4 Ways to Identify Fast-Moving Dividend Stocks

Dividend investing generally involves the tried-and-true — and requires a bit of patience.

In the simplest terms, we identify quality businesses trading at measurable discounts to their intrinsic worth, hoping to pocket a nice gain in the future when that gap narrows (or disappears).

Of course, we also aim to collect a growing income stream along the way.

There’s certainly nothing novel about that approach. It’s common practice for most investors to gauge the potential upside of any new investment candidate. Is it 25%? 50%? Could this possibly be a triple-digit gainer? Valuation is at the heart of such analytical guesswork.

It would seem, then, that the goal is to always seek out the most underpriced securities. After all, the bigger the price discrepancy, the greater the potential reward. Right?

Well, not always. Let’s not forget that simple formula:

Rate = Distance/Time

It’s all too easy to forget about the denominator.

Let’s illustrate with Carnival Corp. (NYSE: CCL), which incidentally is a recommendation in my Capital Wealth portfolio. The stock closed yesterday near $14. Based on the company’s returns on capital and myriad other financial inputs, Morningstar calculates a fair value of $28.

That implies a potential upside of 100% — a potential doubler in the making.

So we know the distance between point A ($14) and point B ($28). But what about the other half of the equation, time? We need to make some educated guesses about how long it will take CCL to make the trip.

Clearly, a 100% return in one year would be outstanding. If it takes two years, then the annualized gain would slip to 42%. At three years, the stock would deliver a yearly return of 26%. And if it lumbers to $28 in four years, then it would have gained 19% per year.

I don’t think anybody would complain about a 19% annual return. But the point remains: Velocity matters.

Let’s be honest, we’ve all got some slow movers. You know, the ones that stroll along leisurely and stop a few times to ask directions. Maybe they make a wrong turn and move backward for a while.

I closed out Swiss Re (OTCMKTS: SSREY) at a 63% profit back in 2021. But the stock meandered in the portfolio for six years.

That’s certainly not the worst result. I’ll take a slow gain over a fast loss any day. But the math says your portfolio will benefit more from a modest 10% gain that takes one year than a 63% gain that takes six — particularly if the proceeds can be rolled over into another similar performer the following year. The sooner you reach one target, the sooner you can get started on the next.

I know; slow and steady wins the race. Dividend investing isn’t about latching onto meteoric stocks that deliver market-crushing gains in a matter of days or weeks. It’s important to remember that undervalued stocks typically get that way because the market has some tangible concerns about the business or industry.

Those concerns don’t just melt away overnight. It takes time to right the ship and restore confidence.

But that doesn’t mean settling for stocks that drift aimlessly with no visible means of propulsion. They call it “dead money” for a reason.

That begs the question: How do you identify stocks that are poised to reach their destination sooner rather than later?

I can answer that in one word.


Four Catalysts to Look For

Long-term StreetAuthority readers know that catalysts are embedded in our DNA. Our former flagship publication, Market Advisor, was dedicated to tracking down these special events. Allow me to dust off a passage from the May 2010 archives:

In the scientific realm, catalysts are agents that speed up reactions between substances. We’ve borrowed the term for the investing world and used it to describe a similar phenomenon. A catalyst can be anything that triggers a significant acceleration in earnings and a corresponding increase in share price.

For the record, that served as the introduction to a stake in American Tower (NYSE: AMT). At the time, we felt that “bandwidth-hungry smartphone users are putting increasing strains on network infrastructure, and the upcoming rollout of 4G networks will usher in a wave of telecom spending.” We believed this massive transition could quickly send AMT racing from $40 to a target price of $50.

It hit that mark just five months later. Update: With 5G spending billowing its sails, the stock has since cruised to $170.

Catalysts can take many forms and range from company-specific improvements to general industry trends to big-picture geopolitical developments. They often fall into one of these categories:

A New Product Launch

Developing and commercializing a hot new product can be a game-changer. There’s no denying what the release of a must-have storage gadget called the iPod did for Apple (NSDQ: AAPL) all those years ago. The company went on to ship tens of millions of units in short order (and then hundreds of millions), radically transforming the music industry and fueling a 2,000% surge in APPL stock.

More recently, look at the fervor surrounding the launch of artificial intelligence (AI) tools and platforms developed by Google, Microsoft (NSDQ: MSFT), and others.

Market Expansion

While mature industries in the U.S. and Europe have reached the saturation point, penetration rates are often still low across emerging markets. That’s exactly why Restaurant Brands (a former HYI holding) is planning to open at least 7,000 new Burger King, Popeyes, and Firehouse Subs locations in international markets from South Korea to the United Arab Emirates.

Remember the excitement when Las Vegas Sands (NYSE: LVS) won a coveted casino operating license in Macau, breaking into that lucrative Asian gaming market for the first time? The company’s packed Macau resorts now churn out $600 million in EBITDA (earnings before interest, taxes, debt, and amortization) per quarter.

Don’t overlook the impact of a business tapping into rich new customer channels.

Favorable Regulatory Changes or Government Stimulus

Whether it’s state or federal, there’s no doubt that government policy (from import tariffs to infrastructure spending to healthcare reform) can tilt the playing field and line the coffers of certain well-positioned companies. Mere comments from the Department of Energy can send investors fleeing coal and piling into renewables.

Decrees coming out of Washington (to say nothing of national elections) ripple through both Main Street and Wall Street, favoring some industries at the expense of others.

Take the landmark Supreme Court ruling to lift the ban on sports wagering, or the recent SEC approval of Bitcoin exchange-traded funds (ETFs). Coinbase (NSDQ: COIN) has already surged from $150 to $224 since the January announcement.

Wild Cards

There are countless developments that can spur a stock to new highs. Some are simple one-off events, such as a beneficial legal ruling on a patent infringement case. Or an airline successfully negotiating with the pilot union to avoid a strike. Or falling fueling prices for a trucking company. Or a manufacturer winning a record order from a key new customer.

However, the more meaningful catalysts tend to have a more lasting financial impact. Take the COVID pandemic. While a nightmare for many, it has been a boon for others and continues to push billions in revenues toward vaccine maker Pfizer (NYSE: PFE).

Broad macroeconomic factors often fall into this category. Think falling mortgage rates for homebuilders or stronger foreign currency translation for a multinational retailer. Needless to say, wars can also bring cash windfalls. With ongoing conflicts in Ukraine and the Middle East, military drone maker AeroVironment (NSDQ: AVAV) just posted a massive 481% surge in EBITDA and has a record order backlog.

Some catalysts are glaringly obvious. The recent surge in gold to a record-high $2,400 per ounce is a nice tailwind for Dundee Precious Metals (OTCMKTS: DPMLF). Others are more nebulous and require investors to draw conclusions and connect the dots.

In any case, you probably get the picture. It’s not enough to find cheap stocks. Trust me, they can stay that way for a long time. Just ask AT&T (NYSE: T) shareholders. Absent any discernible catalyst, shares of the telecom giant have essentially gone nowhere over the past two decades.