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Use a Market Sell-off to
Lock in Higher Yields |
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Published:
March 17, 2008
Hardly any investor likes to see the
market drop, especially as sharply
as we have seen over the past few
months. The good news? A declining market not only makes stocks more
affordable for value investors -- it can also dramatically ratchet up their yields.
And over the long-term, a little extra yield goes a long way.
Boost Your Returns Seven-Fold
It shouldn't come as a surprise that dividend-paying stocks tend
to outperform non-paying stocks, especially when the market is tanking.
The fact that these companies have ample cash on hand to
distribute to shareholders is itself a reassuring sign -- most
dividend-payers are well-established and generating positive
cash flows. At the same time, those payments can also help
soften the blow of a falling market. The further a stock slides,
the higher its yield climbs, thereby inviting buyers and helping
to put a floor on the share price.
As you might expect, investors who sought the relative shelter
of dividends have come out ahead lately. In fact, as of March
1st, the 387 dividend-paying members
of the S&P 500 had only slipped
about -5.7% over the past year,
while the 113 non-payers
surrendered -8.5% on average. And over time, the difference can
be even more pronounced.
Market guru and longtime dividend advocate Jeremy Siegel has
spent much of his career researching the power of dividends. In
his book, The Future for Investors, Siegel shares page
after page of illuminating statistics highlighting the long-term
success of dividend investing -- and the impact those payouts
can have when reinvested and compounded over time.
For example, imagine that the S&P 500 was split up into five
quintiles ranked solely in terms of yield: the 100 highest-yielding stocks in the top quintile, the next 100 in the second,
etc. From the launch of the index in 1957 through 2003, stocks
in the lowest quintile returned about +9.5% annually, turning a
$1,000 investment into about $65,000. Meanwhile, those in the top quintile
scored average gains of nearly +14.3%, transforming that same
initial investment into over $460,000 -- more than seven times as
much.
$250 Billion and Counting
For all the complexities of investing, dividend yields are
fairly simple. There's really only two ways for a shareholder to
see their current yield increase: a drop in the share price or a
rise in the payment amount.
As to the first, the market will at times be very accommodative.
And consider that if the averages
are sent into a freefall, many individual stocks
will show far steeper declines than
the broader indices. Quality
companies will recoup those losses sooner
or later, but in the meantime
investors can find substantially higher yields on many
undervalued stocks.
Better still, many companies continue to funnel more and more
cash toward dividends. According to Standard & Poor's, 60% of
all S&P 500 benchmark members raised their dividend payouts
in 2007, writing checks for some $252 billion in aggregate -- about
+12% more than the total from 2006.
Let Your Portfolio Take you Places
With all this in mind, now is an
opportune time to embark on a
dividend quest. However, your objective
shouldn't simply be to
identify the stocks with the highest yields -- a simple stock
screen could do that, and it is often a recipe for mediocre
performance. After all, there is little sense in picking up a
yield of 10% only to watch the shares fall by -20% and remain
underwater for a prolonged period of time. . .
With these points in mind, Nathan
Slaughter, editor of
StreetAuthority's value-investing
newsletter
Half-Priced Stocks, set out
in his latest issue to find not only
those stocks whose dividends have
increased dramatically amid the
market sell-off, but that are also
undervalued. In the process he
uncovered eight different stocks
that met his approval -- and have
seen their yields climb an average
of +24% in the past few months.
Among these stocks is a REIT whose
yield has rocketed +44%, but the
shares could still rise nearly +40% before they reach their fair value.
Another winning idea is an asset
management firm with a yield that
has risen from 4.9% to 7.0% --
giving investors a chance to lock in
a mouth-watering yield for the long
haul.
To learn the names of these stocks,
we invite you to try a no-risk
subscription to
Half-Priced Stocks. To learn
more, please
visit this link. |
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