How To Make 12% Annually (Forever) From Stocks
“Efficient market” proponents are wrong – you can bank returns of 12% or more from stocks regularly.
You need to ignore common Wall Street “wisdom” and follow this simple 3-step formula. It maximizes your shareholder yield, which in turn sets you up for big returns.
Most individual investors don’t make anything close to 12% per year because they practice “buy and hope” investing. They pick up shares and root for them to appreciate in price. With no specific plan outlining how they are going to profit from their stocks, they are doomed.
Even “tangible” fundamental drivers like higher sales or profits are no guarantee that you will profit. Ever been frustrated when one of your stocks trended lower after a good earnings report? If so, you may have complained…
“The Stock Market Doesn’t Make Any Sense”
It will if you consider that there are three – and only three – ways a company’s stock can pay you:
- A cash dividend.
- A dividend hike.
- By repurchasing its own shares.
Most savvy income investors know that dividends are to thank for a big chunk of stock market returns. But they often fail to appreciate the dividend hike, which is simply the safest and most reliable way to get rich buying stocks.
Not only do dividend hikes increase the yield on your initial capital, but they often are reflected in a price increase for the stock. And that’s how you turn a small current yield into a 12%+ annualized return.
For example, if a stock pays a 3% current yield and then hikes its payout by 10%, it’s unlikely that its stock price will stagnate for long. Investors will see the new 3.3% yield, and buy more shares. They’ll drive the price up, and the yield back down – eventually towards 3%. This is why your favorite dividend aristocrat never pays a high current yield – its stock price rises too fast!
Stock repurchases are equally underrated. When the number of shares are reduced, every “per share” metric – dividends per share, earnings, and free cash flow (FCF) – all improve. And their increases are leveraged to the amount of stock that is bought back.
After all, if profits are flat while float is reduced by 50%, the result is a 100% increase in earnings per share! And when EPS rises, the stock price rises.
Total up these three “shareholder return” vehicles, and you’ve got the return that you can expect from any given stock.
For example, let’s look at income-hound favorite Verizon (VZ). It pays a 4.2% yield, but we can expect higher returns because the firm is growing its dividend every year. As Verizon grows its dividend, its current yield is likely to remain the same because investors will reward the stock with a higher price as they have over the past three years:
No Coincidence: VZ Price Returns = Dividend Growth
Future price gains should remain modest, however. Verizon is only growing its payout by about 2% annually – which means we should expect returns of about 6.2% going forward (4.2% current yield plus 2% projected dividend growth).
While investors tend to fixate on stocks’ current yields – which are widely published and available – meaningful dividend growth can be a valuable source of hidden yields.
Dividend Growth in Action
Let’s look at three popular dividend stocks – 3M (MMM), Procter & Gamble (PG) and UPS (UPS) – to see this in action. Over the last five years, the trailing yield for each of these issues has been relatively constant:
Steady Yields for Over Time…
There’s a reason – their price returns have tracked dividend growth almost to a tee.
… As Dividend Growth Predicts Price Returns
Buying stocks that are growing their dividends fast is the surest way to bank double-digit returns. But make sure you handpick them instead of relying on an index fund, because the S&P 500 itself is only on track for 5% to 7% dividend growth in the years ahead. I’ll share my 7 favorite ideas with you shortly – but first, let’s talk buybacks.
Dividend Growth on Steroids
There’s a way to further juice your returns – look for dividend growers buying back their own cheap stock.
Stock repurchases can drive big shareholder returns. When firms reduce their outstanding stock flow, they can power virtuous cycles where their profits and dividends per share increase constantly.
These efforts have their greatest impact when shares are cheap and management receives the most bang for its buck. But any buyback program is usually a good way to outperform the broader market.
Take the PowerShares Buyback Achievers ETF (PKW), which simply buys stocks in companies that have reduced their outstanding share count by 5% or more over the last 12 months. This “dumb” screen doesn’t consider future repurchases or the price these firms are paying for their own shares – but it still outpaces the S&P 500 comfortably:
A Simple Buyback Criteria Beats the S&P 500
Three simple criteria – dividend payments, dividend growth and buybacks – can boost stock returns when applied haphazardly. As you’d probably guess, they bring even more profits when applied intelligently.
Example #1: Forcing Boeing’s Take Off
This time last year, we added shares of Boeing (BA) to our Hidden Yields portfolio because the stock was cheap, and management had a plan to return significant cash to investors.
Shares were trading for less than 12-times free cash flow (FCF). The company was taking advantage of the sale price by buying back shares. Boeing had reduced its float by 11% since 2013, and had an outstanding repurchase authorization that would let it retire another 7.6%.
