It’s September, and stocks are shaky. We’re right on schedule.
The weeks ahead on the calendar have provided us calculated contrarians with some of our best dividend buys in recent years. In fact, two out of the last three years, we took advantage of seasonally weak Septembers to buy low.
In October 2020, with the world reportedly about to end, we locked in yields up to 10.8%. A sharp pullback presented us with values, while an accommodative Federal Reserve provided follow-up fuel. Price gains followed.
And last year, in November 2022, we bought bonds. It wasn’t a popular pick—everyone hated them! Which worked perfectly. We enjoyed 9%+ gains in just three weeks via iShares 20+ Year Treasury Bond ETF (TLT).
This September is setting us up for dividend deals, too. Here’s why. The 10-year Treasury yield is bumping its head on the 4.3% ceiling.
This is the time to buy bonds. Rates are high, and investors (ironically) hate the bonds attached to them.
Buy Bonds Here… and Here!
Ironically, nobody wants bonds when they pay. Which is perfect for us contrarians. We’ll happily take this potential trade of the decade.
After all, vanilla income seekers pile into bonds after they have rallied. They buy high when bond yields are low.
These moves may feel comfortable at the time, but they rarely work out. Let’s take TLT, a popular “one-click” Treasury bond fund with nearly $40 billion in assets.
Two years ago, TLT paid just 1.3%. Who was buying this thing at such little yield? Not us!
Fast forward to today. TLT pays a more respectable 3.7%. Yet it’s one of the most loathed ETFs on the planet, because it’s lost investors money for the past two years.
Well no kidding! It’s a case of loving high and hating low. Well, we’re intrigued by TLT at 3.7%. But we can do better—by considering bond proxies.
These are stocks, such as utilities, that trade like bonds. But they are actual businesses that can grow cash flows. Which means, not only are their prices low today, but they have more room for gains than a mere bond fund.
Vanilla investor favorite SPDR Select Sector Fund (XLU), for example, pays 3.4%. XLU holds the who’s who of utility stocks like NextEra Energy (NEE), Southern Co (SO) and Duke Energy (DUK).
Given a choice between XLU and TLT, I’m going with XLU because of the upside potential. The ETF has grown its dividend by 47% over the past decade. As goes the dividend, so goes the stock price—higher.
But why stop at XLU when we can cherry pick its very best holdings? NEE has the fastest growing utility payout on the planet! The company raised its dividend 183% over the last ten years. Why not keep it simple and stop at NEE, the truffle butter of utility stocks?
NEE: 183% Dividend Growth Last Decade
We dividend magnet students know this story. Over time, rising payouts drag their stock prices higher. They are magnets, pulling the stock higher.
Over the last 10 years, NEE delivered 344% total returns (including dividends). It trounced XLU, which returned 137% over the same period.
NEE grows faster because it’s a better utility. Its NextEra Energy division is one of the world’s biggest renewable-power investors, with 67 gigawatts in operation. Meanwhile NEE operates regulated Florida Power and Light, big in solar, now the cheapest form of energy in the state.
Chief Financial Officer Kirk Crews is my dividend hero because he’s the fastest pay raiser in the utility space. Kirk “calls the shots” too in terms of how much more money he’s going to hand out in the years ahead.
Our dividend man recently said he expects NEE to pay out 10% more annually through at least 2024. That’s consistent with the utility’s last 15 years of dividend growth, which have been (to use a technical term) terrific!
That’s right. NEE investors have enjoyed 9.9% dividend growth per share every year since 2007:
NEE’s current yield tends to stay steady because the stock’s dividend magnet pulls its price higher. The 2.8% it pays today is actually pretty good by historical standards. We can thank higher interest rates for the recent pullback.
We contrarians guide our portfolios by looking through the windshield rather than the rear-view mirror. And the road ahead for NEE looks smooth and clear. When we take its current 2.8% yield and add expected 9.9% dividend growth, we see 12.7% yearly returns for the foreseeable future:
And that’s the baseline! A minimum 12.7% yearly return is hard to beat. Sign us up for this Cadillac dividend—before it becomes popular again!
And believe it or not, 12.7% per year is low by my dividend growth standards. Most of our safe income machines are set to pay 15% per year, every year—please read on for the details, including company names, stock tickers and buy prices!