How I Found One Of The Best-Performing Stocks Of 2014

Nathan Slaughter's picture

Friday, July 11, 2014 - 9:15am

by Nathan Slaughter

Two-in-five.

That's the number of mutual fund managers that have actually beaten the market over the past five years, according to the S&P Indices Versus Actives Funds Scorecard.

Why, you might ask, do these "experts" so often fail to beat the market?

Reasons vary widely, but there's one simple thing these managers often fail to account for... a stock's "Total Yield."

And though there's ample evidence to prove that this investing strategy beats the market -- you'll hardly ever hear about it in the mainstream financial press.

I've been talking about the benefits of a Total Yield strategy for months now. In short, the strategy looks at all the ways a company rewards shareholders.

It not only accounts for dividends, but also two other payment metrics: stock buybacks and debt reduction. (I talked about the importance of each of these "extra" payment methods in detail here and here.)

It's simple. Investing in companies that use all three of these shareholder-friendly practices can mean the difference between merely keeping pace with the market and beating it.

To show you what I mean, I'd like to reveal one of my favorite Total Yield stocks. Since I recommended it to readers of my premium newsletter, Total Yield, in January, it has been one of the top-performing stocks in the entire market.

Southwest Airlines (NYSE: LUV) is a low-cost airline you've no doubt heard of before.

Southwest was built on an inexpensive, no-frills model. It set up shop in smaller airports and poached scores of travelers from high-priced competitors. While other airlines have struggled and were forced into bankruptcy, Southwest has enjoyed 41 profitable years in a row and is on track for many more.

Many think of Southwest as an infant rival nipping at the heels of legacy airlines like Delta or American... But that concept is outdated. With the 2011 acquisition of AirTran, more passengers board Southwest each year than any other airline. It now flies to nearly 100 destinations throughout the United States and Puerto Rico in addition to five international markets.

All of this makes a compelling story for the stock on its own. But only through my Total Yield analysis did I feel confident that this stock was going to outperform the market.

First, I looked at the company's dividend. Southwest dished out $71 million in dividends in 2013, which gave it a 0.5% dividend yield.

A 0.5% dividend yield is nothing to get excited about. But look closer and you'll find that on top of those dividends, Southwest paid more than $853 million in the two other "extra" payments I mentioned earlier.

For starters, the company bought back $540 million in stock in 2013 -- more than seven times what it paid in dividends. In addition, the company reduced its debt by $313 million. You can see this in the company's cash flow statement, which is partially shown below.

I won't bore you with the math behind the Total Yield formula, but when you combine Southwest's 0.5% dividend yield at the time with the company's buybacks and debt reduction in 2013, the stock carried a respectable Total Yield of 6.3%.

Based on these compelling fundamentals, I recommended Southwest to my Total Yield readers back on January 27.

Naturally, as you can see in the chart below, these extra payments -- buybacks and debt reduction -- made shares more valuable throughout the year.

While the S&P 500 may be up 11.3% since the end of January, Southwest has been blowing it away, nearly tripling the market's returns.

But Southwest isn't the only market-beating stock I found using the Total Yield strategy.
In late January, I also recommended Ameriprise Financial (NYSE: AMP), which carried a 7.1% Total Yield. It's up 14.5% compared with the market's 11.3% return.

And this evidence isn't just anecdotal. From 1982 to 2011, the Total Yield strategy returned 15.04% annualized -- enough to turn a $100,000 investment into a whopping $6.7 million. The strategy handily outperformed the S&P 500, which returned 10.96% annualized over the same period.

That's the power of the Total Yield strategy.

Now, I can't promise that every stock with a high Total Yield score will beat the market. But the results so far have proven overwhelmingly in favor of the strategy.

The bottom line is, to have a strong chance of earning better-than-average returns, you should be looking at more than just dividend yields... you need to look holistically at a company's Total Yield. As is the case with Southwest and the rest of my Total Yield holdings -- the more a company dishes out in the form of dividends, share buybacks and debt reduction -- the more valuable the stock becomes and the larger the potential gains.

There's a lot more to tell about the success of the Total Yield strategy. Our research shows that last year, 24 out of 25 stocks with the highest Total Yield scores more than doubled the S&P 500's return. And for this year, the stocks from my report, "The Top 5 Total Yield Stocks For 2014" could very well do the same. To learn more about my Total Yield strategy -- and get access to my special report, visit this link.

 

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