3 Steps to 51% Returns in 5 Months with Dividend Payers

Brett Owens, Chief Investment Strategist
Updated: January 31, 2018

Looking for dividend payers with the most price upside? They’re available, even in this pricey market. You just need to follow the free lunch signs…

Five months ago, I told readers to grab the “hurricane dip” in the best reinsurers. My Hidden Yields subscribers specifically were told to buy shares in Validus (VR) on September 15.

Why reinsurance? Why then? And why Validus?

Let’s answer these three questions, because they’re the reason Hidden Yielders woke up to 44% gains last Monday morning (and banked 51% total returns in 5 months).

This “Free Lunch” Was Cashed at Once (for 51% Gains)

(Then I’ll share my top 7 dividend growers with 51% upside by July 4th, too – for those of you who missed our reinsurance party.)

Step 1: Pick a Great Business Model

The first step to successful investing is to buy fantastic businesses. And if insurance is a great business, then reinsurance is indeed a fantastic one. (Reinsurance is insurance purchased by insurance companies to manage their own risk exposure.)

Insurance itself, when done responsibly, is a cash cow. Firms collect payments up front from their customers but may not have to pay it out in claims for a long time, if ever. The companies then invest that money – called “float” – and pocket the income they earn.

If they priced risk properly up front, they make more on premiums than they have to pay out in claims. Plus, they get to keep the profits they made on the capital they borrowed for free!

These big cash flows let reinsurers do three things regularly:

  1. Return lots of money to shareholders as dividends and stock repurchases,
  2. Compound those gains every year (which results in more repurchases and higher dividends), and
  3. Withstand capital drawdowns caused by hurricane season.

Great economics is a promising start. Next, we need a whiff of fear to buy at a favorable price.

Step 2: Buy During Disaster

In September, I wrote:

Reinsurers usually emerge from hurricane season relatively unscathed. And they tend to outperform the S&P 500 every September (along with most other months on the calendar, too).  

Take these two leading stocks in the space – they usually to selloff in late summer, and rebound quickly:

An Almost-Annual Buying Opportunity

And these are price gains only (before dividends). The smartest reinsurers pay plenty of dividends because they are extremely capital efficient.

The reality is, disasters are (paradoxically) great for savvy reinsurers. Catastrophes can take out weaker competition, and give the strong firms a reason to raise rates. Which means those that can foot the one-time bill can enjoy higher profits in the years (and even decades) ahead.

Hurricane fears had Validus selling for a song. It was fetching just book value – which is liquidation value. If you buy at book, you’re getting enough collateral to cover your investment in full – and you’re receiving the actual business for free!

And Validus was selling for exactly book in September. Investors who purchased the stock at cheap moments like those had timed price dips (orange line below) quite well:

Buy At or Below Book (Blue Line) for Best Bargain

It sure felt “different that time” with a row of raging hurricanes lined up in the Atlantic. But it wasn’t.

American Insurance Group (AIG) recently looked at the same numbers (and perhaps our September issue of Hidden Yields!) and realized that Validus was still a great buy at 1.5 times book value – a 50% premium to its free lunch price:

A Bargain 50% Higher, to AIG

Why’d AIG choose Validus? For the same reasons we did.

Step 3: Buy the Best Company

Validus (VR) has grown its book value plus dividends (BVPS) by 11.4% annually since its IPO:

Validus Compounds by 11.4% Yearly

Want to make 12%+ per year forever from stocks? Buy firms that compound cash this fast.

As Warren Buffett does with Berkshire Hathaway, Validus emphasizes its growth in BVPS to gauge value creation for shareholders. Book value reflects the amount of money its assets would fetch today if the firm were liquidated – a relatively accurate measure because its balance sheet consists of bonds and other securities with active markets for them. And dividends, of course, are cash in your pocket.

This excellent long-term track record is due to smart underwriting. This is reflected its impressive “combined ratio”:

Combined Ratio = (Incurred Losses + Expenses) / Earned Premiums

A ratio below 100% indicates an underwriting profit – which means the business is profitable thanks to savvy underwriting alone. From there, the income generated from investing the float is gravy – potentially a lot of gravy, and not required to run the business!

Validus has always been good at making money by simply writing policies.

The firm boasted an 84.2% combined ratio last year. That’s $0.158 on the dollar in free money up front.

Sixteen cents on the dollar may not sound like much, but this is additional free money the firm can invest for extra profits. It’s why insurance (and especially reinsurance) is an even better business than banking – these companies not only get paid by their customers to invest their money and pocket the profits, but if they’re good at writing policies, they don’t even have to give all the original cash back.

I was actually sad to see Validus bought out nine days ago. Sure, the 44% morning returns helped ease the heartache – but I never like to lose a cash cow that compounds our money at 12% per year.

That said, our herd remains strong in the face of an overheated stock market. We have seven buys that are doubling their dividends every few years. And by now, you know what that means – their stock prices will double too.

7 “Free Lunch” Dividends to Buy Now for Quick 51%+ Upside

Life is too short to waste our time with middling dividends! Since share prices move higher with their payouts, there’s a simple way to maximize our stock market returns: Buy the dividends that are growing the fastest.

Don’t be fooled by modest current yields. They often don’t capture the growth potential (and it’s the dividend’s and cash flow’s velocity that really makes us big money – as Validus showed us – rather than its starting point).

How to we buy high velocity dividends, the buyout candidates of tomorrow? 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 12% or more on average with almost no effort or active investing at all.

Which future buyout candidates should you purchase today? Well you know me – I’ve got three best buys – plus four more bonus dividend growth stocks – that should safely double your money every two or three years.

It’s a simple formula – their dividends are doubling often, 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 30.3% annualized returns for my Hidden Yields subscribers since inception. In two-plus years, we’ve crushed the broader market by more than 50%.

If you achieve returns of 30.3%, you’ll double your money in almost two 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. Click here and I’ll share their names, tickers and buy prices with you right now.