One more secret to maximizing income… What a stock's yield DOESN'T tell you about its payouts… 'Looking forward, looking back'… How a 3% yield can pay you more than a 4% one...
Over the past couple of weeks, I (Bryan Beach) have revealed a handful of our favorite investing secrets.
On June 11, I showed you how to identify businesses that consistently trounce their peers. Last week, I shared two simple steps you can take to amplify your investment returns: Reinvest your dividends and "do nothing."
Last week, our inbox had plenty of feedback on the series, including a couple of subscriber "reinvest and do nothing" success stories. It's clear lots of subscribers are very interested in income-producing securities.
Today, I'm going to share one more secret to maximizing the income from your portfolio... A stock's stated yield tells you very little about how much income it will pay you.
For many income investors, this may sound crazy. After all, the yield IS your income, right? The bigger the dividend yield, the bigger your payments.
That thinking overlooks a powerful phenomenon in the stock market that can help you secure bigger, steadier income streams.
But before we get to that, let's take a step back…
When folks talk about dividends, the word "yield" gets thrown around a lot. Quite simply, it's a measure of how much cash you're receiving from your investment compared with what you paid to open the position. The concept is central to bond investing, where investors base their investment decisions on the size and security of those guaranteed cash payments.
If you buy a $1,000 bond for face value that pays 9% interest, your yield is obviously 9% ($90 annual interest payment/$1,000 face value). If it's a solid company, investors may be willing to pay more for a secure $90 payment stream... and the bond price may trade up to $1,200. In that case, the bond is yielding only 7.5% ($90/$1,200).
The same concept of yield applies to dividend-paying stocks. A company that trades for $100 and pays $2 in annual dividends is "yielding" 2% a year. With interest rates near historic lows, bond investors can't find decent companies with bonds yielding 9% anymore. These days, even the bonds of bad companies pay only 4%-5% yields. So bond investors have been looking to stocks to satisfy their thirst for yield…
This has driven up the prices of anything paying a remotely robust dividend. This yield-starved environment has led to a proliferation of corporate structures such as master limited partnerships (MLPs) and real estate investment trusts (REITs) that are required by tax law or corporate bylaws to distribute a vast majority of earnings to shareholders.
It's important for income-seeking investors to understand that the payments received from these entities are different than traditional dividends. For example, Uncle Sam taxes traditional "dividends" and MLP "distributions" differently.
More important, a traditional dividend is paid out of a healthy company's excess cash. It's as if a company says... "Here, take this extra cash, we have more than we know what to do with."
But a REIT or MLP pays shareholders because it's required to... whether the company is "healthy" or not. It's not unusual to see a REIT pay a fat dividend one year and turn around the next year and have to borrow money or raise additional equity just to fund expansion or meet business needs.
For this reason, published lists of "high-income stocks" are often chock-full of unhealthy REITs or fly-by–night MLPs. Last week, we showed you how successful dividend reinvestment and "sloth" behavior can be... but those tips won't work on a REIT or MLP that won't be around in five years.
Don't misunderstand… some REITs and MLPs can be solid wealth compounders. We've recommended our share in Stansberry's Investment Advisory. But not all are created equal. And learning how to identify the healthiest dividend-payers brings us to this week's "secret"…
When searching the equity markets for the kinds of companies that would benefit from the "reinvestment" and "sloth" strategies we discussed last week, we always look at dividend history for at least the past five years... and try to project dividends about five to 10 years into the future.
Simply put, our dividend strategy involves "looking back, then looking forward."
When it comes to investing, projecting things like earnings per share, free cash flows, or stock is almost always a waste of time. But dividends are different. And for stable companies, they are predictable. Here's what I mean…
Let's start with a list of relatively large companies that have increased dividends for the past five years. In the U.S., this takes the population down from around 5,000 candidates to 180. Simply by narrowing our focus to only those companies that have been consistently increasing dividends, we have already weeded out many of the high-risk REITs and MLPs. In other words, we're already light years ahead of the typical income investor.
Here's a list of the "Dividend Raisers" with the best current yields (current annual dividend divided by current stock price).
