Go!
Use a Market Sell-off to Lock in Higher Yields
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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