How to Earn Loan Shark-Like Yields in the Stock Market
How to earn loan shark-like yields in the stock market... The biggest mistake most investors make... Investors take the escalator up, then jump out of the window... Generating extraordinary wealth in the stock market is easier than you think...
In 1978, my friend Neil did something unheard of for most people his age...
He started funding a retirement that was still 40 years away.
Every month, Neil mailed off $50 checks to dividend reinvestment plans ("DRIPs") with household-products behemoth Johnson & Johnson (JNJ), food and drink titans Coca-Cola (KO) and General Mills (GIS), and electric-utility company Duke Energy (DUK).
Over the years, Neil also set up individual retirement accounts, contributed regularly to them, and invested most of his capital into the same four stocks. (Of course, he bought and sold lots of other positions over the years, but he always felt most comfortable with those four stocks.)
By dollar-cost averaging purchases over four decades and reinvesting the ever-growing dividends, Neil has amassed large positions in four high-quality businesses.
Now, he can stop reinvesting his dividends and start to enjoy the hefty checks... And because he accumulated large positions with rising payouts, he should never have to sell a single share to maintain his lifestyle.
To better appreciate what Neil has accomplished, let's look closer at one of these positions...
The first share of JNJ stock he purchased 40 years ago has turned into about 81 shares today, thanks mostly to five stock
JNJ currently pays an annual dividend of $3.60. That translates to a yield of around 2.6%. (For comparison sake, the average S&P 500 stock yields 1.9%.)
In other words, his $85 investment in 1978 will generate $300 in annual dividends today – an incredible 350% yield on his initial investment. (Of course, that's just dividends alone... those 81 shares are worth almost $12,000 today, too.)
My friend Neil understood the power of compound interest and will be reaping its benefits for the rest of his life.
'But I don't have 40 years left to compound my investment capital,' you might be saying...
Fortunately, you're in luck.
As long as you have 10 to 20 years left to invest, you still have sufficient time to assemble a portfolio earning high yields on your initial stake.
But to make up for lost time, you must get the biggest "bang" for your investment. In other words, to maximize the future income-generating potential of your portfolio, you must buy shares of dividend-paying stocks when they go "on sale."
The best way to do this is to buy when other investors are panicking. To paraphrase Warren Buffett, one of the great investors of our time, you need to be greedy when others are fearful.
More
Back in September, I took an in-depth look at this phenomenon...
Big stock moves almost always occur because investors suddenly change their expectations about future cash flows.
The stock market always looks ahead. The problem is, it doesn't always get the forecast right.
Markets represent the collective actions of countless humans, none of whom can accurately forecast with any consistency what will happen tomorrow, let alone a year from now.
Consequently, our expectations for the future are often skewed by what has happened most recently.
This is a dangerous bet... one that's destined to fail.
To borrow a phrase from former Stansberry Research editor in chief Brian Hunt, stock investors like to take the escalator up to the top floor, then jump out of the window to get back down.
As financial results improve from quarter to quarter, investors expect this will continue...
Stock prices move up incrementally in
Then, the moment that something happens to threaten the company's outlook – usually with little warning – investors head for the window all at once.
The same principle applies to the market as a whole.
As you can see in this chart, it took five months for the benchmark S&P 500 Index to ride the escalator up from its 200-day moving average in May to its most recent high... then just six days to give it all back...
But while people are panic-selling at the first sign of trouble, smart investors use the pullbacks to deploy "dry powder" and establish large positions in dividend-paying stocks.
Take software giant Microsoft (MSFT), for instance. The company is one of the most widely owned dividend-paying stocks of the past 20 years.
Think back to early 2008, the last time we experienced such a long, escalator-like bull market run...
Microsoft was trading at a multiyear high near $36 and yielding a paltry 1%.
Then, over the course of 2008, the Great Recession ripped through the U.S. financial markets, sending stock market indexes down more than 50%. Despite operating a largely recession-proof business model, Microsoft wasn't immune to the sell-off... By early 2009, shares were trading around $16.
Now, almost a decade later, let's see how buying $5,000 worth of MSFT shares at the top would have fared versus buying near the bottom...
As expected, $5,000 invested at the market bottom sets you up for far greater future income than buying near the top.
Today, Microsoft is once again yielding a measly 1.7%, not much higher than it was back in 2008. If you're serious about accumulating large positions with the potential for loan shark-like yields, you'll have to look elsewhere for now.
In the meantime, I recommend opportunistically adding special high-yield situations to your portfolio...
For instance, earlier this year, my colleagues at Stansberry's Credit Opportunities and Income Intelligence alerted their subscribers to two stocks suddenly yielding around 12%. In both cases, investors were "jumping out of the window" due to special factors that had created a brief opportunity to lock in current high yields on investment.
