The Best 7% Dividends
A Trump-proof, Fed-proof portfolio that lets you collect 7% dividends this year, with 12% to 38% price upside to boot!
Let’s sort through the current hysteria regarding interest rates, President Trump and inflation. Thanks to some headline-driven insanity, there are once again pockets of value that pay meaningful dividends of 7% or better.
And many have 12% to 38% price upside to boot! Why?
Because Rate Hikes Will Probably Disappoint
This time last year, the Fed was promising four rate hikes over the next twelve months. The “smart money” crowd (via Fed Funds futures prices) was betting on two. And both parties were too aggressive as we saw just one rate hike in 2016.
Today we have Yellen & Co promising three hikes in 2017, while the futures markets say just two:
The Smart Money Bets 2 Hikes in 2017
Given their track records, I’m inclined to take the “under” on both predictions. But it doesn’t really matter if we see one rate hike or two (or even three) next year.
The income investments I like best have already been discounted well in excess of their rate hike risk. I’ll highlight my favorite 7% plays for 2017 in a minute – but first, let’s address the long-term rate boogeyman, too.
The Long Bond Needs a Breather
The 10-year Treasury rate has nearly doubled off its summer lows. It pays 2.4% today and, quite frankly, needs a breather:
The 10-Year Yield Won’t “Go Parabolic”
When everyone believes long-term rates have nowhere to go but up, you know what happens – they drop. Get ready for a pullback that will surprise everyone.
And while we’re talking about unexpected events, how about this high yield “rich guy” favorite that’s set to soar…
7% Retirement Play #1
Tax-Equivalent 10%+ Yields With 38% Upside
The last time this happened, municipal bonds soared 40% over the next 12 months.
These usually-steady payers are coming off their worst month since September 2008, according to Standard & Poor’s, when its “muni” index dropped 4.8% (and popular funds fared even worse):
The Last Muni Bloodbath in Sept 2008…
October 1, 2008 didn’t mark the bottom for munis. But it turned out to be a pretty good time to buy, with these funds returning up to 38.4% in the ensuing 12 months!
… Gave Way to This 12-Month Muni Boom
Those were scary times. The financial world was melting down, and prominent pundits feared that municipalities would be the next wave of defaults.
These pundits were, of course, dead wrong. Munis have actually been the safest bonds you could have purchased this side of U.S. Treasuries. The S&P Municipal Bond Index tracks over 79,000 bonds from over 22,000 different issuers. Over the last five years, it’s recorded a default rate averaging just 0.16%:
Only 0.16% of Muni Bonds Defaulted Recently
This Time, “They” Are Worried About
Inflation and Taxes
Munis were quite popular as recently as summer. Yields on the four Nuveen funds I highlighted in the charts above were sitting at or near five-year lows – a sign of endearment:
Muni Fund Yields Spike Off Lows
A couple of things triggered their recent selloff. First, the 10-year Treasury yield rose a full percent – from 1.4% to 2.4% today.
And then Trump won the election. His tax plan should benefit high earners, with the top Federal rate projected to drop to 33% (from 39.6%). Which means rich guys won’t derive as much in tax savings from munis as they do today.
Most muni bonds are Federal tax-exempt. Which means a 6.5% paying fund like the Nuveen Enhanced Municipal Credit Opportunities Fund (NZF) actually pays top-bracket earners a 10.7% tax equivalent yield!
A 10.7% Tax Equivalent Yield
Trump’s cuts wouldn’t derail this tax-efficient gravy train much, however. A 33% tax bracketer will still enjoy a 9.6% equivalent payout from a fund like NZF today.
But what if rates really climb?
Believe it or not, munis and long-term rates haven’t always had an inverse relationship. Last decade, they actually co-existed peacefully and tended to move in tandem:
Munis and Rates Haven’t Always Disagreed
This traditional relationship should eventually resume. If the 10-year yield (somehow) rolls towards 5% or 6%, municipalities will have to pay more to fund their projects. But their premiums should be modest, thanks to the tax benefits they provide.
