One Click for the 50 Best Dividend Growers

Brett Owens, Chief Investment Strategist
Updated: February 16, 2017

Eric Ervin was making his rich client so much money that he suggested: “Hey, why don’t you just quit your job?”

The investor saw the opportunity to scale Eric’s “secret strategy” – and he wanted to help invest!

Both guys knew the power of dividend growth investing. But Eric’s second-level insight is what made them both a boatload of cash. He figured out a way to bet purely on the higher payouts – as close to a “sure thing” as you’ll ever see in stocks. Here’s what I mean.

Blue chip stocks tend to raise their dividend every year. Even if it’s a token increase, it keeps shareholders happy. Betting on S&P 500 dividend growth is steadier and better than wagering on price appreciation itself:

S&P 500 Dividend Growth (Blue) vs. Price (Gray)

Problem is, traditionally there’s been no way to bet on the blue line above. You’d have to buy the index and hope its price appreciates in tandem. Not as compelling a bet.

Well Eric figured out that he could buy “swaps” on S&P 500 dividend growth itself. He walked me through the specifics on the phone in late 2015 – before his new ETF delivered incredibly steady returns for 2016.

At the time, he managed to buy contracts that were only pricing in 1.5% dividend growth for the S&P 500 in the 2016 calendar year. Payouts rose much more (as they usually do) and Eric banked the upside for his Reality Shares DIVS ETF (DIVY):

Stocks Up? Down? DIVY Don’t Care

The genius of DIVY is that it capitalizes on the underappreciated annual tradition of dividend raises. For 41 of the last 44 years, S&P 500 companies have increased their dividends at large. And the swaps that Eric buys tend to be perennially underpriced – resulting in incredibly steady gains that track payout growth rather than price action.

Eric’s Newest ETF

Since launching DIVY, Eric and his team created a five-tier rating system called DIVCON that provides a snapshot of dividend health for individual companies. It combines and weights seven factors (such as cash flow, earnings growth, and shareholder payouts) to provide a comprehensive snapshot of a company’s dividend health.

DIVCON 5 is the best bucket. It means the dividend is in good shape, and there’s a 97.6% likelihood that it’ll be increased in the next year.

DIVCON 1 is the danger zone. It means the dividend is more likely to be cut than increased in the next 12 months.

Over the past 15 years, investors who would have traded off DIVCON ratings – buying the fives, and selling or shorting the ones, would have done quite well:

DIVCON’s Dividend Prescience

By now you probably know that higher payouts drive stock prices up in tandem. It’s why dividend growers have returned 10% per year for the past three decades, outpacing static dividend payers, dividend cutters and non-payers (according to Ned Davis):

Dividend Growers Have Outperformed Since 1987

But we can’t look in the rearview mirror to predict future dividend growth and stock returns. We need a leading indicator – like DIVCON.

And Eric is making outperformance easy for us individual investors. Thirteen months ago he launched the Reality Shares DIVCON Leaders Dividend ETF (LEAD) to buy DIVCON’s top 50 stocks and hold them for a year. Many of them boast dividend charts like these beautiful staircases:

Stairway to Payout Heaven

Everyone loves dividends, but dividend hikes are often underappreciated. Not only do they increase the yield on your initial capital, but they often are reflected in a price increase for the stock.

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!

LEAD is a convenient way to get exposure to stocks that are “at-risk” of rapid share price appreciation. With DIVCON looking ahead, you can use this fund to create a diversified portfolio of the 50 blue chip stocks most likely to raise their dividends over the next 12 months.

The Sweet Spot: 8% Yields With Dividend Growth

But what if you need big dividend income today so that you can retire comfortably? After all, 2% or 3% just won’t cut it unless you’re rich already!

You can retire on as little as $500,000 today by focusing on stealth income plays such as closed-end funds, preferred shares and real estate investment trusts (REITs). In many cases, these issues pay secure yields of 8% or better – with dividend growth to boot!

This means you are assuring yourself of 10%+ annual returns, with most of that coming as cash dividends. These vehicles are safe, but they aren’t as well known as the usually-expensive dividend aristocrats. And that’s a good thing for us, because we can lock up secure income streams of 8% or more while enjoying payout growth and price upside to boot.

These stealth plays are the perfect investments for 2017. Regardless of Trump’s next tweet, these 8% payers are going to become increasingly popular with retirees as they’re discovered. Make sure you buy them now, before their prices get bid up (and their yields are compressed). Click here for the details about my favorite 8% plays in funds, preferreds and REITs – and I’ll share the names, tickers and buy prices with you, too.