Of the Top 180, only nine have a "bond-like" current yield of at least 6%. The table lists these nine securities alongside the EV/EBITDA valuation metric, which is a quick and easy way to compare how pricey these stocks are.
| Highest Current Dividend Yield Within the 'Top 180 Dividend Raisers' | ||||||
| Company | Ticker | Corp Structure | Recent Price | Annual Dividend | Current Dividend Yield | EV/EBITDA |
| StoneMor Partners | STON | MLP | $24.41 | $2.39 | 9.8% | 47.8 |
| Vector Group | VGR | Corp | $20.75 | $1.54 | 7.4% | 11.1 |
| Exterran | EXLP | MLP | $28.81 | $2.08 | 7.2% | 11.8 |
| Amerigas | APU | MLP | $46.05 | $3.32 | 7.2% | 10.2 |
| El Paso Pipeline | EPB | MLP | $36.20 | $2.55 | 7.0% | 11.5 |
| Senior Housing | SNH | REIT | $23.83 | $1.56 | 6.5% | 15.7 |
| Kinder Morgan Energy Ptr | KMP | MLP | $84.50 | $5.33 | 6.3% | 11.4 |
| Enbridge Energy | EEP | MLP | $35.40 | $2.17 | 6.1% | 17.6 |
| TC Pipelines | TCP | MLP | $53.22 | $3.21 | 6.0% | 21.8 |
Remember, I told you on June 11 about the secret of investing in "dirty" businesses…
|
Right at the top of the list of high-yielding stocks is StoneMor Partners (STON), an MLP focused on cemetery operators. Throughout the last five years, STON has consistently yielded 10%-11%, which is why the market currently pays so much for its earnings. (Remember, EV/EBITDA is a measure of how much the market is willing to pay for each dollar of earnings. A good rule of thumb is that less than 10 is cheap and more than 20 is pricey... STON is pushing 48.)
The list above also has a REIT focusing on senior housing (which, some would say, also fits into the "unattractive" business category), and six MLPs related to the booming U.S. oil and gas industry. The only traditional company – that is, not a REIT or MLP – is the tobacco company, Vector… another "dirty" business.
But current yield is only part of the equation. We want to "look back, then look forward." So next, let's check out the last five years of dividend history. The table below shows the most aggressive dividend raisers in the Top 180 over the past five years.
| 'LOOKING BACK' Most Aggressive Dividend Raisers within the 'Top 180' | |||||||
| Company | Ticker | Corp Structure |
Recent
Price
|
Current Dividend Yield | 2008 Annual Dividend | Current Annual Dividend | Annualized Dividend Growth Rate |
| Lorillard | LO | Corp | $60.48 | 3.8% | $0.61 | $2.20 | 29% |
| Williams Companies | WMB | Corp | $58.66 | 2.6% | $0.43 | $1.44 | 27% |
| Hanover Insurance | THG | Corp | $62.61 | 2.2% | $0.45 | $1.36 | 25% |
| Western Gas | WES | MLP | $77.39 | 3.1% | $0.76 | $2.28 | 25% |
| Prudential Financial | PRU | Corp | $90.30 | 2.1% | $0.58 | $1.73 | 24% |
| CMS Energy | CMS | Corp | $30.49 | 3.4% | $0.36 | $1.02 | 23% |
| Tupperware | TUP | Corp | $75.78 | 3.4% | $0.88 | $2.48 | 23% |
| Darden Restaurants | DRI | Corp | $44.49 | 4.9% | $0.80 | $2.20 | 22% |
| Wisconsin Energy | WEC | Corp | $45.48 | 3.3% | $0.54 | $1.45 | 22% |
| Target | TGT | Corp | $60.73 | 2.8% | $0.62 | $1.65 | 22% |
| Lockheed Martin | LMT | Corp | $168.10 | 3.1% | $1.83 | $4.78 | 21% |
| Texas Instruments | TXN | Corp | $48.20 | 2.4% | $0.41 | $1.07 | 21% |
| El Paso Pipeline | EPB | MLP | $36.20 | 7.0% | $1.01 | $2.55 | 20% |
| Equity Lifestyle | ELS | REIT | $44.72 | 2.1% | $0.40 | $1.00 | 20% |
| Digital Realty | DLR | REIT | $63.17 | 5.0% | $1.26 | $3.12 | 20% |
| Harris Corp | HRS | Corp | $73.10 | 2.2% | $0.60 | $1.48 | 20% |
| Safeway | SWY | Corp | $34.83 | 2.4% | $0.32 | $0.78 | 20% |
For purposes of compiling this list, I left out some companies that initiated their first dividend in 2008... as those "growth rates" were distorted.