For a secure investment, muni bond prices sure can swing wildly. Which is exactly why they provide us with such stellar buying opportunities.
In a sane world they would always trade at modest yield premiums to Treasuries. But I prefer to buy them now, when they are paying 7% to 8% more (in taxable terms) than T-Bills. An insane premium.
These income streams are secure, with no major credit risk. And portfolio managers will soon be able to buy higher paying issues to better compete with the 10-year. After all, we contrarians make our money buying when nobody else wants to – and the last time munis were this hated, they returned 30-38% over the next 12 months.
Which muni fund is my top pick for this year? I’ll share the details with you in a minute – and highlight two more pockets of value paying 7%+ yields with double-digit price upside potential, too.
But first, let’s discuss why 7% is a critical number for any investor hoping to actually retire on dividends alone.
Why 7%+ is a Retirement Must-Have
Most investors practice “buy and hope” investing. They pick up shares, and root for them to appreciate in price. And that’s it.
These first-level types have no plan on how to generate cash flow from their holdings. They think they’ll sell someday, and hope it’s at a higher price. But they don’t have a set game plan to sell and methodically harvest cash from the portfolio they worked so hard to build.
Many financial advisors step into this void, pitching a “4% withdrawal rate.” These guys (who have not retired successfully themselves, by the way) say that you can safely withdraw 4% or so every year from your portfolio and use this as spending money.
Generally, they’re right. But when they’re wrong, it’s disastrous.
The fatal flaw with the 4% annual withdrawal strategy for retirement is that every few years, you’re faced with a chart like this:
Selling Here is Reverse Dollar Cost Averaging
And the 4% withdrawal “strategy” means you’re forced to take out money at exactly the wrong time. If you don’t have enough dividend income to support your family at the time, you must sell shares for additional income.
Sadly you’re forced to practice reverse dollar cost averaging – you sell even more shares when prices are low, reducing your upside when markets normalize. This is the same phenomenon that built your wealth, except working against you!
The solution is to transition away from ever having to sell a share. And meaningful dividends of 7% or better are a great solution. They give you a means to “cash out” your nest egg on a monthly and quarterly basis, without being forced to sell low (or sell ever).
Now let’s talk about our second and third vehicles for 7% dividends and big upside in 2017.
7% Retirement Play #2
“Preferred” Shares for 8.1% Yields
Most investors only consider “common” shares of stock when they look for income. These are the shares in a company you receive when you place an order with your broker.
Take Wells Fargo (WFC) for example. Recent scandal aside, it’s a model big bank. Warren Buffett has held shares for 27 years and counting, slowly adding to his position over time. The firm is better run than most competitors – its efficiency ratio (costs as a percentage of revenue) is just 57.4%, compared with a sector average of 68.7%.
Problem is, everyone knows it’s a model big bank. Investors constantly bid up Wells’ common share price to capture its safe dividend, which keeps its current yield in check:
Even in Scandal, Wells Pays Less Than 3.5%
Most investors however don’t know about Wells’ preferred stock. Its “Series L” shares, for example, currently yield 6.3%, more than double the common’s payout.
In many cases, you can boost your dividends by 100% to 150% simply by trading in your common shares for the preferred variety.
However they are complicated to buy (Series what?), so you may be tempted to take a logical shortcut and purchase an ETF. After all, funds like the iShares S&P U.S. Preferred Stock Index Fund (PFF) and the PowerShares Preferred Portfolio (PGX) pay 6.7% and 6.5% respectively and provide you with one-click diversification.
Don’t take easy street. Diversification in preferreds is actually not what you want. When you buy a basket of these, you are going to get enough basketcases to drag down your returns!
And if we include the basketcases these funds purchased ten years ago, these funds haven’t even performed to their current yields:
The Problem With Financial Basketcases
Plus, these ETFs don’t emphasize floating-rate securities enough. Just ten years ago, less than 10% of preferred issues were floating rate. Today, that number has jumped to more than 60%.
Your best bet? Choose a fund manager that understands credit and interest rate risk. Pick the right vehicle and you can bank an 8.1% yield thanks to a management team with decades of experience picking the right preferreds.