Add in a 3% yield and a recent impressive 20% dividend increase, and we had a formula for 10% to 30% gains in Boeing shares.
How’d it play out? Exactly as anticipated. The firm reduced its share count by 7.4% over the next year while raising its dividend by another 30% at the end of the 12-month period. Shares responded, delivering 17.3% total returns:
Share Count Down, Price and Dividend Up
Example #2: Valero Primed for 30% to 40% Returns
Here’s an example of a stock ready to return 30% or more over the next year. Blue chip refiner Valero (VLO) has a great management team that knows how to make money no matter what happens with energy prices.
Over the last five years the company has increased its free cash flow (FCF) by 115% per share while rewarding investors with a cumulative 300% dividend raise, even as oil prices were chopped in half:
A Free Cash Flow Machine
Shares yield 3.6% today – that’s money in your pocket. Plus management recently raised its dividend by another 16.7%. And dividend hikes have everything to do with future returns.
Here’s why: Early next year, Valero will tee up another payout increase. It will probably be a $0.10 per share raise (in line with the last three hikes).
The company has plenty of cash to do this already. It generated $10.40 in FCF over the past twelve months, and will only pay out $2.80 in dividends over the next twelve!
A “one dime” hike would be 14%. And if Valero’s shares stand still, they’ll yield more than 4% this time next year.
But here’s the thing – they probably won’t pay 4% then because investors will bid Valero’s price up (and its yield down) in anticipation of the hike. After all, even 3% is generous today.
Which means that Valero’s share price should climb in line with its next hike. And that’s exactly what was unfolding until late-2015, when the stock “decoupled” from its dividend’s trajectory:
Valero’s Stock Due To “Catch Up”
This means Valero’s share price actually has two past dividend hikes to “catch up” with as well. The stock easily has 30% to 40% upside thanks to past, present and future payout hikes alone.
And let’s not forget share repurchases! The firm bought back 15.5% of its outstanding float over the last three years, and should continue to be a buyer of its own bargain stock.
Buybacks, remember, are underrated as a driver of returns. When the number of shares is reduced, every “per share” metric – dividends per share, earnings, and FCF – all improve. And their increases are leveraged to the amount of stock that is bought back.
After all, if profits are flat while float is reduced by 50%, the result is a 100% increase in earnings per share! And repurchases also support dividend growth. In Valero’s case, it has fewer and fewer shares to “settle up with” every year, so it can hike its payout more than it would otherwise with a static share count.
7 Dividend Growth Stocks for 100%+ Gains
Of the three investing profit drivers we discussed, dividend growth is the one with the potential to make you rich.
Few stocks yield more than 4%. Even fewer companies buy back enough of their shares for it to matter. Your best bet? Find companies that are growing their dividends by 15%, 20% or more annually.
I’ve got seven in particular that I like right now. No matter what Trump tweets, these stocks will benefit from dividend growth that will simply force their prices 100%+ higher in the months and years ahead.
Dividend Growth Play #1
Trumponomics’ Star Student
This firm has been acing Trumponomics 101 – and rewarding shareholders – for years. And its dividend growth is poised to “accelerate” once again.
Its sales are booming in China, thanks to the nation’s insatiable demand for clean, hot water:
China’s Booming Demand Drives These Dividends
That’s driving strong top line and bottom line growth, resulting in outsized cash flows. Over the last five years, $1 in sales growth has resulted in an extra $10 in free cash flow (FCF)! Which means the firm could easily give shareholders a generous raise today, and its next dividend hike should be a big one.
Dividend Growth Play #2
Riding the Trend for “More Stuff”
This firm has a unique strategy that lets it “cherry pick” the best locations for its facilities. Formed in 2012 with 100 sites, it now harvests cash from 315 properties in the US:
Big Growth Since Inception
This firm raised its payout twice over the past year. At this pace, the firm will double its dividend within 4 or 5 years – which means your 4.7% initial yield will soon grow to 9.4%, and so on.
But future investors won’t be able to lock in an 9.4% yield. They’ll see this stock quoted at a 4%, or more likely, a 3% yield as dividend-starved investors swarm. Which means you’ll be sitting on capital gains of 100% or better, in addition to your big initial yield!
Dividend Growth Play #3
800% Payout Growth
You’d probably be thrilled to see your current income double or triple over a few short years, right?
Well, here’s a company that has increased its dividends eightfold just since a dynamic new management team took over four years ago.
They’ve also been buying back shares aggressively and plan on continuing to do so with an additional $50 million already earmarked for the purpose.
So with a very clear plan in place for future sales growth, this stock is a complete no-brainer for anyone looking to get bigger and bigger dividend checks from here on out.
