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LEARN HOW TO BOOST YOUR INCOME…IN FIVE MINUTES OR LESS

By John Persinos • July 20, 2023 • Stock Market Investing

Printable PDF

Like many married couples, my wife Carole and I are addicted to Netflix. Last
night, we watched (again) “The Wolf of Wall Street” (2013), starring Leonardo
DiCaprio as the ruthless investment adviser Jordan Belfort.

The movie starts with Belfort’s first day as a stockbroker for L.F. Rothschild,
a date that fell on October 19, 1987. As DiCaprio drawls in the voice-over
narration:

“They called it Black Monday. By 4:00 p.m. the market had dropped 508 points,
the biggest plummet since the crash. Within a month L.F. Rothschild, an
institution since 1899, closed its doors.”

On Black Monday, global stock markets crashed. The Dow Jones Industrial Average
fell to 1,738.74, for a one-day loss of 22.6%. Major culprits for the crash
included program trading. Fears over the rise of artificial intelligence (AI)
have resurrected this worry on Wall Street.

But so far this year, we’ve been enjoying a stock market rally. The bear market
of 2022 has become a distant memory.

The S&P 500 currently hovers above its 50- and 200-day moving averages,
indicating sustainable momentum. The New York Stock Exchange Advance/Decline
line (NYAD) also hovers above those key averages, indicating greater market
breadth.

Leading the rally have been technology stocks, which took a massive beating in
2022. Tech shares have rebounded, as investor enthusiasm (albeit with an
undercurrent of social trepidation) builds over AI.

Here’s the lesson: Don’t buy stocks that you’d probably sell in a Black
Monday-type panic. Methodically build a portfolio that you’d want to hold
through good times and bad. Accordingly, if you’re an income investor in search
of robust dividends, keep your sense of perspective and follow my all-weather
advice below.

I’ll only take five minutes (or thereabouts) of your time.

1987 Redux?


The main U.S. stock market indices on Thursday took a breather from their recent
run-up and closed mostly lower, as follows:

 * DJIA: +0.47%
 * S&P 500: -0.68%
 * NASDAQ: -2.05%
 * Russell 2000: -0.89%

Nothing as bad as 1987 (or 2008) appears to be in the cards right now, but you
must contend with the constant threat of sell-offs until we get clarity on
several unknowns. We still face a litany of risks.

The Federal Reserve’s next meeting is July 25-26, and if the central bank
continues to display hawkishness, it could undermine the economy and the equity
rally. The Russia-Ukraine war could take a turn for the worse. Russian President
Vladimir Putin is behaving like a cornered animal and he’s been rattling his
nuclear saber. Inflation has been cooling, but if we get unexpectedly hot
inflation data, investors might panic.

China’s economy has been decelerating, with second-quarter 2023 gross domestic
product numbers missing forecasts. America’s relations with China have been
deteriorating, and Taiwan could erupt as a geopolitical flash point.

And yet, the major indices in the U.S. and overseas have been soaring. Risk-on
assets have come back into vogue. But don’t give short shrift to quality
dividend-paying stocks. They have a lot to offer. Dividend payers provide
potential income growth and share-price appreciation, as well as ballast for
your portfolio.

Want to rev-up your income portfolio? I’ll show you how.

Traditional income havens such as real estate investment trusts (REITs), master
limited partnerships (MLPs), and utilities are conventional sources of dividend
income.

Despite the surge in bond yields due to the Federal Reserve’s tightening cycle,
exchange-traded funds (ETFs) that focus on dividend stocks have recorded
increasing inflows of investor capital. Keep in mind, dividend stocks have
generated higher absolute returns than bonds during all meaningful time periods.

The key is to pick the right dividend stocks or funds. When looking for dividend
stocks, it’s tempting to gravitate towards securities with the highest yields.
This is not always the smartest strategy; there’s more to a worthwhile dividend
stock than just a high yield.

Stocks that can generate steady and sustainable dividend growth, rather than the
fattest yields, are better bets for dividend investors.

Sure, robust dividends are offered by well-known companies with solid balance
sheets. But income investors often lose sight of the fact that high dividends
also can be used by new or weak companies as bait for investors.

Beware the dividend trap…

A “dividend trap” is when investors hungry for yield are suckered into a high
dividend yield, only to eventually discover that the underlying company is
deeply troubled. That’s when the dividend gets cut or eliminated and
unsuspecting investors get hurt.