I’ve got the details on my favorite investment vehicle in a special report that I prepared for you about preferred shares. I’ll show you how to get your copy of my analysis in a minute – right after we talk about my final favorite 7% play for 2017.
7% Retirement Play #3
Well-Timed Recession-Proof REITs
Sam Marks recently invited me on his popular investing podcast show to chat about REITs (real estate investment trusts). Passive income is Sam’s beat, and he’s naturally attracted to this asset class for its generous, steady payouts.
He asked me bluntly:
“Is there a way I can time my buys – without doing all the complicated analysis you’re rattling off?”
Though a smart, savvy guy, he just lost a bunch of money on a REIT dog. Sam purchased Senior Housing Properties (SNH) on the (correct) assumption that more and more seniors needed specialized places to live, but the (incorrect) belief that SNH was the right way to profit on the trend.
Problem is, SNH isn’t very good at converting this demographic bull market into higher dividends. Over the last five years, its payout hasn’t gone anywhere – which explains why its stock price has stagnated, and lately, declined:
Summing Up Sam’s Mistake
The REIT business is simple. Management has two jobs:
- Generate income from their properties now.
- Figure out how to grow those income streams consistently.
Any armchair mogul can buy a property for current cash flow. The real skill comes next – in creating more value from the same pool of assets and making smart decisions on future purchases.
Sam himself doesn’t want to make a career out of REIT analysis. He’s just looking for some simple ways to buy smartly. I’ll share the specifics of my timing tips in a moment. But first, let’s talk about what we’re going to buy.
ETFs, though attractively simple, are out. In REIT-land, there’s only one main choice anyway, the Vanguard REIT Index Fund (VNQ). And one “fatal flaw” dooms it to underperformance versus the sector it’s supposed to mirror.
VNQ owns the most popular REITs in the world, and they are hardly ever cheap. Blue chip names like Simon Property Group (SPG), Public Storage (PSA) and Realty Income (O) are great firms, but everybody knows it and pays up for the perceived safety. This means higher valuations and lower yields. Not much upside and plenty of potential downside.
Still, I explained to Sam, you can do better than VNQ by timing your purchases of the same blue chips. Simply…
Buy when yields are high.
Blue chips aren’t my top choice. But when I do buy them, I make sure their yields are higher than usual.
For example, Simon Property Group (SPG) is VNQ’s top holding. The firm owns high-end shopping malls all over the world, and its rent checks have powered its dividend 175% higher since the start of 2010. Which certainly makes it a better investment candidate than the two dogs we’ve discussed so far!
SPG’s price has appreciated 133% over the same time period. That’s in the range of what we’d expect to see – a stock that follows its dividend higher.
But not all buying times provide equal opportunities for gains. Its high yield mark in early 2010, 3.8%, was an ideal time to pickup shares. Since then, buyers have done well purchasing SPG when its yield climbs above 3% (as it is now):
High Yields Indicates a Low Price
But are malls really recession proof?
With blue chip REITs, you are almost always well served trusting their excellent management teams to figure out their next moves. Which means you buy when yields are high, valuations are lower, and wait.
I said almost always. SPG does not currently have a place in my recession-proof REIT portfolio because I don’t think the dividend yield is high enough to compensate for the brick-and-mortar retail risk where e-commerce increasingly dominates.
Which is fine, because we have other recession-proof landlords to choose from. Two REITs in particular are compelling buys right now. Both pay 7% or better, which is well on the high end of their historical ranges. This means right now is the best time to buy them to maximize your current yield and price upside potential.
Within just a few years, you’ll be receiving 10% yields on your initial purchases. And you’ll be sitting on price gains to boot!
7% Yields With 15% to 38% Price Upside
It’s only a matter of time before other investors ditch their paltry 3% and 4% payers and find their way over to these “slam dunk” income plays paying double or better. Which means the time to buy is now, while they still trade at deep intrinsic discounts and pay yields that are sky high with respect to their historical norms.