These companies aren't likely to raise their dividends at double-digit annual growth like Microsoft. But combining a high initial yield with a slower-growing dividend can ultimately produce Microsoft-like returns.
It's important to note that it's not normal for stocks to yield 10% or more. When they do, it's usually because investors don't believe the current payout is sustainable. The challenge is finding high-yield stocks paying safe dividends.
Indiscriminately buying stocks at high current yields could be disastrous for your portfolio. Fortunately for you, many of my fellow Stansberry Research analysts are experts at evaluating these situations.
Recently, my colleague Dan Ferris and I came across one of the best dividend stories we've seen in years...
We told Extreme Value subscribers all about it in the September issue.
This stock continues to trade near five-year valuation lows, despite management's upbeat assessment and anticipated 25% dividend increases for each of the next two years. As we detailed in the issue, we think the company could very well raise it 25% for a third time, too. If it plays out as expected, shares purchased today could be yielding near 9% in three years.
Looking much further out, if dividend growth averages 5% per year over the next two decades, then shares of this company could be yielding more than 20% on capital invested today.
In short, ordinary people like you and me can generate extraordinary wealth in the stock market...
My friend Neil is living proof.
One time-tested approach is buying high-quality businesses at attractive prices and holding them for years.
This approach is a hallmark of Extreme Value.
For instance, a stock we recommended during the worst of the 2008 panic, Automatic Data Processing (ADP), is the top-performing open position at Stansberry Research, up 404% as of yesterday's close.
Readers who took our advice a decade ago are now earning a nearly 8% yield on that investment. The dividend is growing 10% per year, and if it continues to do so for another decade, the yield on that initial 2008 investment could rise to more than 20%.
In the October issue of Extreme Value is a section titled 'Why the Smart Money Is Terrified Right Now'...
I think it's one of the most important and timely pieces we've penned in a long time.
We detail a lesser-known sentiment index that has failed to bounce back this year... record-high insider selling... anecdotes from industry contacts... even a "triple red alert" from one of the greatest investors of all time.
We also include a critical warning about the growing possibility of a "liquidity shock." In other words, widespread market panic – the kind that creates wonderful, once-in-a-lifetime buy-and-hold opportunities – could be a lot closer than anyone thinks.
Dan and I will do everything we can to help our readers exploit it. Best of all, we have nearly a dozen positions in the model portfolio that new investors can put money in today. You can learn more about an Extreme Value subscription right here.
Great Minds Wanted, Knack for Markets Adored
Stansberry NewsWire is looking to hire an experienced analyst/trader to expand our research efforts. We're looking for people with a genuine passion for finance.
The ideal candidate has five to seven years of background as a trader/analyst and is curious, competitive, humble, and has experience identifying and evaluating investment themes and sector trends. Your goal is to conduct meaningful, insightful research and to write for our publications. Formal experience is preferred but is not necessary, depending on the candidate.
If you've ever wanted to make a living reading, writing, and thinking, please send us the following...
- A basic resume. Tell us what you've done before. We admire people who aren't afraid of hard work or odd jobs.
- A writing sample. Tell us about an investment opportunity related to trend recognition. We're interested in the fundamentals of your best idea, as well as something based on charts.
If interested, send your resume, cover letter, and writing sample via e-mail with the subject line "Stansberry NewsWire Analyst," to AnalystCareers@stansberryresearch.com.
New 52-week highs (as of 11/1/18): none.
In today's mailbag, one reader weighs in on Doc Eifrig's "Graduate's Guide to Wealth," and two others share their experience with Steve Sjuggerud's True Wealth Systems Melt Up Portfolio so far. As always, send your questions and comments to feedback@stansberryresearch.com.
"Dr. Eifrig, thank you for publishing [your guide] and allowing us to send it on to our kids and grandkids. You asked if we had any of our own secrets to wealth building. I didn't learn about wealth building until I was almost retired, so I can't say that I was a success at it. But one thing I learned, possibly from the book The Millionaire Next Door, is that you need to live BELOW your means. If you do that you will have extra money that you can invest
"I have never written in before but had to. Steve you and Stansberry are awesome! I listened to your Melt Up last week. It was great information as usual. I did what you said, and my portfolio is up over 10% in a little over a week!!!! THANK YOU THANK YOU for all you do to teach us about investing. I sleep great turning off the TV talking heads and listening to you..." – Paid-up subscriber Craig P.
"I subscribed to Steve's True Wealth Systems on Oct. 26, 2018. I immediately invested $100,000 in the
"I really appreciate the in-depth explanation of the five critical metrics of the stock market [in Steve's November issue of True Wealth Systems]. Also, the explanations of the three key measures signaling a recession are enlightening. Thanks again for the quality research." – Paid-up subscriber John K.
What investments in your portfolio are yielding double digits based on your initial investment? Let us know at feedback@stansberryresearch.com.
Regards,
Mike Barrett
Orlando, Florida
November 2, 2018