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Six Safe Stocks
Yielding More than 10%
In today's fast-paced
investing world, speculators often look to make a quick fortune on "the next
Microsoft" or some other fast-growing company that operates in an exciting
new industry. However, it would be shortsighted to focus entirely on
volatile, unproven firms and overlook the
numerous benefits offered by well-established, dividend-paying companies.
Although many investors consider the
sub-2% yield offered by the S&P 500 to be
trivial, it would be a
huge mistake to dismiss dividends. In fact, a look back at statistical
data over the past 75 years
shows that nearly half of the market's total returns have come in the form
of dividends. |
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Between
1926 and 2004, dividends represented approximately 42% of the total return delivered by the S&P 500.
Over that same span, it's been calculated that $1,000 invested in the S&P
would have grown to $2.3 million if reinvested dividends are included, but
only $90,000 without the dividends.Using history as a guide, dividend-paying stocks should also perform better
than their non-paying counterparts over the long haul. Contrary to
conventional wisdom, studies have shown dividend payers handily outperformed
non-payers from 1970 to 2000. At the same time, those same dividend-paying
stocks experienced far less volatility -- they could be counted on to
deliver stronger relative returns in difficult market environments. What's
more, according to the latest data from Standard & Poor's, dividend-payers
are still outpacing non-payers in today's volatile marketplace.
(1.)
Tax Changes Favor Dividends
Thanks to tax changes investors are now getting more bang for their buck
from most dividend-paying stocks. Until 2003, dividends were taxed as
ordinary income -- up to a staggeringly high 38.6% maximum tax rate. By
contrast, capital gains were taxed at a much lower 20% rate. That
advantageous tax treatment, combined with a roaring bull market, led many
investors to gravitate toward high-growth, non-dividend-paying stocks in the
late 1990s.
However, thanks to legislation that took effect in 2003, the playing field
has now been leveled, and a uniform 15% tax rate applies equally to both
dividends and long term capital gains. And income-oriented equity investors
are able to retain a much larger chunk of their gains.
Over the past several years, thousands of companies have taken advantage of
the favorable new tax law. Instead of buying back shares to boost stock
prices, an increasing number of firms have opted to return excess cash to
shareholders in the form of dividends. Over 1,700 companies announced
dividend increases in 2004 (the first year after the new legislation went
into effect), and many firms -- including a number of formerly tight-fisted
technology companies -- initiated new corporate dividend policies for the
first time. This trend, which has continued since, has not only lifted the
payouts that most income investors receive, but has also expanded the pool
of quality income-paying candidates to choose from.
(2.)
The Importance of Compounding
The dividend payments generated by a modest investment might seem to be
inconsequential initially, but through the magic of compounding, it won't
take long before they begin to make a dramatic impact on your portfolio.
After all, dividends can be reinvested and used to purchase more shares,
leading to even larger dividend checks. These larger checks can then be used
to buy even more shares . . . and so on. In time, thanks to the power of
dividend reinvestment, even a small stake in such stocks can grow into a
tidy sum.
Investing in high-quality stocks
for the long term and then reinvesting the dividends is one of the
best ways to build wealth. For this reason, many investors choose to
enroll their securities in dividend reinvestment plans (DRIPs), which
automatically use all dividends paid by a stock to buy more shares.
DRIPs are powerful wealth-builders.
By pouring your dividends into more shares, DRIPs make it easy to
harness the miraculous power of compounding. The beauty of compounding is
that any little smidgen of money you can put to work now -- no matter how
small -- can have an extraordinary effect on your wealth down the road.
Take a look at this example: Let's
assume you purchase 1,000 shares of a stock with a share price of $10 (for a
total initial investment of $10,000). Let's also assume that this stock
offers a 6.5% annual dividend and steady +10% share price appreciation each
and every year. Because this stock's growth rate (+10%) exceeds its dividend
yield (6.5%), it's only natural to assume that capital appreciation would
play a more important role in the stock's total returns over the long haul
-- right?
Well, if you thought this way, then
you'd be dead wrong. Without dividends reinvested, after 30 years
this $10K would turn into $292,107. That's a respectable gain, but you'd
still end up with just 1,000 shares. With dividends reinvested for 30
years, however, that initial $10K would be worth over $1.15 million.
Best of all, you'd now own 6,614 shares of stock. At year #31, those 6,614
shares would be generating more than $75,000 in annual dividend payments
alone!
The bottom line is that dividends
matter big time, and reinvesting the dividends earned from high-yield stocks
matters even more. As you can see from our example, when you invest in
companies with abnormally high dividend yields, you can make staggering
profits. In fact, your dividend check can eventually grow so large that it
surpasses the original price you paid for the stock. The exhilaration of
"lapping" your stock that way is a feeling you'll never forget.