You'll notice an Investment Advisory holding at the top of this list – cigarette maker Lorillard (LO). That's no coincidence.
I'm not going to cover all the companies, but if you review the list, you'll see it's peppered with energy MLPs, along with some blue-chip companies and a couple of REITs.
Now, let's "look forward" and make some conservative estimates as to how much these companies will be paying investors in the future.
This is not a perfect science... but it's critical. Think about it. Income investors need to take a long-term outlook – you can't enjoy the power of compounding and sloth if you demand instant gratification.
But while current yield is the most common metric reported to potential income investors… it may obscure superior income investments.
For example, let's assume an investor, "Mary," is considering buying a company called Acme Corp., which has a current yield of 2%. That's decent, but not enough to really excite most income seekers.
Mary has "looked back" and sees Acme is in an industry with major tailwinds. And it has consistently raised dividends by 20%-25% per year since 2008. While this pace isn't sustainable, Mary thinks annual dividend raises of 10%-15% per year are realistic for at least five to 10 years given the company's prospects and continued strength in the industry.
At that rate, by Year 7, Acme will be yielding around 5% based on what Mary would pay for shares today... more than double the 2% yield published on all the mainstream financial websites. By Year 10, the investment could be yielding around 8%.
As a long-term investor, "estimated future yield" gives you a better idea of how much cash your equity investment will bring in over the long term.
Now let me show you one more table drawn from our Top 180 Dividend Raisers. You'll notice an "estimated future yield" column. I based this estimate on some relatively conservative assumptions of future dividend growth, assuming that the rate of growth will shrink over time…
| 'LOOKING FORWARD' Highest Estimated Dividend Yield (10 year horizon) | |||||||
| Company | Ticker | Corp Structure |
Recent
Price
|
EV/ EBITDA* |
Current Dividend Yield | Estimated Dividend Yield | Sector |
| El Paso Pipeline | EPB | MLP | $36.20 | 11.5 | 7% | 14% | Energy |
| Vector Group | VGR | Corp | $20.75 | 11.1 | 8% | 12% | Cigarettes |
| Amerigas | APU | MLP | $46.05 | 10.2 | 7% | 12% | Energy |
| Kinder Morgan Energy | KMP | MLP | $84.50 | 11.4 | 6% | 10% | Energy |
| Darden Restaurants | DRI | Corp | $44.49 | 10.5 | 5% | 10% | Restaurant |
| Digital Realty | DLR | REIT | $63.17 | 16.3 | 5% | 10% | Specialized REIT |
| Holly Energy | HEP | MLP | $33.81 | 13.9 | 6% | 9% | Energy |
| Oneok Partners | OKS | MLP | $57.97 | 16.2 | 5% | 8% | Energy |
| Alliance Resources | ARLP | MLP | $48.57 | 6.0 | 5% | 8% | Energy |
| Omega Healthcare | OHI | REIT | $38.45 | 16.7 | 5% | 8% | Health |
| Realty Income | O | REIT | $45.29 | 20.8 | 5% | 8% | Specialized REIT |
| Alliance Holdings | AHGP | MLP | $70.04 | 7.4 | 5% | 8% | Energy |
| Lorillard | LO | Corp | $60.48 | 11.7 | 4% | 7% | Cigarettes |
| Phillip Morris | PM | Corp | $85.08 | 11.6 | 3% | 7% | Cigarettes |
| Reynolds America | RAI | Corp | $57.16 | 11.6 | 4% | 7% | Cigarettes |
| CMS Energy | CMS | Corp | $30.49 | 8.5 | 3% | 7% | Energy |
| Targa Resources | NGLS | MLP | $68.84 | 14.8 | 4% | 7% | Energy |
| Tupperware | TUP | Corp | $75.78 | 10.7 | 3% | 7% | Consumer Goods |
| Wisconsin Energy | WEC | Corp | $45.48 | 10.3 | 3% | 7% | Energy |
| * represents trailing 12-month figure | |||||||
As I often say, this is not a shopping list for stocks. It's a starting point for research. Many of these may be excellent long-term holdings, but you have to know the business and its sector well before you make an investing decision.
