The Dividend Strategy For Safe Returns Up to 437%
Contrarian Outlook | Jun 06, 2018 06:14AM ET
Just because you’re a dividend investor doesn’t mean you’re fated to “grind out” 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 “ultimate contrarian dividend strategy” – and buy select born again payouts.
The strategy is two-fold:
- Find the stocks with rock-bottom sentiment around them, and
- Only buy them when a cheery outlook is guaranteed.
First, Find Firms Burdened With This “Stigma”
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 – and prices abnormally low – thanks to popular yet incorrect beliefs.
Corporate bankruptcies can be particularly profitable events for strong-willed because they extinguish any and all hope.
And here’s the best part – we don’t 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 – 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.
There’s 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 “too cheap” thanks to the bankruptcy black eye they carried.
But I’m risk averse – and I’m 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.
That’s why I employ this income-twist on bankruptcy buying. It helps me avoid the losers and bank safe double and triple-digit returns – while collecting yield to boot. (And by the way, it works whether or not the firm officially filed for bankruptcy – or simply got in enough trouble that it had to eliminate its payout.)
Get The News You Want
Next, We Buy the “Reborn Dividend”
How do we know when a turnaround is working?
Simple – management reinitiates the dividend.
Let’s 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 firm’s dividend to preserve cash and pay off debt!
First Industrial leases distribution centers. And Bruce, as he described it, went “back to basics.” He had his team focus on increasing occupancy across his current facilities. Then, he started raising the rent on his tenants.
How’d investors know for sure that Bruce’s strategy was working? The clear signal came in 2013, when he reinitiated the firm’s dividend. Investors who bought then have enjoyed 82% returns in the four years since:
The “All Clear” Signal Precedes an 82% Gain
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. Here’s what to look for when considering a reborn dividend:
- A new CEO. In my experience, a new leader (and new way of thinking) is essential.
- Low or no debt. Most distressed firms simply owe too much money.
- 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 “reborn” variety?
As you can see – as much as possible. This strategy is such a “slam dunk” for investing returns that there’s no reason to collect more current yields than you need right now. If you can “forego” some amount of income today, I would encourage you to consider investing that capital into dividend growers.
It’s a simple three-step process:
Step 1. You invest a set amount of money into one of these “hidden yield” 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 you’re 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 “hidden yield” stocks should you buy today? Well you know me – I’ve got seven best buys that should safely double your money every three to five years .
It’s a simple formula – their dividends are doubling every three to five years, which means their prices will rise in tandem. At the same time, we’ll 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, we’ve crushed the broader market (the S&P 500 returned 15.9% over the same time period.)
If you achieve returns of 25.3%, you’ll double your money in less than three years. So if you haven’t been following this strategy, why not? The best time to get started is right now – before the seven dividend growers I mentioned begin to move. .
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement ."
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