3 Big Dividends To Buy Before The Market Rally

Brett Owens, Chief Investment Strategist
Updated: February 10, 2016

Stocks are about to rally – just ask the rare bettor who took the Broncos on Sunday.

While Sunday’s Super Bowl was a one-sided affair, the betting that preceded kickoff set records in sports books. More than 80% of the money and bets helped push the Carolina Panthers from 3.5-point to 6-point favorites. It’s the public’s favorite game to bet on, and they piled cash on the team that they just saw cruise to two blowout wins in a row.

Closer to kickoff, the “smart money” came in on Denver. The professionals waited through the initial wagering, and then bought value where they saw it. They won, and the public lost, as usual.

Now, the same public is worried about a stock market crash. Again, they’re betting on what they saw most recently – the S&P 500 down 10% year-to-date.

3 Signs of a Short-Term Bottom

We’ve already seen a 10% pullback in U.S. stocks. Since 1950, that’s happened 28 times. That turned into a 20% loss 9 times, and a 30% loss just 5 times (in 66 years).

The odds are against a 20% loss – and if it happens, we’re more than halfway there (13% off last summer’s highs). Of course that doesn’t mean it can’t happen. But there are better ways to manage risk and protect capital than to sell when a decline is losing steam.

Also, option bets are getting increasingly bearish. The CBOE’s equity put-to-call ratio shows the number of bearish option wagers is currently near a 10-year high:

CBOE-Put-Call-Chart

In other words, option traders are increasingly betting that stocks will go down in the short-term. When this happens, equities have a habit of reversing their trend.

And traders aren’t the only ones nervous. The American Association of Individual Investors (AAII) survey measures the percentage of investors who think the stock market will be higher six months from now. The long-term average is 38.7% bullish. But today, only 27.6% of respondents are bullish – which is near 5-year lows:

Investor-Sentiment-Chart

Rising markets usually need climb a “wall of worry” – and the proper concerns are now in place. While these indicators aren’t absolute guarantees of a market rally, they do show us that we’re probably closer to a short-term bottom than not.

Which means now’s the time to go shopping for contrarian income – and use the pullback to load up on sizeable dividends that are safe (and preferably, likely to grow).

Contrarian Income Shopping List

As an income investor, I prefer to deploy capital when stock prices are low because it means that yields are high. And some of the best yields I’m seeing right now are in Real Estate Investment Trusts (REITs).

The Vanguard REIT Index Fund (VNQ) doubled over the last seven years, but it’s down 15% in the last 12 months. Investors worried that Fed Chair Janet Yellen would raise rates to the point that everyone will look to safer vehicles (like Treasuries) for yield.

But that’s probably not going to happen anytime soon. In fact, the Fed funds futures market is now expecting there won’t be a rate hike at all this year.

VNQ boasts an attractive yield by historical standards – its highest this decade, in fact – thanks to the selloff:

VNQ-Dividend-Yield-TTM

Now 4% isn’t quite enough for us to get excited about. But that’s OK, because there are REITs focused on the booming healthcare sector that are paying 5-6% or better. And their upside is backed by one of the biggest demographic shifts in history – the 77 million Baby Boomers in the U.S. who just started retiring.

These issues are actually easy to time – just buy them when their yields are high. For example, over the last five years, Ventas (VTR) investors have been rewarded with quick double-digit returns (blue line) every time VTR pays 5.5% or better (orange line):

VTR-Return-Yield-Chart

HCP (HCP) has exhibited the same “mirror image” between yield and price. You want to buy it when it’s paying 6% or better:

HCP-Return-Yield-Chart

Same deal with Welltower (HCN) – it’s a buy when it pays 5% or better:

HCN-Return-Yield-Chart

The price (blue) lines may appear to be grinding sideways, but don’t forget that dividends are the big drivers in these stock returns. When we look at total return, we see triple-digit returns over the last decade – a ten-year period that included 2008, and the current pullback:

HCN-HCP-VTR-Total-Return-Chart

As much as I like these three stocks right now, I’m really excited about three other healthcare REITs that aren’t quite as well known. They’re the perfect contrarian income opportunities because they don’t get as much attention from Wall Street.

As a result, they’re currently yielding 7.6%, 8.2%, and 8.3%. They raise their dividends every year, and one company actually raises its payout every quarter. Get the details on all three and start profiting right now.