperformed the S&P during the “dot-com” bubble and the 2008 financial collapse. It beat the market by 14 percentage points in 2001. And it outperformed the S&P by an average of 9 percentage points per year when the market got crushed in 2002 and 2008.

Simply put, if you’re not looking for the two extra ways companies reward shareholders in addition to just dividends, you’re taking on extra risk and you’re not going to maximize your total returns.

Good investing,

Nathan Slaughter

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Source: Dividend Opportunities