The Secret to 162% Gains From Safe Blue Chip Dividends

Brett Owens, Chief Investment Strategist
Updated: January 17, 2018

While most income investors are reaching for big yields right now, a small group of “hidden yield” stocks are quietly handing smart investors growing income streams plus annual returns of 12%, 27.1% and even 54% or more per year.

So if you want to double your money every few years – and double your income as well – then you need to focus on the seven stocks I’m about to share.

Rule #1: Dedicate Some Cash to Dividend Growth

As I wrote in this month’s edition of the Contrarian Income Report, our portfolio pays 7.5% today. And I can even get you 8.3% yields on new money, by focusing on our seven best buys.

A CIR subscriber with this portfolio spread amongst our positions is earning $75,000 in dividend income alone. (And no doubt urging “first-level” financial friends to ditch their underwhelming dividend aristocrats and subscribe!)

But what if this person doesn’t quite need $75,000 per year yet? If not, that’s great – we can peel off a piece of that portfolio, and grow it quickly in the meantime.

And I’m not talking about investing this “growth capital” into risky high-flying names like Tesla (TSLA) and Snap (SNAP).

We can scale our money more securely – but just as spectacularly – by purchasing sound dividend payers that happen to be growing their payouts rapidly. Here’s why.

The Most Lucrative Way Shareholders Get Paid

There are three – and only three – ways a company’s stock can pay us:

  1. A cash dividend.
  2. A dividend hike.
  3. By repurchasing its own shares.

Everyone loves the dividend, but investors usually don’t give enough love to the dividend hike. Not only do these raises increase the yield on your initial capital, but also 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” – a company everyone knows and has paid dividends forever – never pays a high current yield. Its stock price rises too fast!

For example let’s look at Verizon (VZ), pays a generous dividend – but doesn’t raise it meaningfully. This lack of payout upside caps the stock’s price upside.

Frustrated Verizon investors need not look further than this chart for an illustration of why their money is underperforming:

Verizon’s Sleepy Dividend Slows the Stock

Verizon’s stock and dividend have increased by roughly the same amount. That’s no coincidence – it happens all the time.

You’ll also notice that the firm’s track record of “yearly dividend raises” means little because the raises themselves weren’t meaningful.

This a common mistake dividend aristocrat fans make when they flock to track records. They’re not that far off the scent of 100%+ gains, however. They just need to look ahead, rather than behind. Let me explain.

The Path to Fast 162% Gains From Safe Blue Chips

Have you always wanted to buy a safe blue chip stock like Coca-Cola (KO) and get rich from it like Warren Buffett?

It’s doable. But most investors “live in the past” and fixate on dividend track records rather than a payout’s forward prospects. And looking ahead is the key to yearly gains of 12%, 27.1% or even 54% or more with blue chip stocks.

(Yes, that’s no exaggeration. It is possible to make 54% annualized gains on a safe blue chip stock. I’ll share an example in a moment.)

Let’s first consider the case of Coke, which achieved its dividend royalty status in 1987 (its 25th straight year with a dividend hike). The firm hit its coronation with a head of steam, rewarding investors with a 362% payout hike in just five years (from 1986 to 1991). Its stock price raced to keep up with its dividend, rising 234% over the same time period:

Great Dividend Growth, Great Returns

It didn’t really matter if you bought shares before or after the company was officially a dividend aristocrat. The driving factor for profits was the dividend’s velocity – it was moving higher quickly, so its stock price followed.

Fast forward to the last five years, and we see that Coke’s youthful exuberance has slowed considerably. The firm still hikes its payout every year, but it’s a slower climb – totaling 45% over the past five years. Which means its stock price merely plods along too (+25% in five years):

Average Dividend Growth, Average Returns

Why is Coke’s dividend slowing down? Simple – just look at the top line.

Shrinking Business is Bad for Payouts

It sounds obvious, but income investors often wade so deep into the dividend weeds that they ignore obvious cues – such as shrinking sales.

Let’s add Coke’s top line into the last chart, and we’ll see that the fact that the payout is growing at all is an act of financial wizardry:

Shrinking Sales Slow the Dividend

Coke’s top line has shrunk by 22% over the last five years. Which makes its dividend growth quite the feat!

Contrast this with the 1986 to 1991 period, when the company was younger and still growing. It boosted its sales by 30% over that time period.

Of course it’s possible to grow payouts faster than profits and sales. In fact, this is what often happens with dividend payers. But even the most gifted managers can only squeeze so much in payouts from a shrinking pie. It’s better to focus on businesses with the winds at their backs.

And That Can Include Spry Blue Chips, Too

Two years ago I told my Hidden Yields subscribers to buy Boeing (BA) because:

  • Its business was booming,
  • Its stock was quite cheap with respect to cash flow, and most importantly
  • Management was plowing profits into payout growth.

Boeing wasn’t a dividend aristocrat like Coke. But it was a much better buy. Here was the tale of the tape in December 2015 (pay special attention to the last column, because it’s the most important):

Boeing vs. Coke (December 2015)

If you want to make real money with stocks, you should always put your money with the faster dividend grower. Boeing was no exception – its two massive dividend raises in the last two years have sent the stock soaring to 150% total returns:

Boeing Soars With Its Payout

Our secret, as usual, is we purchased the payout that was growing the fastest. We enjoyed a 57% cumulative “raise” from Boeing, which in turn rocketed its stock price higher.

Since share prices move higher with their payouts, there’s a simple way to maximize our returns: Buy the dividends that are growing the fastest.

7 Dividend Growers to Buy Now (for 162%+ Upside)

How much money should you allocate to dividend growth?

As you can see – as much as possible. This strategy is such a “slam dunk” for investing returns that there’s no reason to collect more current yields than you need right now. If you can “forego” some amount of income today, I would encourage you to consider investing that capital into dividend growers.

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 “hidden yield” stocks should you buy today? Well you know me – I’ve got seven best buys that should safely double your money every three to five years.

It’s a simple formula – their dividends are doubling every three to five years, 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 27.1% annualized returns for my Hidden Yields subscribers since inception. In two-plus years, we’ve crushed the broader market (the S&P 500 returned 16.1% over the same time period.)

If you achieve returns of 27.1%, you’ll double your money in less than three 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.