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And this is not just some lucky strike. Out of the last 30
positions held, 22 were closed for a profit, with an average
gain of +39.3%. So, if your portfolio isn't doubling the S&P, then you need to subscribe to
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(3.)
What to Look for In a Solid Dividend-Paying Investment
While it might be tempting to invest exclusively in the market's
highest-yielding securities, this shortcut approach usually leads to
mediocre returns. To begin, off-the-charts dividend yields are typically the
result of very depressed share prices. In many cases, the companies that
offer such high yields are in poor financial shape.
In addition, poorly-performing
companies often see their share prices decline even further, leading to
dismal overall returns. Remember: income securities offer returns from two
sources -- dividends AND capital gains. With this in
mind, although you can hold a stock that offers an exceptional 15% dividend
yield, if the underlying shares lose -20% in a year, then your investment will end up
losing money.
Furthermore, corporate dividends
are by no means guaranteed -- companies can reduce their dividend payouts (or even eliminate them altogether) -- whenever they like. As such, a fat dividend
yield alone does not guarantee investment success.
With this in mind, we prefer to
focus our research on companies and funds with a proven ability to not only
pay dividends year after year, but also to increase their payouts. We also
examine a number of other factors to ensure that our investment ideas are
fundamentally sound. Before investing in any dividend-paying stock, we
carefully evaluate each of the following items:
Yield -- A company's dividend
yield indicates the annual return a stock delivers in the form of
dividend payments. In an effort to hone in on investment ideas with the most
impressive dividend yields, we'll focus exclusively on
securities with yields of 10% or more in today's report.
Cash Flows -- When searching
for high-quality income stocks, we pay particularly close attention to each
firm's cash flow. After all, that is what a company uses to pay out
dividends. Cash flow often provides a better picture of a firm's
profitability, especially when compared to earnings, which incorporate the
impact of non-cash items such as depreciation and amortization. As cash flows
grow, so does the pool of assets used to fund dividend payments.
Reliability -- Companies are
under no legal obligation to continue paying dividends. Therefore, we want
to find companies that we can count on to maintain -- and even
increase -- their regular dividend payments. When searching for income
investing ideas, we usually look for companies that have paid consistent
dividends for several years. We also look for firms with strong
track records of increasing those dividend payments. A lengthy history of
stable (and rising) dividend payments is often convincing evidence of a
company's commitment to its shareholders.
Total Return -- Although
dividends are certainly an important part of the picture, they don't
represent the whole story. In the end, the total return that a stock
delivers is really a combination of its dividend yield and capital
appreciation. A stock may pay a decent annual dividend, but if its share
price declines year after year, then the net effect could be a flat -- or
possibly even money-losing -- investment. So, when searching for quality
income stocks, we're careful to examine far more than just dividend yields
-- we look for high-quality, growing companies with the best total return
potential.
Taxes -- Income investors
should always be mindful of the after-tax rate of return they earn on any
investment. A stock may pay a solid dividend and its shares may outperform
the market, but if those gains are taxed at a stiff rate, then this may
neutralize some of the returns.
As mentioned earlier, several years ago the
tax rate imposed on most dividend distributions was reduced to 15%. One
notable exception, however, are real estate investment trusts (REITs) --
their distributions are still taxed as ordinary income at rates as high as
35%. Despite the higher tax rate, many REITs still
generate after-tax returns that are far superior to other income stocks.
Therefore, investors may want to consider shielding REIT dividends by
placing those stocks in qualified, tax-advantaged accounts -- such as IRAs.
(4.)
Stocks and Funds With Yields of 10% or Greater
With the analysis above in mind, we believe all investors
need to have exposure to dividend-paying stocks. Along those lines, below
we'll introduce you to several income stocks and funds that not only offer
dividend yields of at least 10%, but that also appear poised to deliver
market-beating total returns in the years ahead . . .
END OF FREE
CONTENT
The
remainder of this report is available exclusively to our Market Advisor and
Investor Update subscribers.
In it, our research staff provides an in-depth look at several of our favorite stocks
with yields of 10% or more. These companies
include:
A shipping stock that takes advantage of its locked-in rates to offer
investors a 30.0% dividend.
A Brazilian utility that is using hydroelectric power to expand its
production to serve the country's growing population in this developing
economy. Not only that, but it offers a 10.0% yield.
Thanks for reading
today's special report -- Six Safe Stocks Yielding More than 10%.
Good investing!
-- Research Staff
StreetAuthority.com
http://www.StreetAuthority.com
StreetAuthority LLC
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
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