How My “Dividend Magnet” Strategy Helps You Avoid Payout Cuts
MMost investors are unaware of the “magnetic” link between dividends and stock prices. It makes them miss out on huge wins and sets them up for big losses, too.
Here’s what I mean: In my previous article in our ongoing series on my “Dividend Magnet” approach to investing, I gave you example after example of how a rising dividend almost inevitably drives the stock price. action of a company with him.
This is one of the main reasons why we demand a dividend that is not only growing, but accelerating in my Hidden returns dividend growth service.
It’s as clear as a bell in the picture Texas Instruments (TXN), below is one of the examples we talked about in our previous article. The stock has offered us significant “dividend-fueled” returns, with both the price and the dividend rising in tandem, beat for beat:
TXN’s Dividend Magnet Ignites
Many people are surprised when I show them graphs like this. But it’s pretty intuitive when you think about it. Have you noticed, for example, that the current performance of some of your favorite stocks generally stays about the same, even after are they increasing their dividends?
This is because the higher payout attracts investors, who then drive the stock price up, and with it, the yield drops back to its “normal” level (because yields tend to move in opposition to prices). It’s the Dividend Magnet that works in real time!
How my dividend magnet can help us avoid dividend cuts
It’s shocking how neglected this strategy is. One of the best parts is that it’s not just a recipe for higher prices. We can use it to protect ourselves from the dividend cuts, too. Because just as rising dividends pull up stock prices, falling payouts act like a sinker on a stock.
And if we’re looking for tell-tale signs of a weak dividend (more on those below), we can use this strategy to squeeze those stocks out of our portfolios before they do major damage. This “dividend safety check” is critically important in this fickle market, where investors are already looking for some reason to hit the sell button.
Examples of how a falling dividend lowers the price of a stock are easy to find. You can see it in the stock of the regional telecom operator Lumen Technologies (LUMN), a dividend contender if there ever was one.
(This stock is so cut-prone that I included it in my special investor report “Behind the 8 Ball: Eight Popular Dividends Set for a Cut,” which you get with a 60-day trial for Hidden returns. I’ll give you my full dividend growth strategy and a chance to get yours here.)
Too bad for the poor soul who bought this title ten years ago, when it reported an attractive 7.3%. Since then, the payment has been reduced twice, for a total reduction of 65%:
Lumen’s payment plunges, taking its stock price with it
This is the trap that investors risk falling into when they see a high dividend and only buy on that basis. We can see the same pattern with the Elderly Care Operator Ventas (VCR), which cut its dividend when COVID-19 hit, simultaneously causing the stock price to plummet:
Ventas: dividend down, share price down
Of course, we can forgive the company for cutting payments when the virus arrived. But he had given signals that a cut was coming long in advance. See how the payout slowed and then stabilized in the chart above?
It is a clear “tell” that a cut was in sight. An investor selling at that time would have avoided it and the sharp drop in the stock price.
This metric can give you an “early warning signal for dividends”
But we can do even better, potentially even a dividend slowdown with another of my favorite “dividend safety indicators,” a company’s free cash flow (FCF) payout ratio.
It is essentially a measure of how much money a company has paid out in dividends over the last 12 months as a percentage of its FCF, which is a reliable snapshot of how much cash flow it generates. (I prefer FCF to earnings per share because EPS can be more easily manipulated.)
For the FCF payout rate, I require a level below 50% for maximum security. For real estate investment trusts (REITs), which use funds from operations (FFO) as the primary measure of profitability, we can accommodate ratios of up to 90% because REITs receive predictable rent checks from their tenants .
This ‘holy cow’ dividend could be next to cut its payout
With that in mind, Kimberly Clark (KMB) is a stock that we absolutely want to avoid now. First, the dividend, which may seem attractive with its 3.6% yield. But this “high” yield hides something: a slowdown in the growth of distributions!
Kimberly-Clark Dividend Slows–A Cut in the Cards?
Finally, KMB’s FCF payout ratio is way too high at 93%, and it threatens to continue to rise as soaring material costs weigh on the company’s bottom line.
My opinion ? Don’t buy the “wisdom” that a consumer staples maker like KMB is “safe”. With inflation likely to persist, its dividend should come under more pressure. And because it’s mostly held by conservative investors, they’ll quickly sell on a dividend cut, fueling the “reverse dividend magnet” and crushing the stock price as well.
(This is the third post in our series on my dividend magnet approach to investing. In our next post, we’ll look at how dividend growth combines with another very misunderstood way in which companies give us credit. “pay”: stock buybacks, to send returns higher.)
7 Buy for Accelerate Dividends (thanks to inflation and Recession)
My “Dividend Magnet” approach is driving the steady double-digit gains I predict for the 7 stocks I want to tell you about here.
All 7 are posting sharply rising dividends, and I expect these rising payouts to drive up the stock prices of these companies for years and years to come. Your projected return? 15% per year from these 7 robust dividend producers, on an annualized basis.
These reliable dividend producers are the antidote to today’s depressed market, transitioning between inflation and a potential recession. Their growing payouts, which support their stock price, act as a buffer against this uncertainty and a source of growing income for you.
Don’t miss your chance to buy these 7 big dividend producers while they are still bargains. Click here and I’ll reveal all the details of my Dividend Magnet approach and give you access to these 7 “dreadnought” dividend producers in an exclusive investor report.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.