The table above includes a couple of companies we wouldn't touch right now and some that could get in trouble should the economy turn sour. (Darden Restaurants, for example, owns Red Lobster, Longhorn Steakhouse, and other casual restaurant chains... not a recession-proof business.)
But let's look at how using this list can maximize your income and long-term results. Here's a real-life example of how to use this estimate…
You'll find Consolidated Edison on just about every list of income-producing winners. It's a great company with a nearly 200-year-old history. As a public utility, it operates in a monopoly and yields 4%.
But it doesn't make that last list. Instead, a couple of other utilities you might not know show up: Wisconsin Energy and CMS Energy.
ConEd is the largest company – about the size of Wisconsin Electric and CMS Energy combined. And ConEd's current corporate entity has a longer track record of dividends... but Wisconsin Electric and CMS Energy are not exactly risky micro-caps. They are both modern corporate descendants of companies that have been providing electricity to the upper Midwest since the 1800s.
All three companies operate in the same industry, and trade for reasonable EV/EBITDA ratios of 8-10. So why would an income-focused investor prefer Wisconsin Energy or CMS? Well, as the table below demonstrates... the Midwestern utilities' "estimated future yield" is actually 7%, vs. 5% for Consolidated Edison.
| Utility | History of uninterrupted dividends | Current Yield |
Annualized Dividend Growth Rate (Looking Back) |
Estimated Future Yield (Looking Forward) |
| Consolidated Edison | 1980-present | 4% | 1% | 5% |
| Wisconsin Electric | 1987-present | 3% | 22% | 7% |
| CMS Energy | 2007-present | 3% | 23% | 7% |
At this point, I know what you're asking: "So what? That's an awful lot of work to eke out an extra 2%."
Well, here's where the power of compounding and doing nothing takes over... Any time you compounding your returns over an extended time period, every percentage point makes a huge difference.
To illustrate this point, let's assume two companies have the same share price ($100). Company A yields 5% ($100 per share, with a $5 dividend). Company B yields 7%.
If everything else about the companies stays the same – including the share price – here's how a 100-share, $10,000 investment in each would fare over 30 years...
| • | Company A: 432 shares worth $100 each = $43,200 |
| • | Company B: 761 shares worth $100 each = $73,100 |
What was a measly 2% difference has compounded into and extra $30,000... or 76% more money. And again, this spread will only increase as the years pass.
So when the table above demonstrates a 7% yield vs. a 5% yield... you're actually talking about some big numbers, assuming you plan on using the one-two punch of reinvesting dividends and being patient.
My colleagues Dan Ferris and Dr. David "Doc" Eifrig have written as much as anyone about the power of investing in "dividend growers." Doc's Income Intelligence maintains a portfolio of high-quality blue-chip stocks that have consistently grown their dividends this way. You can learn more about Doc's service here.
You'll also find several of these companies in the model portfolio of Stansberry's Investment Advisory… The "capital efficient" companies we covet are frequently dividend-raisers as well. When your business piles up cash the way McDonald's and Wal-Mart do… you can afford to steadily increase what you return to shareholders.
Lastly, I'd like to draw your attention to a completely free resource for anyone who's serious about "looking back, then looking forward." Standard & Poor's "Dividend Aristocrats" is a list of companies that have increased dividends every single year for the past 25 years. As of June 30, there are only 54 names on this list.
Our Editor in Chief Brian Hunt has described it as a "cheat sheet" for finding world-class stock investments. These companies are the biggest and strongest in the world, which is why they can afford to raise their dividend every year.
There are few "undiscovered" treasures on this list. The names will be familiar. So you may have to be patient and wait for their prices to come back to you. But assuming you buy at a reasonable price, almost any stock on this list would be an outstanding candidate for the "reinvest and do nothing" strategy.
New 52-week highs (as of 7/24/14): Automatic Data Processing (ADP), American Homes 4 Rent (AMH), Activision Blizzard (ATVI), SPDR S&P BRIC 40 Fund (BIK), Chevron (CVX), ProShares Ultra MSCI Emerging Markets Fund (EET), EMC (EMC), Enterprise Products Partners (EPD), Energy Transfer Equity (ETE), Eli Lilly (LLY), and Pepsico (PEP).
