It’s a great metaphor for the goal of these big bailout programs from the Federal Reserve and Congress.
Usually when the government injects money into the economy, it wants to stimulate economic activity.
But with a viral pandemic raging, the lack of economic activity isn’t due to lack of money. It’s due to people staying home to avoid getting sick.
So the recent emergency programs — checks from the IRS to individuals, loans to businesses and Fed liquidity for debt markets — are designed to keep the economy in stasis until things can return to normal.
The goal is to have as much of the economic infrastructure that existed before the virus still in place as possible when the crisis is over. That way we can pick up where we left off … in other words, suspended animation.
Of course, investors don’t do suspended animation. We relentlessly search for gains anywhere we can find them.
The problem is, since we don’t know how long any of this is going to last, markets are behaving unpredictably. Just as stocks started to recover, they’ve started downward again … exactly as I predicted they would when core economic data started coming out.
So what’s an investor to do?
Make a little money where we can now so we have more to invest when the market finally recovers. Because it will. It always does.
And I’ve got just the way to do that.
Three Rules for Market-Beating Returns
How? Invest in dividend-paying companies.
I like this type of investment so much that I built one of my Bauman Letter model portfolios, Endless Income, around them. And it’s paying off…
Open plays in the Endless Income portfolio are currently beating the market by 1,600% when comparing the same amount invested over the same time period. And it’s less than a year old! Click here to learn more about The Bauman Letter.
What’s my secret for these market-beating returns? I’ll boil it down to three simple factors for you:
No. 1: I target companies that provide essential inputs to the biggest technological growth trends. These are companies that you don’t hear much about. But they’re so integral that — in the case of one group, for instance — without their products, we not only won’t have 5G wireless … we wouldn’t even have an internet.
No. 2: I target companies with strong balance sheets. That means low debt and plenty of assets with alternative uses that maintain their value no matter what.
No. 3: I look for companies run by people who are committed to paying a safe dividend. There are plenty of companies out there paying double-digit dividends who won’t be around in a couple of years.
Yield on Cost Is King
I’d rather buy a company paying a decent single-digit dividend that’s going to be around for years. That’s because my strategy for the Endless Income portfolio is built around a simple concept called yield on cost.
Yield on cost is the dividend you get as a percentage of your original purchase price. It’s the yield you should care about. By contrast, the yield you see advertised on financial websites is the dividend as a percentage of today’s price. It’s going to change as soon as the stock price does.
As an example, let’s say you bought company XYZ for $10 a share. At the time, the company was paying a $0.50 annual dividend, giving you a 5% yield.
XYZ is a strong company, and its share price keeps growing. And so does its dividend.
So let’s say XYZ now trades for $100 a share. That’s great share price appreciation! Congratulations!
But the gains don’t stop there. Its annual dividend is now $5. Since you paid $10 a share for the company, you’re now getting a 50% yield on cost!
There are many investments that can do that for you.
Your Back Door to Great Dividends
Of course, things are a lot more complicated than my example. Most people buy into companies in tranches, and the yield on cost will reflect the average cost basis of their position.
But it’s still a great strategy, and there’s an easy way to play it: with exchange-traded funds (ETFs) that specialize in dividend payers. Here are three that are worth your attention:
- The Invesco KBW High Dividend Yield Financial ETF (Nasdaq: KBWD) has a forward dividend yield of 16.32%, distributed monthly. That’s almost double the yield that paid this time last year, and it’s all due to a drop in the ETF’s price.
- The Amplify High Income ETF (NYSE: YYY) has a forward yield of 11.7%. Last year, that yield dropped to as low as 2.54%. It also pays monthly.
- The First Trust Dow Jones Global Select Dividend ETF (NYSEL: FGD) has a forward yield of 11.54%. A quarterly payer, last year’s average yield was 5.82%.
One of the great things about dividend-paying ETFs is that if a company cuts or suspends its dividend, it’s dropped from the index. So unlike buying individual companies, you have essentially guaranteed dividend income.
When the economy comes out of suspended animation, the prices of these ETFs are going to appreciate quickly.
Buy them now, and lock in yields on cost that you’ll probably never see again.
And then use that income to play the stock market when this is all over!
Editor, The Bauman Letter