That’s why I’ve prepared three in-depth guides, outlining each of the strategies I mentioned above…
Special Report #1 (a $99 value)
The first is called the 10% Tax-Equivalent Yields With Upside.
Inside you’ll find the ticker symbol, my buy-up-to price and in-depth backstory on my favorite tax-advantaged investments, including:
- The best managed fund paying tax-equivalent yields up to 10.5%.
- My full analysis showing why these are the second-safest bonds on the planet.
- And 4 more high quality funds to buy that paying Federal tax-free yields of 5% or better (all tax-equivalent yields of 7% or better).
Special Report #2 (a $99 value)
The second guide is called Preferred Shares: Looking Past Common Dividends for 8.4%.
Inside you’ll find my favorite fund for investing in preferred shares, along with its management profiles and investing strategies.
The fund pays 8.4% today. High yield is great, but its best quality may be its lack of correlation with the broader stock market.
The shares this fund owns are preferred in every sense of the world – meaning it gets paid its fat dividends no matter what the broader market does.
Special Report #3 (a $99 value)
Finally your third guide, Recession Proof REITs: 2 Plays With 8%+ Yields and 25% Upside, will discuss my two favorite REITs. Both pay annual dividends of 8% or better, both raise their payouts regularly and both have easy 25% upside from here. They include:
- The 9.7% payer that’s a recent spin off with a spotless balance sheet.
- The 8.4% dividend machine that’s raised its dividend the last 17 quarters in a row.
In each report you’ll get the rationale behind where, why and how to profit. In short, everything you need to know about these stocks before you invest a single penny.
How to Get All 3 Reports Absolutely Free
To access all three reports, 10%+ Tax Equivalent Yields, Preferred Shares and Recession Proof REITs at no cost whatsoever, I simply ask that you take a risk-free trial of my research service, The Contrarian Income Report.
I created The Contrarian Income Report to help self-directed investors uncover overlooked and under-appreciated income plays before Wall Street and the mainstream herd bid them up.
Every new investment I recommend pays 6% or better, including three funds in our portfolio that each deliver over 9% dividends right now – and they pay out monthly.
As I write this, my five favorite “best buys” are paying between 6% and 10% and our entire portfolio sports an average yield of 8.1%!
Meanwhile, the S&P 500 pays a meager 2% on average, and the 10-year Treasury bond barely 2.3%. Most investors could double – or even triple – their income overnight!
Safe Yields Are Only the Beginning
In addition to my favorite REITs with 9% average yields, the tax-equivalent yields of 10%, and the 8.1% Preferreds, your your risk-free trial includes a whole lot more…
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Bonus #1: The Dirty Dozen: 12 Dividend Stocks to Sell Now
I come across countless opportunities begging for your investment dollars every single day. Sadly, many of the juiciest dividends are ticking time bombs just waiting to go off.
This report reveals the 12 biggest potential disasters on my watchlist, including some of the most popular names on the street. Can you guess…
… which corporate services giant pays a dividend 3 times greater than earnings with borrowed money?
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Make sure you’re not holding any of these losers when they finally make the decision to cut payouts and share prices plummet!
And you’ll get your very own copy of my personal playbook…
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In the coming months, many investors will struggle to get by on their paltry 2% and 3% payers, holding their breath for the next signal from Washington on the state of the economy, fearful of what might happen in China & Europe.
But my Contrarian Income Report readers and I will rest easy thanks to our Trump-proof, Fed-proof portfolio and enjoy our 7% dividends with 12-38% gains over 12 months.
Are you going to join us?
Yours in profits,
Chief Investment Strategist
The Contrarian Income Report
P.S. Since my recommendations are contrary to prevailing popular beliefs, they have a habit of rallying quickly as soon as the mainstream herd catches on to what they’ve been missing. I encourage you to get started right now so that you can get in at a good price!
P.P.S. Remember, your risk-free membership comes with the names and full details on my favorite 10%+ tax-advantaged yield, average dividends of 9% from my top REIT plays, and Preferreds that will hand you 8.1%. Even a small position in any one of these picks will easily cover a full year’s membership… most likely before your 60 day trial even ends!