Find the Key to Yield

yield

I spent the better half of last week in The Bahamas mingling with many of our readers and gaining some of the best investment and asset protection insights available.

While I was there, I gave a presentation on what I believe is the most important topic in today’s market — how to collect income.

It’s an important topic no matter what’s going on in the market, but with traditional yields such as bank CDs and Treasury notes paying practically nothing, you are forced to find income in other ways.

The stock market remains a favorite amongst investors to find high yields, and I agree. But you have to make sure you find it in the right kind of stocks. Let me explain…

The need for dividends in the stock market is important; we all know that. But a stat Jeff Opdyke, our investment director, pointed out on Wednesday made that need perfectly clear:

A $1,000 investment in the 1970s turned into $20,873 in terms of stock-price appreciation alone. Dividends added another $63,037 — triple the price appreciation.

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This really jumps out at me.

Not because I’m shocked to see that dividends added more wealth than share price. I know dividends are essential to building wealth, but stating it this way helps put it into perspective with expectations for market returns.

It tells you that even though stock-price appreciation generates great returns, if you want significantly better returns, you must collect a steady and consistent stream of dividends — and in today’s market, it’s more important than ever.

That’s why I have a stock that will do just that for you today — Duke Energy (NYSE: DUK). What’s important about Duke Energy is not as much about its growth prospects, but more about its stability. Let me explain.

The Keys to Unlocking a Stock With Strong Yield

Just like any other investment, you can buy a bad dividend-paying stock. These stocks are only as strong as the underlying company.

For example, many stocks seem to pay significant yields, but remember, yields have an inverse correlation to stock prices. That means as a stock price falls, yields rise. Therefore, some stocks will seem attractive based on yield, but it’s actually a fundamental weakness in the company that has caused the stock to fall in price. So you have to look deeper than just the yield.

Here’s what to pay attention to.

When it comes to dividend stocks, you want a company you can buy and hold onto for years. In other words, you don’t want some fly-by-night company. We want a large, stable dividend-paying company.

A key point of emphasis here is the company’s operations. For Duke Energy, it has over 7 million customers who depend on the company to provide them with their essential power needs — even if we are in a recession or boom times, we need lights on and our A/C running.

But you also want to see a long history of the company paying dividends. What’s more, you want a company able to generate a yield that is comfortably above the S&P 500 average — Duke Energy has both.

The stock has a current yield of 4.5%, well above the 2.1% average yield for the S&P 500 list of stocks. And the company has paid a dividend since 1971.

In fact, had you invested in the company back then, you would have generated a stock-price return of 295%. Not bad, but the S&P 500 generated a 2,000% increase over the same time frame. But when you look at Duke Energy’s gain with dividend, then your return soars to more than 10,000%! Take a look:

Duke Energy Dividend Return

 

 

As you can see, the dividend return (black line) trumps the other returns easily, which just reiterates the stat Jeff pointed out earlier.

Another area to focus on when it comes to utilities is the amount of revenue generated from regulated utilities. These are utilities where rates and demand are basically fixed because they are supplying a critical need to the economy. Utilities that are unregulated are good at times, but end up providing much more volatility in share price and more risk to the bottom line, which may include the dividend.

In Duke Energy’s case, 92% of revenues are from the regulated utility market, which provides stability and consistency that you need in a dividend stock. Shares of the company currently fetch 15 times this year’s expected earnings compared to an average of 20 over the past five years. That indicates shares could rally 32% in the next year.

Of course, we are not buying Duke Energy in anticipation of rapid share price movements; just take a look at the chart. Instead, we want to own its dividend stream and continue to collect consistent dividend payments.

Regards,

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Chad Shoop

Editor, Pure Income