Thanks for all the feedback and encouragement the last couple of weeks. Porter's back in the saddle next Friday. In the meantime, send your e-mail to feedback@stansberryresearch.com.
"Bryan, one of the great Stansberry things that is taught over and over is just exactly this, Two simple secrets most investors ignore…
"I certainly wouldn't forget them after a few years of hearing them over and over in a variety of ways. My guess is that you have made many people wealthy just because this is taught over and over a couple of times a year. Everyone needs to hear it. Everyone needs to see it.
"But my sense is that they need to hear it over and over to remind them that it is really the only way to get wealthy and stay wealthy over the long term.
"Thanks for all that you guys write. Thanks for imparting a great deal of knowledge that is only gained by experience." – Paid-up subscriber Jeff Spranger
"Just read the July 11th Digest. As a lifetime subscriber to Stansberry's Investment Advisory, I'm extremely excited to see the results of Bryan's work on 'the best' businesses. This is precisely the kind of research I've been looking for since I am unable to dedicate the time needed to do such research on my own.
"I am looking forward to the 'global top quality' screen Bryan has been working on.
"Porter, I really appreciate the value that has been added since I subscribed and then decided to become a lifetime member (Stansberry Data level). I can't put in to words how much your work and your analysts' work has improved my understanding of the markets and my investment results.
"Joining with you was worth every penny! Especially as I learn more and see my subscriptions pay for themselves many times over thanks to the quality team you invested in. I heard you jokingly complain how much these guys are costing you... in my opinion, they are working out great." – Paid-up subscriber Shanan Levin
Good investing,
Bryan Beach
Roswell, Georgia
July 25, 2014
I held $100,000 worth of metal in my hand...
S&A Resource Report editor Matt Badiali is in Vancouver right now for the Sprott Natural Resource Symposium. In today's Digest Premium, he shares some of the things he has learned so far...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
I held $100,000 worth of metal in my hand...
Editor's note: S&A Resource Report editor Matt Badiali is in Vancouver right now for the Sprott Natural Resource Symposium. In today's Digest Premium, he shares some of the things he has learned so far...
Greetings from Vancouver. I (Matt Badiali) am in British Columbia. I'm in town for the Sprott Vancouver Natural Resource Symposium. Today was the first full day of talks, led off by one of my favorite speakers: Sprott Global founder and good friend Rick Rule.
Rick's talk today was all about potential. His big takeaway was simple: The key to buying low and selling high is buying low... and right now, we're low. He told the audience that the current market reminds him of 1992, when a bear market morphed into one of the best bull markets on record.
He believes we've seen the bottom in natural resources and we'll see a saucer-shaped recovery. He expects volatility on the way up. But the pieces are in place for a "dramatic recovery."
According to Rick, bull markets happen when markets exceed expectations. And today, the expectations for this market are zero. Case in point, the conference business is terrible. The big discussion last night at dinner was the Metals and Minerals conference series (formerly known as the Hard Assets conferences).
Held in San Francisco, New York, and Chicago, these conferences were icons in the mining world. However, due to lack of interest from investors, the upcoming conferences have all been canceled. The Hard Assets conferences aren't alone. Sprott salvaged this conference, too. It took over the current conference from Agora Financial, which had its worst attendance ever in 2013. This year, there are around 400 paying attendees, close to an all-time low.
That's a pretty good sign that Rick is right to call the bottom. Nobody cares about natural resources, particularly junior miners today. And because natural resources are as cyclical as the Sun's orbit around the Earth, that's a huge opportunity.
The best part of the day came in the afternoon, when Pretium CEO Bob Quartermain sat down next to me. He reached into a canvas bag and pulled out a chunk of rock about the size and shape of a clothes iron. It was light colored with bands of brownish mineral running through it. And it was heavy. Turns out, I was holding a chunk of ore containing more than five pounds of gold. The brown mineral was electrum... 70% gold, 30% silver. The metal was worth around $100,000.
Now that's a hand sample.
– Matt Badiali
I held $100,000 worth of metal in my hand...
S&A Resource Report editor Matt Badiali is in Vancouver right now for the Sprott Natural Resource Symposium. In today's Digest Premium, he shares some of the things he has learned so far...
To continue reading, scroll down or click here.