WATCH THIS VIDEO: Ouch! The 10 Warning Signs of a Dividend Trap

Always look for healthy payout ratios, plenty of cash on hand, and a history of
earnings growth. These quality dividend payers demonstrate greater resilience
during an environment of rising rates and market volatility.

When investing in dividend-paying stocks, investors need to be mindful of the
trade-off between risk and reward. If a company suddenly can’t generate enough
cash flow to support its dividend, it may cut the dividend or get rid of it
altogether.

To determine the safety of a company’s dividend, investors look to the payout
ratio.

Healthy businesses generate large amounts of cash flow and earnings. For a
dividend to be sustainable, the amount paid out to investors must be well
covered by the amount of cash coming into the business. How well the dividend is
covered by actual cash is measured by the payout ratio.

Payout Ratio = Dividends Per Share / Earnings Per Share

The lower the payout ratio, the more resistant a company’s dividend payouts will
be to future declines in earnings. A company with a high payout ratio
distributes a significant portion of its current profits to shareholders, while
a company with a low payout ratio distributes a small portion of its profits in
dividends.

If future earnings decline for a company with a low payout ratio, it’s still
likely to generate enough cash flow to support dividend payments. Moreover,
because companies with low payout ratios pay out only a small percentage of
their profits, they are more likely to have room to increase future dividends
than companies with high payout ratios.

Look to the Aristocrats…

The so-called “Dividend Aristocrats” always provide fertile ground for income
investors. To earn the honorific Dividend Aristocrat, a company must typically
have raised dividends for at least 25 years. More precisely, the company needs
to have a managed dividend policy that increased its dividend every year for
those 25 years.

These dividend powerhouses constitute the S&P 500 High Yield Dividend Aristocrat
Index, an official index of the 50-plus highest dividend yielding stocks in the
S&P Composite 1500. This Aristocrat Index is maintained by Standard & Poor’s,
which every December updates the list of companies that make the grade.

By its very nature, a Dividend Aristocrat tends to be a large and stable
blue-chip company with a strong balance sheet. Many of these companies are
familiar names that produce household brands. Because of their strong balance
sheets and financial wherewithal, they tend to weather market ups and downs.

Here are two cases in point. During the 2008 crash, the Dividend Aristocrat
Index fell 22%, whereas the S&P 500 index fell 38%.

In 2022, during the punishing bear market, the benchmark ETF ProShares S&P 500
Dividend Aristocrats (NOBL) fell -6.52%, versus -18.11% for the S&P 500 and
32.38% for the tech-heavy NASDAQ (see chart).



Dividend growth investors should focus on buying and holding high quality
businesses for the long run. Think of time as the currency of your investment
life. And with that, my five minutes (more or less) are up.

PS: If you’re looking for a way to generate steady income, consider our premium
trading service, Rapier’s Income Accelerator, helmed by our income expert Robert
Rapier.

Up, down, sideways… even in the face of rising interest rates…elevated
inflation…overseas war…and anything else Mr. Market throws at you, Robert’s
trades are income-generating machines.

Robert Rapier can show you how to squeeze up to 18 times more income out of
dividend stocks, with just a few minutes of “work” each week. Click here for
details.

John Persinos is the editorial director of Investing Daily.

To subscribe to John’s video channel, click this icon:

 


ABOUT THE AUTHOR

John Persinos
Bio | Archive
John Persinos is the editorial director of Investing Daily, overseeing such
publications as Personal Finance, Utility Forecaster, Profit Catalyst Alert,
Rapier's Income Accelerator, Income Forecaster, and Marijuana Investing Daily,
among others. John also writes the Mind Over Markets daily stock market recap,
and he's the chief investment strategist of Marijuana Profit Alert.

 
John has decades of experience in the technology and political realms. He has
worked as a staff editor at Inc. and Venture magazines, and written for
Kiplinger's, Street Authority, Investing Answers, and TheStreet.com, to name a
few. In a career that has spanned more than 40 years, John has been diligently
and prolifically covering the news and its impact on investors.

 
John also has experience with the inner-workings of Capitol Hill, serving as a
press secretary to U.S. Rep. Byron Dorgan (D-ND). John started his career as a
daily newspaperman with The Orlando Sentinel.

 
John holds undergraduate and graduate degrees from Boston University. He also
completed the Davenport Fellowship in Business and Economics Reporting at the
University of Missouri (Columbia).

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