Dividend Growth Play #4
25% Shareholder Yield
Our fourth stock is sitting on $4.8 billion in cash. Much of it is overseas, and may come home in 2017 if President Trump follows through on his promise for a tax break on repatriated funds.
This company already has more money than it needs to fuel its exciting growth prospects, which means it will probably give the cash back to shareholders in the form of repurchases and more dividend increases.
It’s boosted its dividend by 80% over the last five years, while buying back an incredible 37.7% of shares outstanding. The firm has also ramped up its shareholder yield well into the double-digits, to an unbelievable 18.3% over the last 12 months!
Big Yield Increases
It gets better. Cash is being returned to shareholders in an accelerating manner. In the last year alone, the company put $5.6 billion back in its shareholders’ pockets – reducing its outstanding shares by 14% while increasing its dividend by 14.8%.
On a market cap of $22 billion, we have our amazing 25% shareholder yield.
Dividend Growth Play #5
Shares trade for just 6-times free cash flow (FCF). And stockholders are dialed in for 12%+ returns this year thanks to dividend payments, growth and share buybacks. Plus there’s big upside to boot, as shares traded for a fat 48-times FCF as recently as 2014!
If you bought this stock the last time it was trading for less than 10-times FCF, you’d be up 252%:
Buy When P/FCF (Orange) is Low
Dividend Growth Play #6
A “Pick and Shovel” Play on Internet Growth
This company is the perfect “pick and shovel” play on the booming internet. It builds “roads” – private data center facilities – for the bustling information superhighway. It then collects tolls by leasing them back to its clients.
Think of the company as part developer, part landlord. It builds, and then signs its 900+ clients (such as Microsoft and Verizon) to long-term leases. The firm currently owns 17 data centers in 8 geographic markets – more than half are in California.
Presence in 8 Major Markets
Business is booming. This company has compounded revenues by 17% and cash flows by 26% annually over the last three years, powering 25% annual dividend growth. And its payout is actually accelerating higher – it’s most recent boost was an incredible 49%!
Dividend Growth Play #7
Riding the E-Commerce Boom
My final pick leases distribution centers and warehouses, which has traditionally been a very steady business.
But what’s interesting is that a rapid rise in online sales has created huge – and quickly growing –demand for warehouse space.
Think about it – more packages are being delivered to your house today than ever before and each package starts in a warehouse somewhere.
So this company is right in the middle of that huge trend.
Buying the stock now will get you about 3% a year in dividends, with plenty of upside.
This payout has doubled in just three years, so I recommend buying this stock before its current yield goes up to 6% or more!
These 7 Great Dividend Growth Stocks – Yours Free
With S&P 500 earnings—and dividend growth—slowing, it’s only a matter of time before investors start piling into these seven undervalued winners. Which means the best time to buy is now.
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We just recently clicked “save” on the final draft. Even then, I held it back, just to make sure every “i” was dotted and “t” was crossed.
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Uncover These 7 Incredible Dividend
Growth Plays Today
As I just said, this in-depth report gives you my 7 favorite buys for triple-digit gains and yearly double-digit dividend hikes. But I want to make sure you don’t miss out on all the other new opportunities we uncover in the months ahead.
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Sure, you could buy a stock with a 12% yield now but you could be taking a big risk, because payouts like those often come from dangerous stocks like mortgage REITs or business development companies (BDCs).
Don’t be seduced by their high yields when there are better businesses to own, like the 7 picks in my new special report.
These companies yield around 3% now, but when you hold them for a few years, the yield on your initial buy-in soars while their current yields stay about the same as more investors buy the stock.
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Your Safety Is My No. 1 Concern
Most companies growing their payouts fast enough to drive gains like that are smaller businesses with little analyst coverage, so they’re tough for everyday investors to spot.
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Behind the 8-Ball: Eight Popular Dividends Set for a Cut
To gauge dividend health, you can’t simply look in the rearview mirror. Many “surprise” payout cuts are issued from companies with long streaks of paying, and even raising, their dividend.
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Free Bonus #3:
Shareholder Yield: How to Identify
Double-Digit Returns From Buybacks
As we discussed, when done right, share buybacks can light a fire under stock returns. They also act like a magnifying glass on dividend payments because they cut the number of shares outstanding, leaving fewer for the company to pay out on.
But many companies are going too far, paying out more in buybacks than they’re bringing in through free cash flow.
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This report gives you everything you need to know to make sure the companies you invest in are buying back shares the right way—not simply burning up cash that would be better used as dividends or to develop revolutionary new products.
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Chief Investment Strategist
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