The Single Best Way To Beat The Market With Dividend Stocks

Nathan Slaughter's picture

Monday, May 5, 2014 - 12:00pm

by Nathan Slaughter

Dividend investing is changing.

Over the past decade, many dividend-paying companies have slowly trended away from paying traditional dividends.

Don't get me wrong, many long-time dividend payers will keep paying and growing their dividends into the future. But certain ones are starting to reward shareholders in two other, more tax-friendly ways.

Fortunately for investors, these two hidden, "extra payments" could be much more valuable than traditional dividends alone. (I recently talked about each of these extra payment types here and here.)

That's why over the past few weeks, I've been telling you about a new way to invest in dividend-paying stocks.

It's the single best way I know to get market-beating returns from your dividend stocks, as I'll show you in today's example.

It's called Total Yield investing.

I call it that because it looks at all the ways a company rewards shareholders. This not only includes dividends, but also accounts for two other "extra payment" metrics: stock buybacks and debt paydown.

You're familiar with how dividends work. If you invest $100 into a stock with a 10% dividend yield, you can expect to receive $10 in dividends (or 10%) a year from that investment.

The other two "yields" are a bit more complex. The data to calculate these yields isn't posted blatantly like a dividend yield is on a stock ticker page. Instead, we must find this data deep with a company's financials.

But don't worry, all you need to know about these two other yields is this: they are vital ingredients that take a dividend stock from being simply "average" to market-beating.

Let's look at a top Total Yield stock from my latest research report (which you can find in this presentation) as an example.

Ameriprise Financial (NYSE: AMP) is an investment firm that dished out $401 million in dividends in 2013, which gave it a 2% dividend yield (you'd find this on any financial website, plainly posted).

A 2% dividend yield is nothing to get excited about. But upon closer inspection, you'd find that Ameriprise paid nearly $1.5 billion in stock buybacks in 2013 -- more than three times what it paid in dividends. You can see this in the company's cash flow statement, which is partially shown below (USD shown in millions).

I won't bore you with the calculations, but when you combine Ameriprise's 2% dividend yield with the company's buybacks over 2013, the stock carried a respectable Total Yield of 6%.

These extra payments -- buybacks in this case -- made shares more valuable throughout the year. What the Total Yield idea does is simply measure that "hidden" value that's added to a seemingly pedestrian dividend payer.

Naturally, you can see how these shareholder-friendly moves in 2013 worked for Ameriprise shareholders in the chart below.

The S&P 500 may have had a good year last year, but Ameriprise trounced it, tripling the market's return.

Home Depot (NYSE: HD) is another favorite Total Yield stock I mentioned in a previous issue of StreetAuthority Daily. It pays a modest 2.4% dividend yield, but also paid $17 billion in the form of share buybacks from 2009 to the end of 2013.

Over that time period Home Depot's share price soared 311% -- crushing the S&P 500's 104% return.

These are just two examples of many that show how a dividend-only approach can actually hold you back from seeing higher stock returns. It causes you to miss out on stocks like Ameriprise and Home Depot -- stocks that may only yield a modest amount, but when combined with these other two metrics, they crush the overall market.

My latest research shows that last year, 24 out of 25 of the stocks with the highest Total Yield ratings more than doubled the S&P 500's return. For this year, I've targeted a handful of Total Yield stocks that I expect to do well in my new report, "The Top 5 Total Yield Stocks For 2014."

Put simply, the two extra payments that lead to the best Total Yield stocks may be hidden in a company's balance sheet. But make no mistake, they matter. And choosing to invest in a dividend-paying company that gives out these extra payments over one that doesn't can mean the difference between beating the market or just keeping pace with the crowd.

P.S. -- There's a lot more to tell about the success I've had with the Total Yield strategy in finding quality dividend stocks. In my latest report, "The Top 5 Total Yield Stocks For 2014," I talk about a rapidly-growing financial company that boasts a dividend yield of 7.5% and an even higher Total Yield, plus a dominant global retailer that's soared 143% since 2011. To learn more about my Total Yield strategy -- and get access to this latest report, visit this link.

 

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of AMP in one or more of its “real money” portfolios.